It is my experience that a budget underpins most low to medium income earners’ ability to invest. A budget is largely derived from accounting for our fixed costs, our estimated up and coming expenses and accommodating our discretionary spending.
You could say that it is forecasting what funds are available, what needs to be spent and want to spend.
My Grandfather had a wonderful saying:
‘When your outgoings exceed your income, your upkeep will be your downfall!’
Frankly, I couldn’t have said it better myself.
Budgeting and family planning are key ingredients to a successful property investment portfolio and I am always nervous to advise anyone on an investment opportunity, unless they have a budget and know their expenses.
When you start preparing to do your budget, I recommend you look at blocks of spending to gather information around fixed costs such as mortgage repayments, rates, body corporate fees and utilities, including the phone.
Other areas can be treated more like a forecast. You can actually forecast what you want to spend on items such as take-away, entertaining and clothing, rather than continuing to spend what you have been.
Divide your expenses into six areas:
1. Living expenses
c. Medical insurance/ dental/ pharmacy/ regular medications
d. Alcohol/ cigarettes
e. Public transport/ taxi fees
f. Other, including pets
2. Entertaining Expenses
a. Travel and holidays
b. Dining out
c. Sport and recreation/ hobbies
d. Club memberships
e. Books/ magazines/ newspapers
f. Other entertainment
3. Housing expenses
a. Mortgage/ rent
b. Council rates/ body corporate/ water rates
c. Electricity/ gas/ telephone/ internet
d. House and contents insurance
e. Home maintenance
f. Furnishings and appliances
4. Motor Vehicle Expenses
a. Loan/ lease repayments
d. Petrol and other running costs
e. Maintenance/ service/ repairs
f. Licence fees/ fines/ parking/ road assist
a. Life and TPD (outside of superannuation)
b. Income and protection
c. Superannuation contributions
d. Trauma cover (outside of superannuation)
Lynne Wilton, The Formula – A mentor’s guide to confident property investing