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Dealing with the Budgeting Blues

There are two golden rules to budgeting:

  1. Spend less than you earn; and

  2. Borrow less than you can afford

Sounds simple, doesn’t it?! Hardly! One of the most common hurdles we encounter with clients is gaining a full understanding of their spending – we estimate only around 15% of clients have a clear idea of where their money is being spent as most people dislike the idea of a budget.

On a basic level, we have control over 3 facets of our ability to earn and maintain wealth – how long we work for, whether we invest to educate ourselves to increase our earning (income) potential, and…. this is often the hardest to manage… how much we spend.

The benefits of having an idea of expenses in comparison to earnings are clear. You will gain confidence when future decisions on spending are made (yes, I can afford this overseas holiday), you will be able to prioritise spending more easily (would I rather upgrade the car or pay the mortgage back 3 years faster) and you will avoid buyers’ remorse (OMG I shouldn’t have bought these shoes, I’m worried I can’t afford them).

Where to start? Best to define the difference between Budgeting and Spending Analysis

A budget is forward looking – an estimate of expenses over a specific period and Spending analysis is rear looking – it involves tracking what you have spent over a specific period.

There are any number of budgeting and spending analysis theories, tools and programs online which can then be overwhelming. I find a great place to start for my clients is to get them to split their spending between Non-negotiable items and Negotiable items. What appears in each list may change from client to client (i.e. holidays may become negotiable for some, whilst Foxtel to watch the football may be non-negotiable for others). Once the Non-negotiable items list is complete, we minus this from net earnings. This leaves the amount of funds left over to cover the spending items under Negotiable column.

This blue print allows the spending analysis to happen – is there enough left to fund the negotiable column? Is a rethink required regarding negotiable and non-negotiable items? Can money be saved on any of the line items (i.e. reviewing your Electricity bill / home insurance provider)? Am I saving enough off my mortgage to repay it before retirement?

This analysis is also the confronting part – am I borrowing from my future to fund the lifestyle I am living today?

Once the non-negotiable items are agreed and reviewed, it becomes as simple as dividing this figure by your pay cycle and setting aside this amount each period in a separate ‘bills’ account. Anything left over can be spent with the confidence and knowledge that you will have enough to cover your non-negotiable expenses.

Heart Financial Advisers prides themselves with their mission of providing security and trust with a disciplined approach to their clients, so they can achieve financial success.

Disclaimer This information is current as at 05/11/18.This article has been prepared by Heart1Stop, a social media brand owned by Heart Mortgage Services and Heart Financial Advisers. The information contained in this article is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The views expressed here are not those of Heart1stop, Heart Mortgage Services, Heart Financial Advisers, shareholders, directors or staff and associated contractors and business associates. This article has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this article, consider its appropriateness, having regard to your objectives, financial situation or needs. Any taxation information contained in this article is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual’s situation may differ, and you should seek independent professional taxation advice on any taxation matters. While the information contained in this article may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of Heart1Stop or Heart Mortgage Services and Heart Financial Advisers that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and no party of Heart1Stop or associated entities as mentioned is in any way liable to you (including for negligence) in respect of any reliance upon such information. This article may also contain links to websites operated by third parties ("Third Parties") who are not related to Heart1Stop. These links are provided for convenience only and do not represent any endorsement or approval by us.

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