This article is written by Hamish Landreth, Associate Director.
Even just the mention of “budgeting” can be enough to send some people into a panic. Images of austere living, sacrificing the things we enjoy or the inevitable guilt when the budget gets “blown” immediately spring to mind.
Whether you own a business or are trying to meet your family’s living costs, cashflow is the lifeblood of any financial strategy. It’s therefore not surprising that a recent study by CoreData, on behalf of Fidelity International, found that 65.7% of Australians say they worry about money at least monthly and 23.5% at least daily. More concerning is that over half of those surveyed say this affected their mental health.
Forecasting expenditure is still really important when evaluating the impact of a business or personal financial decisions, however it is clear that budgeting, as a tool to managing cashflow, isn’t working for most of us and we need to reframe the way we approach managing our money.
As a financial adviser, one strategy I suggest to my clients is to focus less on what they think they are going to spend and focus more on tracking what they actually spend.
Step 1: Get a snapshot of what your cashflow looks like right now. If you’re running a business there are a number of excellent pieces of software that can collate and categorise the many deposits and withdrawals that run through your accounts every day, making this a largely automated process. This allows you to review your business performance almost in real-time, a feat that was seemingly impossible not too many years ago.
Running a household can, at times, seem like running a business and now many banks are providing automated tools to help people track their own spending habits. Alternatively, simply going back through the last few months of bank account or credit card statements and totalling up your different spending categories can prove very enlightening.
Step 2: When you have a picture of your “spending reality” (not the forecast you made months ago), look at the categories in which you can possibly achieve some savings. For example, how long since you last reviewed your insurances or are your commercial or personal loan interest rates still competitive?
Step 3: Once you’ve gone after the quick wins, you’ll have a better idea of what your core expenses will be on a recurring basis. A tip here is to transfer that amount into a separate account each fortnight/month. If you can meet all your core expenses from that account then you know you are tracking to your budget, but if you are regularly accessing extra funds to help ends meet then you know you are over-spending. This provides an easy, live tracker of how your cashflow is going, no spreadsheets required! If there is a cashflow issue then this should allow you to identify it and take the required action sooner than you otherwise might have.
The key to success here is honesty and simplification; be honest with yourself about what you’re spending and make it as easy as possible to track, that way you’re more likely to stick with the process and the long-term rewards for doing so are significant. You can worry less about money and start thinking more about how best to apply your savings, which is not only a lot more fun but is the fundamental step in ensuring you are improving your financial situation each year.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please contact us if you want more information. Prosperity Wealth Advisers Pty Ltd (ABN 32 141 396 376), Authorised Representative and Credit Representative of Hillross Financial Services Ltd, Australian Financial Services Licensee and Australian Credit Licensee 232 706.