Budgeting.

Hi, I’m Bronwyn Lawson from Westpac’s Davidson Institute, here to talk to you about ‘Budgeting’. 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. I prefer to think of it as mindfully choosing how I want to use my money.

A personal budget is a simple tool but one that can make a big difference when it comes to managing your money. By taking the time to work out your personal financial situation and PLANNING for how you want or need to spend your money, you are much better placed to make confident decisions about your money. Confident decisions that, over time, will help you to plan for the future and get the GOOD things you want out of life.

Before I get started, I need to let you know that the information contained in this presentation 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.

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: • Understanding your financial position and using a budget to plan for what you want to achieve. • Developing good spending habits to support your budget. • Saving for your financial future.

A budget is really just a plan for your money. It shows the money that is available to you, the amount that you plan to spend, and what’s left over. While many people aren’t excited by the numbers, what you might get excited about is the things that a budget can help you 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 day to day but to share in some of the good things that life has to offer. Things like dinners out, holidays, cars, bikes, concerts, … whatever it is that you enjoy. There are also life 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 short of money.

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

So, the first part of planning is to think about your goals. What is it you want to achieve out of life? That might be a well-earned holiday, buying a new car or helping your kids buy their first car, owning your own home, or perhaps early retirement. Whatever it is, it’s not going to happen unless you want it, and you make it happen.

This brings me to my next point - taking responsibility. While it may feel like there are many things outside of your control, like prices going up and so on, you are still the one making decisions about your life and, to a large extent, how you spend your money. Only you can be responsible for you and your financial situation.

One of the most positive steps you can take 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 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 places that your money might come from. For many people the first obvious one is you work for it. This could be either you work for someone 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 a deposit or savings account, 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 we have, and where we get it from, is generally the easier 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 else).

The goal of course is to create a surplus and have money available to use. One of the tools you can use to understand what you spend your 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 are 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 each week /fortnight /month to start putting together your budget.

You can then 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 those goals we talked about earlier. Any notebook will do but there is also a Money Diary that you can download from the Davidson Institute website.

You can then add all those amounts into a budget planner like this one, also available to download from 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 - we suggest starting 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 show all the money you need just to live; then 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 are aiming for a surplus, so we have more money to spend or save. If you end up with a deficit, then you may need to either increase your income (not always easy) or look for ways to reduce your spending.

If reducing spending is something you’d like to explore further, try our Cost-cutting Checklist for some ideas on where you may be able to make some changes. Like the Budget Planner you can download it form the Davidson Institute website and it provides some thought-prompters on where you might find some savings in your everyday spending.

Remember, the great thing about a budget 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 cutting back on 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 disrupting your budget goals.

Often, one of the biggest challenges you’ll experience 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 significant issues. 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 every day. Let’s say that you buy a sandwich and a drink for lunch each day. That might cost around $15. For many people $15 isn’t really a lot and they possibly wouldn’t even miss it.

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 you could do with $3,750. And this is just one little leak! Keeping a money diary might help you to identify your leaks just like the example we’re going to have a look at now.

I’d like you to meet “Leaky” Luke. Luke lives in the suburbs and catches the train into the city every day for work. He’s always running late but doesn’t miss buying a coffee to give his day a kick start. When he gets into the city, he buys a bottle of water to drink as he walks the rest of the way into work. He loves a good latte and so never misses coffee with the gang at morning teatime.

Because he is always running late in the morning, he buys his lunch every day – which is normally a sandwich and a soft drink. He and his mates are movie buffs so their weekly trip to the flicks costs him about $30.

What is this actually costing Luke? 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 for Luke. Then there’s the monthly subscriptions he pays for a couple of streaming services. 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. Again, it’s not necessarily denying yourself these things. It’s about making a choice as to whether you want to continue to spend 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 Luke decides it’s time to make a few changes and get better organised. By getting up a little earlier each morning he can catch an earlier train … one that doesn’t charge peak hour prices. He would also have time to make his lunch most days and have a coffee at home before he leaves. He does enjoy his morning coffee catch-ups and is happy to buy his lunch once a week, but now drinks tap water from his reusable bottle.

Because he wants to save enough for an overseas trip he’s decided to cut back his movies to once a month, and he’s cancelled the streaming subscriptions he was no longer using and decides to keep just 1 pay TV subscription. Not huge changes for Luke, but significant ones for his budget! Instead of his leaks costing him more than $10000 a year, these little regular spends are only costing him just shy of $4000 a year.

That’s a saving of $6,750!! And what could Luke do with an extra $6,750? Well – forget Luke -- what could you do with an extra $6,000? Luke’s example is a simple one but a common one. Your daily expenses may look slightly different, but think about it – 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 to help you stick with your budget: Firstly, don't spend more than you earn! Sounds obvious, right? However, it’s a very easy trap to fall into misusing things like credit cards or buy now pay later services. So, how do you avoid it? By planning well, being aware of your cash flow, and developing good spending habits.

It’s also important to recognise Wants vs Needs: Much of our spending isn’t really necessary, but it’s nice to have. So next time you are tempted to splurge ask yourself “Do I really need it?” Now, I’m not saying don’t buy the things you want, but I am recommending making an informed choice. Ask yourself “If I buy this thing that I want now, what else might I be missing out on in the future?”

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. This is simply where you let an emotional reaction override your careful plans. If you are 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 money. Aim to ensure you use any interest-free period you have and clear your card in full each month. If you are 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 are buying. 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 for the future. 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 financial future first.

So, how much should you pay yourself? A good guide is about 10% of your total 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. Make it even easier by automating your savings using pay disbursements or auto transfers so you don’t need to even think about it. Once 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 have to continually dip 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.

We also suggest keeping your savings separate to your spending money. Tuck it away, out of reach, and make it work for you … potentially earning more money or saving you interest on your home loan in an offset account.

To me, saving is about creating the financial future that you want but it shouldn’t mean that the present is all hard work … set yourself some regular milestones as you see your savings grow over time and reward yourself. Enjoy that sense of accomplishment as your savings work toward giving you options and choices in the future. Like your good spending habits, good saving habits will help you to achieve financial security and your 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. You’ll 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 long-term investments - things like superannuation, shares, or purchasing investment properties. Accessing this money is generally more difficult. However, that is 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, throughout the webinar we have 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 have set helping make our goals all the more achievable.

Thank you for watching our ‘Budgeting’ video. I trust you found it helpful, and I encourage you to check out the other resources on the Davidson Institute website to help build your financial confidence. Bye for now.