How to balance the budget.

The silly season is over, the New Year is in full swing and many of us are setting goals and making plans for the coming year. Many of us are also dealing with a financial Christmas hangover. Which makes this a great time to look at your budget for the coming year. Set aside some time to have a close look at your finances to see how you can save some extra cash this year.

Yes I know that spending the day looking at your budgets isn’t anyone’s favourite pastime. It really isn’t as daunting or difficult a task as you may think it will be and the results can literally save you thousands of dollars each year. It may just pay for that dream holiday or new car you’ve been trying to save for.

• Download our free budget spreadsheet to make things easier. Simply fill in your income on the first tab, then expenses in the next tab. You can simply add any income or expense categories.

How to plan your budget

First of all you will need to look at your income and expenditure for the past year to get a clear picture of your finances.

When looking at our budget, I find it easiest to work on monthly figures, taking into account annual, monthly and weekly expenses.

Firstly look at your weekly income after tax. Multiply this by 52 and divide by 12 to get a monthly figure. For example, if you are earning $500 per week, you are earning $2,166 per month, not $2,000 ($500 x 4).

Now you know your income, you need to work out your expenses.

• Start with your annual expenses, such as car registration and annual insurances. Divide these by 12 to give you a monthly amount you need to set aside.
• Next look at quarterly expenses, such as council rates and electricity. Once again, multiply by 4 and divide by 12 to give you the monthly amount you need to set aside.
• Now list your set monthly payments, mortgage, rent, loan repayments, insurances, etc.

These three figures are your set regular monthly commitments before food, fuel, entertainment and “spendings”,that can vary from month to month. I imagine everyone’s grocery budget went out the window at Christmas!

Now it’s time to look at your weekly spending. You may think you know how much you spend each week, but you could well be surprised at how much you actually spend.

• Go through your statements for the past few months and categorise your spending into groceries, fuel, entertainment, healthcare, pets, clothing etc. Many online banking sites have this feature to make budgeting easier

This exercise is bound to give you some interesting results.  You could be surprised how many “little things” can be cut back on to save money. For example I was shocked to find that my cheap take-home pizzas after work a couple of nights a week had added up to $100 per month. An obvious place to cut back.

• Finally, add up your annual, quarterly, monthly and weekly expenditure to get your total monthly expenses. Subtract this figure from your monthly income. For example, if you are spending $2,000 per month and earning $2,166 as above, you have a $166 surplus per month
• If you are spending less than you earn, congratulations, you are already in good shape, but you can probably save even more.
• If you are earning less than you spend, you have a serious problem which you need to address.  You need to cut your expenditure to meet your income. “Cut your coat to suit your cloth” as my grandmother used to say. If there is really nowhere you can cut expenses, you need to make some extra income to balance the budget.

Making extra income

Do you have a hobby from which you could make some income?

• Selling plants, produce or craft items at your local markets
• De-clutter the house and sell disused items either at a garage sale or through your local Facebook buy swap sell pages.
• Can you offer services such as lawn mowing, house cleaning, pet sitting or babysitting to make a little extra cash.
• Are there any part time or casual job opportunities locally you could take advantage of?
• Do you have larger items such as a boat, car, camper that you no longer need and could sell to pay off a loan?  This will immediately reduce your monthly expenses by the amount of the repayment.
• Can you “back trade” a late model car with expensive loan repayments for a cheaper, more affordable model?

Check your regular Bills

• Have a close look at your regular bills, for example phone plan, power bills, insurances. Do they still fit your needs? Are you still getting the cheapest deal? It can really pay to contact your provider and shop around.
• Are you paying for any subscriptions that you no longer use? Identify them on your bank statement and cancel them. Do you really need, or can you really afford Foxtel or Netflix?
• Look at your credit products, particularly credit cards. For example, are you on a “low fee” card, yet don’t repay your balance in full each month?  If this is the case, you would be better off with a “low rate” card, so more of your monthly repayment is going towards paying off the balance.
• Do you have a number of smaller loans that could be rolled into one loan with a single repayment? Making an appointment with your bank to discuss these options can be very worthwhile

Repay debt more quickly

You might be easily managing your minimum monthly payments on your loans and credit cards . But if you have some surplus funds each month, repaying these more quickly will save you thousands of dollars in interest over the life of the loan

• List your debts in order of interest rate and the amount owing.
• Tackle the smallest debt with the highest interest rate first. Redirect any surplus cash you have at the end of each month to pay it out more quickly, while maintaining the minimum monthly payment on your other loans.
• Once that debt is repaid, move onto the next, redirecting the additional payments from the repaid debt. You won’t miss the additional money that was going onto the original loan. This is known as the “snowball effect”
• Use any bonuses, tax refunds or unexpected windfalls to repay a debt.
• Do be aware that with fixed interest loans, it may not be in your best interest to pay them out early, as you could wind up paying additional “penalty interest” In this case you would be better directing your additional repayments to a loan with a variable interest rate. If you are unsure what type of loan you have, check with your credit provider.

Savings account versus loan redraw

We all need to have a “buffer” for a rainy day. If the fridge blows up, the washing machine dies or we get a large unexpected bill, it is reassuring to know we have a little money tucked away to cover these things.

However, if you have a variable rate mortgage with a redraw facility, you may be better off saving this surplus in your redraw than in a savings account.

Say you have $5,000 in your redraw account. Your monthly interest will be calculated on $5,000 less, with more of your repayment going to pay off the principal. Your mortgage rate will be higher than any savings account rate, so you will effectively be getting the highest return on your savings.

Put simply, at current interest rates, $5,000 in a savings account will earn you around $6.95 per month in interest. The same amount in your mortgage redraw will save you $19.65  per month and help to pay your loan out quicker.

Do check with your bank, but many mortgages allow you to withdraw these funds from the loan just like a savings account.

Consolidate your super

While looking at your finances, don’t forget your Superannuation. Many Australians, particularly women will have accumulated a number of smaller accounts over their working life. Each of these is incurring fees, and quite probably duplicate life insurance premiums which are eating into your retirement savings.

ASIC has a Lost Super page that can guide your through locating and consolidating your super. This will help to boost your retirement savings. Your current super provider should be able to provide you with the necessary forms to do this.

Other money saving tips

• Take lunch to work. Even $10 a day on a sandwich and coffee is $50 per week, or $2,500 per year saved.
• Avoid takeaway meals. A quick an easy meal from the supermarket is much cheaper.
• Fuel shop – in Australia fuel can vary by up to 10 cents per litre between petrol stations. This may only be $5 or $6 per tank of fuel,but over the course of the year, this certainly does add up. There are a number of great apps which can help you to monitor prices near you.
• Think generic when shopping. Yes many “generic brands” are of poorer quality, but there are many things that are just as good. Flour and sugar for example. The savings may seem small, but they will add up over the year.
• Toss your loose coin in a jar and take it to the bank when it is full. You’ll be surprised how quickly this can add up.

The above are a few general tips to help you budget better and save more this year. If you are struggling to pay the bills, you should speak with your bank or a financial counsellor who can give you expert advice.

How to turn your trash into cash

The kids have left home, what now?