How many companies would operate without knowing what revenue they are making, compared to what they are spending? Not many. And what will happen to those spending more than they are earning? They have only two options – increase earnings or cut spending. If not done – it will only be a matter of time before they go out of business.
The same principles apply for households. Many clients that I meet with do not do a household budget for various reasons – some aren’t sure where to start, some feel it’s too time consuming while the majority try to, but simply can’t stick to it.
We see a lot of clients that are trying to do all the right things – paying extra on their mortgage and putting money aside for investments – however – as they are not tracking the budget – they are accumulating debts on credit cards at interest rates usually around the 20% mark – making all the efforts in investing and paying off their mortgage useless!
But where do you start? The first step is to work out your income and compare it against your total expenses – including quarterly and annual bills. Break these less regular expenses down to a weekly/monthly amount to make the comparison easier. For example, if my car insurance is $600 per year – that’s $11.50 ($600/52) per week that I am ‘spending’ each week – even though not actually handing over the cash. It is also a useful strategy to actually put this money away in a separate account each week, so that when the big bills come, they are provided for.
From there, you can make the necessary decisions – hopefully there is money left over – which can be used for investment, extra mortgage repayments or additional super contributions. If not, there are other vital decisions to be made to cut spending.
Contact your financial Planner for assistance.