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 what you would like to spend.
My grandfather had a wonderful saying:
‘When your outgoings exceed your income, your keep will be your downfall!’
Frankly, I couldn’t have said it better myself.
Budgeting and family planning are key to 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 the blocs of spending to gather information around fixed costs such as mortgage repayments, rates, body corporate fees and utilities, including your phone bills.
Other areas can be treated more like a forecast. You can actually estimate what you want to spend on items such as take-away, entertaining and clothing, rather than just spending as you go.
Divide your expenses into six areas:
1. Living Expenses
- Medical insurance/ dental/ pharmacy/ regular medication
- Alcohol/ cigarettes
- Public transport/ taxi fees
- Other, including pets
2. Entertainment expenses
- Travel and holidays
- Dining out
- Sport and recreation/ hobbies
- Club memberships
- Books/ magazines/ newspapers
- Other entertainment
3. Housing expenses
- Mortgage/ rent
- Council rates/ body corporate/ water rates
- Electricity/ gas/ telephone/ internet
- House and contents insurance
- Home maintenance
- Furnishings and appliances
4. Motor Vehicle Expenses
- Loan/ lease repayments
- Petrol and other running costs
- Maintenance/ service/ repairs
- Licence fees/ fines/ parking/ road assist
- Life and TPD (outside of superannuation)
- Income protection
- Superannuation contributions
- Trauma cover (outside of superannuation)
It helps to create your budget around a pay cycle, whether weekly, fortnightly or monthly. However, if your partner is paid in a different cycle, then I suggest a one-week cycle for all budgeting purposes.
6. Savings Plan
By using three months of spending you can capture repeated expenses. Use the five areas of expenses prompt you on once a year expenses and allocate money to them.
I found the best way to save for my first home deposit was to forecast all my expenses and allocate money towards them. I would track my actual spending and then save what was left over at the end of the pay cycle. The trick here is to not judge your finances by the balance in your bank account, but by your budget against your actuals.
A budget does require discipline to calculate, track and monitor, but eventually your budget will run itself. You will create good spending habits,,, and after a while you will know when money is available for a new pair of shoes or when you can afford a holiday.
Despite the fact that I am now well established and still enjoy overseas travel on a regular basis, I still keep a budget. Routinely, I still throw all the supermarket dockets into an urn in the kitchen, and just this morning while waiting for the jug to boil I did a rough calculation on what I have spent on food over the past few months.
Working late nights and often on the weekend, I love it when we keep our restaurant bills down. It all helps!
An extract from Lynne’s book ‘The Formula – A mentor’s guide to confident property investing’. Please call Solid to grab your free copy.