A plan to save for life

Committing to a budget not only saves money, it helps you take control of your future, writes Bina Brown.

By InvestSMART · 6 Sep 2009

By InvestSMART ·
6 Sep 2009

Committing to a budget not only saves money, it helps you take control of your future, writes Bina Brown.

There is something about preparing a budget and sticking to it that leaves most people cold.

Yet often it is the only way of really knowing what you spend money on and where there are savings to be had.

A director with financial advice support business Strategy Steps, Jennifer Brookhouse, says that while budgets can be initially time-consuming and confronting, really considering where your money is spent has definite benefits.

It may identify patterns of behaviour that need to be changed or create the feeling you are losing the freedom to purchase items when you want them but they also identify what you can afford in the future, she says.

The manager of online savings secrets site Simple Savings, Naomi Bruvels, says that by changing just a few simple lifestyle habits you can turn your own household economy around.

Some of her favourite savings tips include cooking from scratch to save $2000 a year and setting a weekly menu to save $7800 a year.

A financial planner at AMP, Mark O'Leary, says that like a favourite pair of faded jeans people can stretch their income to cover life's necessities by taking lunch to work, instead of buying it, and cutting back to one coffee a day to save on health as well as the hip pocket.

For those of us not planning on winning the lottery any time soon, following a realistic savings plan is going to make life a whole lot easier," O'Leary says.

"Take advantage of compound interest and watch savings grow.

BUDGET BENEFITS

Cash flow is the cornerstone of any good financial plan, according to the principal consultant with Melbourne advisers Godfrey Pembroke Camberwell, Mike Ingham.

It provides an insight into a client's spending and earnings and helps answer the all-important question: 'Where are we now?"' he says. "It can identify cash surpluses that can be used to accelerate the repayment of debts, fund major expenditures such as cars and holidays or their retirement.

Brookhouse adds that, depending on your life stage, budgeting can also identify: how much income is required in retirement and therefore how your investments and superannuation need to be structured; your disposable income, which determines how much you can realistically save; whether your disposable income is sufficient to cover expenses; and future expenditure needs and expected timeframes, such as having a child or paying for an education.

Budgeting can assist in achieving long-term goals, such as reducing your debt to own your own home sooner, saving to buy a home or pay for a holiday or wedding," Brookhouse says. "Importantly it identifies regular and irregular expenses such as how much money is spent on takeaway coffees.

She says that once a budget has been set up they should be regularly reviewed.

Setting a budget is actually the easy part. Being disciplined to maintain a budget is much harder. If a realistic budget is prepared, the likelihood of maintaining it will be higher.

"If there are missing or underestimated expenses, regardless of how minor, there is a higher chance that the budget will not be met, she says.

WHERE TO START

Preparing a budget can be as simple as writing a list of your sources and amounts of income. Then write down what you spend over a couple of months. Some people like to categorise their expenses and divide it between essential items which might include telephone, gas and electricity and extras such as entertainment and holidays.

Expenses should also include any current savings you are making.

It may help to pick a time period such as weekly or monthly, the important thing being that the income and expenses match the time period.

Equally important is to be honest with yourself and include all those ad-hoc expenses such as coffees, takeaways and magazines.

With the income and expenses all listed, you can clearly see how much regular income you receive and where your money goes. Subtract your total expenses from your total income to get your net result. If the result shows you are spending more than you earn then some adjustments will need to be made.

An obvious starting point will be cutting back on some of the extras. Don't cut them all out. If your budget is too tight, it will be harder to stick to. If you find that the weekly expenses are not a problem but large bills are, then you could consider setting aside a small amount each budget period. The same could be done if you are saving for something big like a house deposit or a holiday.

Even with the best of intentions, it can be difficult to make yourself leave a certain amount of money in your bank account for future bills. Some people opt for the "cookie jar" method, in which they put some money into a special container and use this for bill-paying, but this makes your savings very accessible.

The ideal way to manage your money is to have separate bank accounts for bills and day-to-day expenses. Look for the financial institutions that offer accounts with no minimum balance requirements and no fees.

Designate one account to be your main operating account. Then, once a fortnight, transfer your "deferred expenses" amount to your bill account. The bill account balance will gradually build up so that, hopefully, you have enough money to pay bills as they come in.

If you can put in extra to start it off, it will help to pay any unexpected bills.

It is important to keep reviewing the budget. Some people recommend rewarding yourself occasionally if you do better than expected, such as through saving more than you thought or paying off something sooner than expected.

Ingham recommends using a pre-formatted budget form or a software tool with all the relevant spending and income items.

It is important to carefully review your bank and credit card statements and add an expenses contingency of 10 per cent to 15 per cent because inevitably you underestimate the 'incidental' expenses of life, Ingham says.

Budget planners are available at: www.understandingmoney.gov.au, www.fido.gov.au, amp.com.au/budgetplannerspreadsheet and simplesavings.com.au.

TOP SAVING TIPS

Cook from scratch. Stop buying pre-packaged, pre-made meals and treats. Average saving per year: $2000.

Plan menus and stick to a list. You can halve your grocery bill by working out what you want to eat for the week and making a list. Average saving per year: $7800.

Buy second hand. Look for clothes in op shops, goods on eBay or other used trader ads. Average saving per year: $8000.

Take your own lunches to work. It's not hard to take leftovers from last night's dinner or a sandwich. Average saving per year: $1300.

Avoid takeaways or limit your takeaway to only once a week or fortnight. Two large family takeaway pizzas can cost about $40. Average saving per year: $2080.

Give up smoking. It is bad for you and is putting a hole in your wallet. Average saving per year: $4000.

Cut back on alcohol consumption. Don't fool yourself into thinking that spending $50 a week on alcohol is normal and OK. Average saving per year: $2500.

DIY beauty treatments. Instead of an expensive $80 facial at the local salon, get together with your girlfriends and have a spa night with homemade scrubs and oils. Average saving per year: $960.

Declutter your house. Make a list of things you don't use or don't need and sell them. Put the money towards your debt. Don't be tempted to waste more money on clutter. Savings per year: $1560.

Keep your razor blades in oil. By resting your razor blade in a dish of olive oil the blades will stop developing rust, which makes them blunt. Each blade should last about three months instead of two weeks. Savings per year: $65.

Source: simplesavings.com.au. See fido.gov.au for more savings tips.

BUDGET CHECKLIST

DO YOU:

Take your lunch to work.

Buy in bulk.

Make your own coffee.

Grow your own fruit and vegetables.

Watch DVDs rather than go to the movies.

Pay yourself first.

Mend clothes rather than buy new.

Shop with a list.

Cook meals rather than get takeaway.

Pay off your credit card in full each month.

Go on self-catering holidays.

CASE STUDY

A FUN day of cooking together has turned out to be a big money saver for sisters Hayley and Fallon Grieve.

Once a month Hayley, 20, and Fallon, 24, spend a day in one or the other's kitchen cooking four different meals that they then package into 50 or 60 individual portions ready to be frozen.

We buy in bulk so we save heaps of money on ingredients," says Hayley, a student. "I'm not spending a lot of money on food during the week and in 40 minutes I can have dinner ready.

In the previous cook-up, the girls spent a total of $137 to create 50 meals, which equates to about $2.74 a meal.

Since starting the venture last year, they have worked out what freezes well. This month's meals include vegetable tagine, pea and ham soup, macaroni cheese and braised chicken.

Other successful meals include vegetable lasagne, apricot chicken, chicken curry, minestrone soup and chicken cacciatore.

The boxed-up meals can go straight into the oven for about 40 minutes. With selected dishes, they cook rice, polenta or cous cous towards the end of the cooking time to add to it.

We both live by ourselves and generally don't get home until late, so it makes it very easy at night," Hayley says. "Also, there is hardly any washing."

Hayley plans to use the money she is saving on an overseas trip. Fallon, a pharmacist, plans to join her as well as buy a house.

EXPLODING THE MYTH OF CHEAP FAST FOOD

INSTEAD of spending $23.85 to feed a family at a fast-food outlet, consider this supermarket list:

500g extra-lean mince, $5.99

Hamburger rolls, $1.99

Cheese slices, $3.49

1.25lt lemonade, 69 cents

2lt premium light ice-cream, $2.99

Chocolate wafers, 65 cents

Frozen french fries, $1.99

10 sachets of cappuccino or latte mix, $4.49

TOTAL: $22.28