Get back to budget basics

Six months ago, a couple went to financial planning group ipac for some advice. Professional people with jobs in upper management, they had a combined income in excess of $250,000. But it wasn't self-managed super or how their investments were going that was on their minds.

"They had built up $200,000 of debt on several credit cards," the national manager for advice strategy at ipac, John Dani, says.

It was time to go back to basics - which, in some ways, is the message of the inaugural MoneySmart Week, which began on Sunday.

"We see a lot of people earning a lot of money and spending more than they earn," Dani says.

People on much more modest incomes can, in fact, be richer, he says, because it's not how much you earn that determines your wealth but how much you save.

The trouble is that these days maintaining a comfortable lifestyle - at least temporarily - no longer requires good money management, Dani says. "Easy access to debt basically means people can live it up," he says.

"But it will eventually come back to bite them. And that's what happened to this particular couple."

Dani recalls how, as a young man, his wages came in the form of cash and he would set aside money in separate envelopes for expenses such as rent and for spending.

"It was with the actual transfer of cash into these envelopes that I first started budgeting," he says.

That physical connection with cash also meant that he thought twice before spending.

"But those days are gone," he says. "Budgeting is under direct threat now due to easy access to debt, eftpos, online shopping and our ever-increasing expectations about lifestyle."

Financial planner and university lecturer Barry Lizmore, author of Take Control of Your Money, also sees rising expectations as an issue, particularly for younger Australians who have known only a growing economy.

"In our parents' day, people didn't take out high mortgages and they made do with a second-hand car," he says. "We used to holiday [down the coast] or in Queensland. Now we holiday overseas."

And people are taking on debt to fund this lifestyle, he says.

What's more, they take on debt under the assumption that they'll always get a better job and that house prices, for instance, will always go up.

How to get out of this rut? Dani says the first step is to know where your money is going now. For at least a fortnight (or your pay cycle), run everything through a single account or card so you can look at one statement to see what's happening.

Next, you need to decide on a purpose for your budgeting.

Both Dani and Lizmore suggest visualising your goals. Now you can start divvying up your money.

"I still have those envelopes," Dani says, "but they're 'virtual' envelopes in the form of separate accounts."

Automating the process is the key, he says. The money should move directly from your pay or a central account to the accounts you set up for specific purposes.

The chief executive of Teachers Mutual Bank, Steve James, says most financial institutions will have some form of bonus saver - such as TMB's Reward Saver - where there's the carrot of high interest if you deposit a minimum and make no withdrawals each month (in TMB's case, 4.75 per cent), and a stick of low interest (0.10 per cent) if you fail to maintain your discipline.

These accounts are sometimes criticised for their low base rates, but James says you should only ever deposit what you won't need.

Finally, Dani says people should stop the constant use of credit cards. If you can't cut them up, lower the limit so you're less reliant on them and use a debit card for most of your spending.

If you have a home-equity loan, refinance with a traditional, must-pay-every-month mortgage, he says.

"A home-equity loan is just an overdraft on your home," Dani says. "The banks talk about how a home-equity loan will help you pay your loan off quicker, but human nature works against that."

Tools for the task

As part of MoneySmart Week, ASIC is offering a financial "health check" via an online questionnaire or mobile phone app. You'll be asked about your goals, budgeting, debt, savings, investments, insurance and retirement planning, with the dial swinging to green, orange or red depending on the extent to which you have things under control.

The online version of the tool then generates an individual report setting out an action plan for the steps you still need to take (the app saves the top five actions).

Then there's the MoneySmart TrackMySPEND app for iPhone, with Android on the way that allows you to monitor spending by category and against limits you set. Its mobile calculator app helps you do your sums on savings, investments, superannuation, loans, mortgages and the true cost of interest-free deals.

Go to moneysmart.gov.au or your phone's app store.