Budgeting with Purpose

Many factors impact our financial goals. But women have a whole range of challenges that most men will never experience. And it doesn’t help that in WA we have the highest gender pay gap in the country at 22.5%.*

Whether you’re returning to work after having children or you suddenly find yourself on your own, if you need to get your finances in order there’s no shortage of financial advice available.

Finding simple tips and tricks to help you save your hard earned cash is easier than ever. But the problem is that its general advice, and if you’re not careful, it can have a negative impact on your finances.

For example, the barefoot investor encourages you to use high-interest savings accounts. Sounds logical right? But let’s say you’re trying to pay off your average-sized mortgage, and you put $10,000 in a high-interest savings account instead of making extra repayments on your home loan. Over the next 15 years, you will be about $3,500 worse-off. That’s enough for a family holiday or to put towards another goal.

To help you steer clear of general advice that could end up working against you, we’ve developed a practical budgeting tool that you can apply no matter the state of your finances or size of your goals.

Before you start thinking about how to budget, we want you to think about your end game or the purpose for your budget. Why? Because if you’re saving just for the sake of it, without a clear picture of what you’re saving for, it’s easy to spend that money whenever the opportunity presents itself.

Starting with your goal in mind will help you eliminate the impulse to spend your savings on something you don’t really want or need. You may have a specific investment goal, like a property portfolio or owning a business. Your goal may be to buy your kids a car when they turn 17 or to have a guilt-free holiday once a year. You may want to retire at a certain age and have a clear vision of what your retirement will look like.

A common goal is to pay off your home loan. But we want you to get to the bottom of why you’d like to be mortgage free. Is it to quit your job and be a full-time mum? Or cut down to 3 days a week? Really think about what your life will look like once you’ve achieved your goal.

Another favourite is having an emergency fund to help out if you’ve lost your job. It’s a good idea in theory, but depending on your specific goal, there just might be a better way. For example, income protection insurance will allow you to continue to work towards your goal of paying off the mortgage, even if you find yourself unemployed. Or have your emergency funds sitting in an offset account so that you can access it if you need it, but in the meantime, it’s working productively towards your goal.

You can have multiple ‘ends’ in mind too. You can have a smaller goal to complete in a year, e.g. a holiday or to clear a credit card, and another goal which is five, ten or even 15 years away.

If you’re clear on what you want and why you want it, creating a budget that will get you there is easy.

Now this is the important part, where we get down to business. Goals are fantastic provided they’re realistic. If you only have $50 spare in your budget and you want $100,000 in 12 months time, you’re headed for disappointment. To be realistic in your budgeting, you must look at your ‘XTRA’ or surplus funds. What do you have to work with to achieve your goal?

We recommend using a few budgeting tools to give you a true XTRA figure. The ASIC MoneySmart calculator is great for factoring in all the items that are often forgotten – expenses like Christmas, birthdays, pet-related expenses and car servicing.

Most banks also have tools within their internet banking which read the data in your bank account and tell you what you’re spending.

Apps like Money Brilliant allow you to sync your bank transactions from multiple institutions and it tells you how much you are spending across all your accounts.

You’re bound to be surprised by some of your expenses, but you’re not alone. The average Australian spends $44 per week on takeaway or dining out, and $77 per week on holidays. Ladies in WA spend 60% less on perfume than ladies in the ACT, and West Aussies also spend 60% less on trips to the movies.**

So after you’ve identified where all your extra cash is going and recovered from the shock, it’s time to look for areas where you can make some savings. The most common areas are home loans, insurances, credit cards, personal or car loans, restaurant and takeaway spending. Luckily, these are also easily adjusted expenses. For your loan and banking products, an experienced finance broker will compare your options and find the most savings possible for you. As for changing your dining habits – well that’s up to you.

Once you’ve got your reworked XTRA figure, you can look at what to do with that money. Go back and prioritise your goals. Whether you have $100, $1,000 or $10,000 extra, you need to know how to allocate that to reach your short and long-term goals.

Don’t worry if you have a small amount to work with. We’re going to look at breaking larger goals down into micro stages, so you’re not waiting 15 years for a win! And we’ve seen people do great things on a shoestring budget.

Working backwards within a time frame works best for achieving your goals. For example, if your main goal is to pay off your home loan, you can break that down to how much you need to pay off each year to achieve your goal in the timeframe you want. This works equally well for a big goal and smaller milestones towards a big goal.

If your big goal is to pay off your home loan in 10 years and that means you will need to make $10,000 in extra repayments on your home loan every 12 months, that’s a total of $833 a month that you need to allocate. If you’ve identified that you have $1,000 XTRA in your budget, you can easily allocate $833 per month.

The same applies if you have more than one END or savings goals. If you identified $1,000 total surplus in your budget, deduct the $833 towards your main goal, and then you have $167 to allocate to a second goal – maybe a holiday or something for your kids.

If you find that you don’t have enough surplus in your budget to make your goal happen in the time frame you want, you will need to break it down further into more realistic chunks or increase the time frame.

Being realistic about how much surplus you have and the timeframe you set, will be the difference between reaching your goals and disappointment.

Reassessing your budget is the moment reality shakes your dream tree. Every 90 days you should reassess your budget to identify if, and where, you’ve been unrealistic. Not allowing for any coffees out with friends, or gifts for your kids and family on birthdays is a perfect example of unrealistic budgeting goals.

Regular reality checks will save you disappointment and time. Let’s say you’re budgeting for a holiday in 12 months, and six weeks before your trip, you realise you haven’t saved nearly enough. Chances are you’ll whip out your credit card for a costly quick fix. Similarly, you don’t want to have a 15-year plan, only to get to year 10 and realise you’re still 15 years away!

When reassessing your budget, ask yourself:

• What worked really well?
• What did you have to force?
• Are your goals still the same as when you started? If yes, the proof that you’re smashing it will keep you motivated.

Look at whether you’ve stuck to all or part of your budgeting goals. If you haven’t, consider why? Maybe the timeframe was unrealistic. Perhaps you only have $50 a week to work with instead of $200.

When you think about potential changes and savings you could make, ask yourself whether you’re able to permanently and radically change your spending habits? It’s ok to say “no”. There are some things that realistically you’re just not going to be able to cut out or sustain. Others are easy to cut back on when you realise the cost, like lunches out every day of the week. But for the most part, if you’ve been spending it every day for the past five years, then you’re likely to continue, as it’s a habit.

Commit to reassessing your budget every 90 days. Put it in your diary and make sure you do it. Remember, you don’t want years to slip away before you realise you are nowhere near where you wanted to be.

It’s human nature to cheat just a little bit and let the ‘reward hungry’ side of your brain take over once in a while. This is why you need to be accountable to someone else – it’s just too easy to make excuses and be forgiving when you only have to answer to yourself.

Share your goal including the amount, timeframe and how much you will contribute every week, month or year with someone you trust. This could be your husband, friend or if you really want to be challenged, share it with us, and we’ll be sure to keep you on track with regular check-ins.

Your quest for financial freedom may be because you’re highly driven, have a certain lifestyle you’re hoping to achieve, or you simply have no choice but to get on top of your finances. Whatever your reason, when you rely on practical tools that keep you accountable and motivated, you really can achieve your goals.

Over to you