Cashflow/Budgeting

17 Aug

Budget is not a swear word

Do you feel like you are earning good money but never seem to know where it is going? Do all your friends seem to be able to afford fancy cars and luxurious holidays but you can’t? We hear this a lot. Many people feel like their money is just eaten up each month with nothing left over. What can you do?

Perhaps you have tried ideas in the past but have found them hard to implement, hard to maintain or so complex that you don’t stick to them (a bit like dieting?!?). Ultimately though if you do nothing you know that you will go on living a restrictive lifestyle, worrying about every dollar you spend and never getting ahead or end up living outside of your means.

In a perfect world, all anyone really wants are options, choices and the freedom to do cool stuff and still be able to save money for the future. Ideally people want a simple solution they can implement that helps them decide exactly what they spend their money on with minimal effort to set up and maintain.

Like many people, I was never taught how to budget or manage my financial affairs and had to figure it out for myself. When I finished High School and headed off to Uni I had to move out of home as I grew up in the country. At the time, my parent’s income for the previous 2 years was too high for full Centrelink benefits so I was on partial Austudy and I worked part time between classes. My mum and step dad had just been made redundant (at the same time) and did not have the means to support me. I did not live lavishly that year. I existed mostly on a diet of home brand 2 minute noodles and bread, even so, my expenses exceeded my income and I racked up about $8,000 in credit card debt, which included my textbooks and computer for school.

The following year I decided I could not keep going that way and left uni looking for a full time job. Through a combination of sheer determination and working in a financial planning firm, I put myself on a debt repayment strategy and budgeting plan. I paid my credit cards off quickly and got on the path to setting myself up for the future. Anything is possible if you know what you are working towards, why you want to get there and if you have the tools to help you.

Budgeting is not about making cutbacks, it is about redirecting your money to spend on things you really want to spend it on. If done right, budgeting should ensure that you stay out of debt or help you work your way out of debt.

One reason why people struggle to save money is that without ever having defined the things they really want today, next year, in 5 years’ time, or in retirement, they end up spending money on things that may not be that important. Clarify what is important to you now and set goals for the future.

Imagine you sat down with your family and talked through what you want and decided you want nothing more than an overseas holiday in 2 years. It could be a romantic trip for 2 to Paris, a family holiday to Disneyland or a trip to Thailand with your best mates. You know you need to save $100 a week. You walk into the shoe/golf/video game store and spot the latest Jimmy Choos, Golf Clubs or Playstation. In that moment, you are more likely to exit the store empty handed when you can visualise your trip to Paris/Disneyland or Thailand. The thing you want reasserts itself as more important that the shiny new thing in front of you.

The second reason people struggle to save is instant gratification.

Instant Gratification is the desire to experience pleasure or fulfilment without delay or determent.
Delayed Gratification is the ability to resist the temptation for an immediate reward and wait for a later reward.

Waiting is hard. In a world that provides easy access to credit, apps which can get you food delivered now, a taxi ride in an instant, subscription to buy stuff RIGHT NOW, it is easier than ever to buy what we want today without having the money for it. More and more people are giving up dreams for bigger purchases such as a home because they can’t see a way to have it now.

Back in the 1960s and early 1970s a series of studies was undertaken by psychologist Walter Mischel, then a professor at Stanford University called the Marshmallow Test. In these studies, a child was offered a choice between one marshmallow provided immediately or two marshmallows (i.e., a larger later reward) if they waited for a short period, approximately 15 minutes, during which the tester left the room and then returned. Researchers found that children who were able to wait longer for the larger reward tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index and other life measures[1].

[1] Mischel, Walter; Ebbesen, Ebbe B.; Raskoff Zeiss, Antonette (1972). "Cognitive and attentional mechanisms in delay of gratification.". Journal of Personality and Social Psychology. 21 (2): 204–218. ISSN 0022-3514. PMID 5010404. doi:10.1037/h0032198.

By giving in to instant gratification and wanting something now, we often end up paying more, either by taking on debt and having to pay interest or by paying more for the item, such as mobile phone plans.

When we pay more for something we further delay our future goal as we leave less money for other things that we want just as much or more than the thing we just bought.

Focus on the reward. Celebrate the win. Saving IS hard but you get from it is a new car, a holiday, a home, freedom, choice and/or flexibility.

Steps

Step 1: Record your income and expenses for the last 3 months (at a minimum) and then x by 4. Add any income or expenses that did not fall in to that 3 month period and are paid or received annually.

Step 2: Split in to Needs (Fixed) and Wants (Fun)