Budgets and Saving
Expanding our savings is something that we all hope to achieve, and budgeting is a great tool to do it. However, the word ‘budget’ can be heavily misinterpreted and misunderstood. To learn more about saving and budgeting techniques we had a chat with Phil Sgangarella, Managing Director and Senior Financial Advisor at FinFit Wealth Solutions.
Simply put what is a budget and why should you have one?
Any financial advisor will tell you that a budget is fundamental if you want to manage your finances. A lot of people actually spend every last cent they have, simply because they can. When you don’t know what you are spending and what you are saving, you don’t actually know what you can do with your surplus money (if any). Whereas, if you know where your money is coming in and going out you can actually make decisions. This is exactly what a budget does. Whether it’s saving for a holiday, paying off a loan or purchasing an expensive item in the future, a budget helps you manage and achieve this. So, if you haven’t set up a budget yet, now is the time to get going.
What would a good budget look like?
Phil explains that he refers to budgeting as a spending plan, which gives you the permission to spend your money. However the proviso is that you only spend what you have allocated yourself. When you have a spending plan and are about to spend money on something, you are more likely to think twice before you actually buy it because you have made yourself accountable.
You firstly need to get your head around your expenses. What items do you spend your money on? How much and how often? One way to do this is with a spreadsheet (or a piece of paper). Take a look at the last 3-6 months of spending and break the expenses into categories and amount spent. This sets you up for future months.
How do you know how much to budget yourself?
As mentioned above, Phil is a big fan of going back and looking at what you are spending your money on, and then using that as a base for the future. When you do your first run of your budget, you will probably find you are actually going negative (not reaching your budget limit). This is because you likely have accounted for items you might not need. What you should then do is look at your discretionary expenses (i.e. those items you really didn’t need to buy) and ask yourself whether you should of spent that much. If not, reduce your budget to no longer include these items. For example, rent is evidently a must pay, whereas countless meals out and online shopping expenses could possibly be reduced in the budget (not removed as you still have to enjoy yourself).
What are the important aspects to have in your budget?
The number one thing is to split your expenses up into different categories. This makes it 10 times easier to keep track. For example, your categories might be home related expenses (rent, utility bills), food related expenses (groceries), car expenses (fuel, maintenance) and of course fun expenses (coffee, dinner, drinks etc.). It is vital to be honest and account for all items as skipping over little transactions will add up and prevent you reaching your budget target.
Should you use more than one bank account when managing your money?
Phil recommends that you should definitely be setting up multiple bank accounts to manage your expenses. Firstly, a transaction account for your everyday spending such as groceries and fuel. Next, an account for bills; expenses that are irregular such as electricity. The reason we break these things up is if you leave it all in your everyday account, it can be tempting to spend the money. Thus when quarterly bills comes around, you may be scrambling for money if it’s not already put aside in a seperate account.
Thirdly, it is a good idea to have a sum of money in an emergency account for any unplanned events such as if you lost your job or your car broke down. The last thing you want to be worrying about if events like this happen is where you are going to get the money from. Of course next is an account allocated to having fun! Having this money in a seperate account means if you want to do something such as go out for dinner, you can see in your account that you’ve got an allocation for it and not feel guilty.
Lastly a very important account is for your savings. This account is one you can really use to plan for the future. You should be trying to allocate 10-15% of your income into your savings account. All banks offer options for high interest accounts, ideal if you are going to be contributing money and not withdrawing it. However do your research to see which account works best for you, information on savings accounts can be found here for Suncorp, Westpac, Commonwealth, ING, ANZ.
How can I save more and have better savings habits?
The biggest thing about budgeting it that you have to track it. It’s all good and well to set out a budget but if you then just forget about it, it is no help to you or your savings. If you have allocated a certain amount of money to an expense and you’ve spent that limit, in theory you should not spend on that expense again until the next cycle.
What length of time should my budget be for?
It is a good idea to be matching up your spending plan with your income schedule. If you get paid fortnightly- run your budget fortnightly, if you get paid monthly- adjust accordingly. This means that when your income comes in, you’ve already got it allocated and you aren’t tempted to spend unnecessarily. Genius.
What technology exists to help with budgeting?
Apps can be a great way to record your spending and track how you are going. Otherwise it can be very easy to setup a spreadsheet and never open it again (from experience). There are many apps available, if you google personal financial app you will get a variety to choose from. Some examples Phil recommends is Pocketbook and Money Brilliant. Some you will need to pay for depending on the functionality you are after, e.g. feeding in transactions from your bank and auto-categorising them. Majority of these applications use the same level of security as banks.
Is it more important to have a savings goal or a budget limit?
Both. Like we discussed, you should be setting a budget limit based off past expenses. But you should also be setting a savings goal of about 10-15% of your net income. This may be tough at first but you need to start somewhere and likely make a few tough decisions about what expenses to cut. It’s important to remember that making these goals benefits you in the long run, such as being able to afford that trip away that you wouldn’t of been able to if you weren’t tracking and saving.
To make sure you are meeting your budget you need to look at every single expense outcome. Should you get a flatmate to reduce your rent? Is your private health insurance too high? Is there a cheaper mobile phone plan available? There isn’t usually one big ticket item, it’s about making small cuts across the board.
DON’T set up a budget and never look at it again, track it, use an app.
DON’T forget about the little items (e.g. ATM withdrawals and coffees, it all adds up).
DON’T use a credit card if you don’t need it, get a debit card.
DON’T keep all your money in one account, use several for different expenses.
DON’T be budgeting weekly if you get paid monthly, match it up.