An ad hoc approach to your personal finances might have worked in the past, but trends such as less stable employment patterns and a cashless society have increased the need to plan ahead.
Increased spending, less financial control
Ask most people if they are good at managing their day-to-day finances and you’re likely to get a positive response.
The statistics tell a different story.
CommBank research2 in 2017 found that more than one third of Australians were spending more than they earned each month, and one in three households would be unable to find $500 in an emergency. $500 is roughly the cost of replacing a broken washing machine.
The findings don’t surprise CommSec Adviser Services Business Development Manager Chris Hill. “People are earning more than ever, but they are also spending more.”
Social change makes budgeting more important
While good budget management has always been important, four trends make it essential:
Research by Gallup in the US finds that about a third of consumers say social media has some influence on their purchasing decisions.3
“We are seeing an increase in consumption and in people being willing to spend money they don’t necessarily have,” says Hill. “It’s about wanting to buy now and not wait for things anymore.”
“The push for frictionless transactions is increasing. Businesses are happy to help us spend our money and are keen to make it easier than ever before.”
Income volatility and outsized expenses
If you’re a contractor, are you budgeting for benefits such as holidays and retirement? Both are traditionally funded by employers, but if you’re part of the gig economy they’re your responsibility now.
But it’s not only contractors who run into problems with budgeting.
“Not only are we spending more, we’re also working for a shorter period due to starting our income earning years later,” notes Hill. “And we are living in retirement longer.”
The cost of big-ticket items like a home and education are ballooning. Private education costs soared 61 per cent over the ten years to 2018, dwarfing the 34 per cent rise in wage growth over the same period.4
Why budgeting can help
If creating a budget sounds like a yawn-fest, think of it as cash flow management. That makes it sound less abstract.
“Your personal cash flow is something that can be managed and you can influence. Good management of your cash flow is vital for achieving financial independence,” says Hill.
“It’s about understanding your money and thinking like a business. That means looking at your costs-to-income ratio and aiming to see it go down.”
According to Hill, it’s sensible to keep costs within 75 per cent of income. “If it’s greater than 75 per cent, then it is a lot more difficult to deal with any financial problems you might face.”
Tools to help you with budgeting
Creating a budget and tracking your spending doesn’t have to be painful. Many people enjoy the sense of control it brings once they’re familiar with the tools.
If you want to go old school, ASIC has a Budget Planner Template you can print out or use as an Excel spreadsheet.
ASIC also offers a free TrackMySPEND app that allows you to monitor personal expenses on the go and track your progress against pre-set spending limits.
CommBank’s free Budget Planner allows you to enter your current income and expenses and configure the information in different ways. You can also vary the amount you spend on different categories to see the overall impact of changes you could make.
The CommBank app includes Spend Tracker, which monitors debit and credit card spending. Spend Tracker allows you to see exactly what you’re spending, and pinpoint the areas where you spend the most.
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Important: This article has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only.