Budgeting – How do you clearly define surplus?
The word that tends to make everyone cringe especially after the holiday period when you are trying to get back on top of your Christmas spending spree. Do you actually need a budget and what purpose does it serve other than making you feel bad about your internet shopping addiction?
Historically from a planning perspective, a budget is really a snapshot into your personal spending averaged out over a 12 month period. This would normally be done by completing an excel spreadsheet and racking your brain to have a guess at what you would normally spend under each category. As we well know, our actual budget generally isn’t as predictable as we would like so it can be difficult to plan ahead for big-ticket items which either end up getting taken from the offset account or put on the credit card to be dealt with later.
The purpose of a budget is to clearly define your capacity to generate a surplus. This magical word is the cornerstone to all future planning and will determine your ability to pay down debts or build your wealth. Given the recent changes to banking policy around investor servicing, it makes it even more important to be in a good position to reduce debts over time as opposed to sitting on an interest-only arrangement awaiting capital growth to provide you with the ability to continue to buy more properties.
So how do we manage cashflow without having to spend hours maintaining a budget?
Here are some simple tips:
- Utilize your offset as a hub account- Money sitting in here even for one day will reduce your interest repayments and save you money so you should consider directing all income into this account.
- Segment your fixed spending from discretionary costs- We all know what our fixed costs are likely to be as they tend to remain stable throughout the year. Where we tend to go astray is on our personal spending which needs to be clearly defined and separated to a separate account.
- Agree on how much spending money you will need a week- Tap and Go technology is a disaster for budgeting as it is too easy to overspend unless you implement safety nets. Work out what you normally spend on entertainment, coffee, lunches, alcohol on a weekly basis and set up an automatic transfer from your offset to a separate account. Once you spend it you need to manually transfer more funds which will alert you to the fact you are spending too much.
- Set monthly savings goals- You may have aspirations for having enough for a new house, investment property or a holiday to Spain but unless you break it down into measurable goals it can be hard to keep on track. Work out the total amount you need to save and get short term targets to hold you accountable.
- Use software to automate your budget- In the age of technology, we have endless solutions to assist with taking the time and effort out of day to day tasks. These tools give you the capacity to track all of your accounts, investments and debts and project to see how your day to day spending will affect the future outcome.
At Aureus Financial, we have recently implemented some new cashflow management software which allows us to automate and manage all of the above and act as your personal virtual CFO whilst giving you valuable insight into your spending patterns and what you can do to keep on track for your financial and lifestyle goals.
Budgeting isn’t about going without your morning coffee or buying home brand tuna to save a few dollars, it is about making educated and informed decisions to improve your long term spending behaviours. Accountability is the biggest tool in your kit bag to enable you to clearly define what you want and the action that needs to be taken to get there. All this is impossible without knowing where you are first so you can live for today and plan for tomorrow.
Thanks for reading,
Jackson | The Wealth Mentor