My money plan.

Hi, I’m Bron Lawson from Westpac’s Davidson Institute, and I’m here to talk to you about building your money plan. This video is one of a series that we’ve produced in conjunction with Ruby Connection aimed at helping women improve their financial confidence and wellbeing.

When you mention the word ‘budgeting’, the first things that many people tend to think of are restrictions, or ‘cutting back’ or having to go without the good things in life. I prefer to think of it though as mindfully choosing how I want to use my money.

By taking the time to work out your personal financial position and PLANNING for how you want to spend your money, you’re much better placed to make confident decisions about your money. Confident decisions that, over time, will help you to effectively plan for the future and get the GOOD things you want out of life.

By taking the time to work out your personal financial position and PLANNING for how you want to spend your money, you’re much better placed to make confident decisions about your money. Confident decisions that, over time, will help you to effectively plan for the future and get the GOOD things you want out of life.

Firstly, times are changing; with millennial women now leading the way in home buying and investments – a far cry from the days (only 30 years ago) when women required a male guarantor to borrow money. And these days women are our household CFO’s, managing 80-90% of household finances despite being less financially confident than men.

However, we still have a long way to go. Currently the average annual salary for women in Australia is $44,000 which means that on average women need to work 59 days more than men to earn the same amount. And while the gap is closing, women are still retiring with 47% less super than men, and with a longer life expectancy it needs to last them longer too.

That’s why Ruby Connection and the Davidson Institute have partnered to bring you this series of videos to encourage women to take a more proactive interest in their finances sooner rather than later and work towards their own financial wellbeing.

So, in this video I’m going to explore the concept of budgeting and money management to help achieve your goals. I’ll talk about: • Putting together a plan for your money. • Developing good spending habits to help you stick to your budget. • And some Saving tips to help you get started.

Before we begin though, I do need to let you know that the information in this video is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice by speaking to a banker, financial advisor, tax advisor or accountant.

In practical terms, a budget is a statement that shows the money that is available to you, the amount that you plan to spend, and what’s left over. Many people aren’t excited by numbers but what they should get excited about is all the things that a budget can help them to achieve.

The purpose of money is to support our way of life. We want to be able to use that money, not just to live but to share in the good things that life has to offer. Things like holidays, cars, boats, concerts, dinners out … whatever floats your boat. There are also some significant events that we want to enjoy to their fullest … like going to university, getting married, having children, buying a house, or even retirement.

It is when we let these events ‘creep up’ on us, or we partake in too many good things in life, that we can run into trouble.

This is where planning can help. At all stages of your life, planning can help you make sure that you have enough money to live the life that you want and achieve your financial goals.

So, the first part of planning is to think about your dreams and goals. What is it you want to achieve out of life? That might be a gap year overseas before going to university, the capacity to help your kids buy their first car, owning your own home, or perhaps early retirement. Whatever it is, it’s your goal and it’s up to you to work toward achieving it.

This brings me to my next point - taking responsibility. It’s also up to you take responsibility, or control if you like, over your finances. Only you can be responsible for your decisions about your money and your financial future.

One of the best things you can do to help achieve your dreams and goals and have the financial future that you want is to develop good money habits. I always think that if you can make something a habit, it becomes much easier to do because you do it without even thinking about it. We’re going to have a look at some good spending and saving habits later in the video.

So, once you’ve thought through your dreams and goals and have an idea of what you want life to look like the next step is to look at what money you have available to you. One way to look at this is through the concept of ‘cash flow’. Cash flow is simply– Cash-In, less Cash-Out, equals a surplus or deficit – or, what’s left over.

Cash-in is “where I get my money from”. There are a number of p sources of income. For many people the most obvious one is you work for it, either you work for someone else or perhaps you run your own business.

Another way to get cash in is to have your money work for you or to earn income from investments, such as interest on your savings or dividends earned on shares. Some people are eligible for social security payments, or others may have income from an insurance company if they’re injured or unable to work.

‘Cash-in’ often only comes from one of these sources and is a very finite amount. Working out how much money you have, and where it comes from, is generally the easy bit. The next step is to work out how much money is going out.

From savings and loan repayment to education or entertainment with food, transport, housing, and health in between there are lots of ways that we use money to support our life. How much you spend on these things will determine whether you end up with a surplus (or money left over) or a deficit (where you may have had to borrow some money from somewhere). The goal of course is to create a surplus and have money available to use.

One of the tools that we can use to understand what we spend our money on is a money diary. Record every single cent you spend for let’s say one month and this will then give you a very clear picture of where you’re spending your money. You can then group these expenses into things like housing, transport, food, etc. and add up the amounts to see how much you spend to start putting together your budget.

You can then add all those amounts into a budget planner like this one, also available on the Davidson Institute website. Start with your ‘Cash-in’ from your wages or wherever it comes from, noting whether that’s weekly, fortnightly or monthly.

Then record all of the ‘Cash-out’ amounts - take care to match up the timing, that is, are you working on a weekly/fortnightly/monthly budget? Start with the money you want to save; then record the money for your commitments to other people like loan repayments, phone plans and so on; then record all the money you need to live… food, housing, transport etc; then include the money you choose to spend to maintain a particular lifestyle.

Add up all these amounts and subtract that from your money in and you’ll end up with a surplus or a deficit.

As we said earlier, we’re aiming for a surplus and if you end up with a deficit, then you should be looking to do one of two things: either increase your income (not always easy) or reduce your spending.

One way to look at reducing your spending is to use our handy cost-cutting checklist. There are some great ideas in here to help reduce costs. Some of them will have a bigger impact than others; some you’ll love, and some may not suit your situation at all. But these thought-starters may even help you think of other ways you can reduce costs to help you stick to your budget.

Remember, the great thing about this is that it is a plan - a picture if you like - and if you don’t like the picture you’re painting, you have the opportunity to change it. By taking the time to look at your spending and develop your budget, you can make the decision as to whether this is how you want to spend your money or whether there is a better way that will help you to achieve your financial goals.

As I said earlier, often when we think of budgeting, we think of reducing our spending or ‘cutting back’. In reality though, there is a certain amount we need to spend all the time simply to live. Then there are the things that we want, as opposed to the things that we need such as that nice piece of jewellery, a fancy dinner, or the latest tech.

When we think of budgeting, we quite often think of not being able to have the nice things that we want, but the reality is that buying a sandwich for lunch every day of the week could actually be the thing that is impacting your budget.

One of the biggest challenges when you’re trying to stick to a budget is spending leaks. Think of your budget like a boat - we know that one big hole in the middle of the boat will sink it! That one big hole in your budget might be major car repairs, unexpected dental work, or even an unplanned trip away. Any of these things has the potential to sink our budget ‘boat’.

But what if we have a few tiny holes? Over time even those tiny holes will leak enough to cause us problems. We call these little holes - spending ‘leaks’.

When you think of ‘leaks’ in terms of your budget, think of the little things that you buy regularly that might only cost a few dollars here or there. It could be as simple as buying your lunch. Let’s say that you buy a sandwich and a drink for lunch which probably costs around $15. For many people $15 isn’t really that much and they probably wouldn’t even miss it from their wallet.

But what if you did that every workday? If you work 5 days a week, it would cost you $75 per week. Over the course of a full year, that $15 per day adds up to $3,750. Think about what else you could do with $3,750.

And this is just one little leak! Your money diary can help you to identify your leaks just like the example we’re going to have a look at now. Meet “Leaky” Leya. Leya lives in the suburbs and catches the train into the city every day for work. She’s always running late but doesn’t miss buying a coffee to give her day a kick start. When she gets into the city, she buys a bottle of water to drink as she walks the rest of the way into work.

She never misses coffee with the gang at morning teatime and loves a good latte. Because she is always running late in the morning, she buys her lunch every day – which is normally a sandwich and a soft drink.

She and her girlfriends love a good chick flick and their weekly trip to the movies costs her $30 What is this actually costing Leya? Individually, each of these things is relatively cheap. A few dollars for coffee, few dollars for lunch … but weekly, those little bits and pieces add up to $200.

Then there’s the monthly subscriptions she pays for a couple of streaming services, and an online music service that she set up when she went overseas and has simply forgotten to cancel now that she doesn’t need it any longer. When you add that into the mix … over a year, that adds up to over $10,000!

Does this scenario sound a little familiar to you? Don’t worry, we all have little leaks, including me. Again, it’s not necessarily denying yourself these things. It’s about making a choice on whether you want to keep spending your money in this way and building it into your budget, or whether you recognise that these leaks could be delaying you in achieving your goals and you decide to do something about it.

Let’s say Leya decides it’s time to make a few changes and get better organised. By getting up a little earlier each morning she can catch an earlier train … one that doesn’t charge peak hour prices. She would also have time to make her lunch most days and have a coffee at home before she leaves. She does enjoy her coffee catchups and is happy to buy her lunch once a week, but now drinks tap water from her reusable bottle.

The lure of saving enough for another overseas trip sees Leya cut back the movies to once a month, and she’s cancelled the subscription she was no longer using and decides to keep just 1 pay TV subscription. Not huge changes for Leya, but significant ones for her budget! Instead of her leaks costing more than $10000 a year, these little regular spends are now only costing her just shy of $4000 a year.

That’s a saving of $6,750!! And what could Leya do with an extra $6,750? Better still, what could you do with an extra $6,750 each year? Leya’s example is a simple one but a common one. Your daily expenses may look slightly different, but consider this – do you really know how much it is costing you? And more importantly, would you continue with that cost knowing that it could mean the difference between achieving your goals or not?

So, fixing our spending leaks is one way of getting our finances into better shape. Here are a few more good spending habits: Don’t spend more than you earn! Sounds obvious, doesn’t it? However, it’s a very easy trap to fall into using things like credit cards. How do we avoid it? By planning well, being aware of cash flow, and developing good spending habits.

We also need to recognise our Wants vs Needs: Much of our spending isn’t necessary. So next time you’re tempted to splurge ask yourself “Do I really need it?” Now, I’m not saying don’t buy the things you want, but do make an informed choice. Ask yourself “If I buy this thing that I want now, what else might I be missing out on?”

Another good habit is to defer spending. We often buy on impulse but if we can defer the purchase for few days or even a few hours the urge often goes away. Some people do things like leave their credit card at home so they can only spend the cash they have on them, or they might decide to wait until next time they shop to see if the urge is still there.

A lot of impulse buying is emotional spending and best avoided. This is simply where you let an emotional reaction override your careful plans. If you’re tempted to make an emotional purchase, ask yourself “Is it really going to make me feel better in the long run? How will it affect the goals I’m looking to achieve? “

It’s also important to use your credit card wisely. Credit cards are a great tool but only if they are used well. Remember each purchase you make will potentially cost you more. Aim to ensure you use any interest-free period you have and clear the card in full each month. If you’re going to use your card for larger purchases that you won’t pay off within the month, look for a card with a lower rate and be disciplined to pay it off as soon as possible.

And finally, Value your Money: This is when it pays to understand the value of what it is that you’re buying. Some of those “great deals” you see advertised - if you break them down - sometimes don’t stack up at all. Do your research, shop around, and make sure you’re getting value for your money. Some people even think of things in terms of …”If I buy this now, how many hours work will I need to do to pay for it? Is it worth that?”

So, there you have it, a few simple habits to form to help you make more mindful decisions about how you spend your money.

Ultimately, the purpose of developing good spending habits is to put yourself in a position where you can save for the future. Remember back to the start of this session – we talked about planning. Planning for a holiday, a wedding, a baby or even retirement. Saving is about our future spending rather than our ‘now’ spending. Like spending, there are some good habits we can develop that will help us to save more effectively.

A good habit to get into is to allocate savings as part of your budget before you allocate spending money! Think about it as paying yourself first or putting your future first. So, how much should you pay yourself? A good guide is about 10% of your income. I know that this isn’t always possible but even if you start small, start now! Even small amounts add up for you over time. If you get into the habit of doing it, then it becomes less noticeable to the point where you don’t even miss it.

I would say though, don’t make your savings goals too difficult. If you say you want to save $100 a week, but then find that you keep dipping into your savings for everyday spending, you will only become disheartened. Start with a challenging but manageable goal and if you find you have money left over, then add that to your savings as well. Build up to higher savings targets over time.

Finally – keep your savings separate to your spending money. If it’s tucked away, out of reach, potentially earning more money, you’ll see your savings grow over time … giving you a sense of accomplishment and opening up options and choices in the future. Like your good spending habits, good saving habits will help you to achieve financial security and future financial goals.

And like your goals, when it comes to savings, there are 3 levels – or tiers – to consider. Firstly – there are short term savings, that help with things like medical expenses or car repairs. This might include an emergency fund to help out when the unexpected happens. You will want to be able to get to your savings quickly so keep this type of money in an accessible savings account.

Secondly - there are medium term savings. These savings are for 3–5-year goals such as saving for an overseas holiday, a car, or even a house deposit. You generally won’t need quick access to this, so you can afford to lock the money away, say in a term deposit, potentially earning you more interest.

Finally - there are long term savings, such as saving for retirement. These savings will often be in the form of investments - things such as superannuation, shares, or purchasing investment properties. Accessing this money is generally more difficult but that’s okay because you generally won’t need to access it quickly.

By allocating your savings to short, medium, or long-term goals you’ll effectively be covering all bases for the future. So, to wrap up, throughout this video we’ve looked at budgeting as a tool we can use to help achieve our dreams and goals. By planning our financial future, we put ourselves in a much better position to have the things we want in life. Developing a budget is about understanding what money comes in and making choices about what goes out and where to.

Developing good spending and saving habits supports the budget we’ve set helping make our goals all the more achievable.

Thanks for watching ‘My money plan’. We hope you found this video helpful and encourage you to check out the other resources on the Davidson Institute and Ruby Connection websites to help build your financial confidence. Bye for now.