Australian household debt levels are getting out of control. Around 3 in every 10,000 households are now considered to be ‘over-indebted’ & most over-indebted households lack sufficient ‘liquid’ assets to cover a quarter of the value of their debts.
This is a bit scary - the average household debt in 2015-16 was $168,600 with the most common form of debt being credit card (55%) followed by home loans (34%) & student loans (17%). According to Finder.com.au (2019), over 70% of Australians own credit cards, there are 15,760,92 cards in circulation (as of June 2019) with a national debt accruing interest of $31.3 billion. In 2018 there was an average balance per credit card of $3211, we’re spending a whopping $27,477,790,515 per month on credit card purchases per month & every year we’re paying about $1.5 million in credit card fees (ASIC 2018). It's time to take back control & budgeting can be your super power.
It seems that many of us are teetering on the edge. We’re possibly too optimistic about the future thinking we’ll always be able to meet our obligations. Things can quickly unravel if money is not managed well or if unforeseen circumstances arise. With Aussies’ appetite for Christmas gift buying on card and “buy now pay later” platforms like After Pay, Zip, Humm or small amount lenders like Wallet Wizard & Nimble, I figured it would be a good time to get you thinking about your money habits & to talk about budgets.
Rowe Partners Accountants & Business Advisors are your partners. We’re not just here to do your tax once a year, we want to see you prosper. If we can play even a small role in helping you to understand & improve your management of every day finances, we will feel we’ve made a positive contribution. Budgeting is a tool you should master. Learning to budget is a critical life skill that will help you conserve money & save to achieve your financial goals, borrow strategically & avoid the debt trap.
Often we inherit our money habits & financial knowledge from our parents. If you were lucky they had a good grip on finances & raised you with a healthy attitude toward money, spending and saving. I learned how to budget through sheer necessity some 15 years ago. I was still living at home & building my first home with my now husband John. Juggling money became very stressful but I was fortunate that my mum was able to step in & teach me the basics. I found it was surprisingly simple & useful. I’ve been an active budgeter since. But many people aren’t so fortunate. Some households just don’t do money well. There either just never seems to be enough money, creating stress & anxiety or there is always plenty & the adults managed everything. This can result in parents & their kids taking for granted that the WIFI will always work & assuming that there'll always be enough food in the fridge. Then when it’s time to leave the nest reality hits these young people & they can struggle financially, even if they’ve been fortunate enough to secure employment. This is because, no matter how much we earn, income is always a finite number. Spending more than you earn results in debt. How soon you get on top of that debt & pay it down will determine your financial trajectory.
If you do fall into a debt trap, there simply may be no-one around to save you. Depending on your history, banks may not come to party either so we want you to become your own budgeting superhero now.
When to start budgeting?
NOW! For most people, there’s never been a better time to get on top of debt. Interest rates are incredibly low. By being disciplined, you can make a serious a dent in debts like mortgages, credit cards & car loans putting yourself in a much better position for the future.
Anything that helps you even out the highs & lows of income & expenditure will make budgeting easier. If you’re on wages, the income you’re receiving is generally a fixed amount & paid at regular intervals. A budget aims to predict your future expenses against your income & help you to identify areas where you can cut back. Your household income needs to be higher than your household expenses.
Key budget considerations for income should include all your (& your partners) income sources (wages, pensions, subsidies, insurance payments).
High level budgeting expenditure categories should include but not necessarily be limited to;
Fun Fund – allow a small amount of free spending if possible. Budgeting is designed to improve your life, not make you miserable. Look for & make a list of low cost & free activities that you can enjoy to avoid slipping into the budget blues or falling of the wagon.
Housing – rent/mortgage, rates, utilities, renovations, insurances.
Food & entertainment – groceries (plan meals), social events, sports (e.g fees, equipment), pet food, Netflix.
Education – school fees, uniforms, books, subscriptions, computers, HECS, further education.
Health & Medical – insurances, dental, doctors, pet care.
Savings, Investment, Debt Payments – holidays, education funds, life events (e.g weddings, birthdays, babies, retirement).
Transport – car purchase, insurance, maintenance, tyres, fuel, bus fees, car parking
Ready, set, go!
Don’t have goals? Set them. If you have a partner, make sure you set goals together. This could be to pay off debt, save for a house deposit, house renovations & improvements, buying a new car, planning a wedding, overseas holiday etc.
Review the budget regularly – again do this with your partner. You both need to be on the same page, share the same goals & be committed. Celebrate your progress!
Be realistic. Factor the costs associated with achieving your goals into your budget. i.e. If you need $10,000 in 12 months is this achievable?
Think about strategies to help you reach your goals. What more can you do? (work more, cut spending).
Know what your total income & expenses are for the year. Don’t guess! There is no point having $150 a week on food if your family spends $300. You can get this information from your bank statements. With a year or 6 months of bank statements you can fill out the budget planner from money smart. https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner
Open more bank accounts to transfer money every payday for savings, bills etc. & set them up so they can’t be accessed easily.
Review your budget at least annually or when there is a change to your income/ expenses i.e. pay rise, having a baby & being off work. Having children is a huge financial change for your household. The primary care giver will be working less at a time when expenses rise. To ease the stress, make a life event plan. https://www.moneysmart.gov.au/life-events-and-you/life-events/having-a-baby
Pay your utility bills regularly. Set up direct debits from your bank or with the supplier. It’s nice to get your electricity bill & be in credit.
With Christmas not far away, when people ask what they can buy you or your kids, choose things that are useful instead of toys i.e. new pjs, bathers, shoes, vouchers, an experience (cinema vouchers, tickets to the zoo, Bounce).
Now is a great time to talk with children who have just finished year 12 & are moving out for university to help them understand finances & work through their income & expenses before they leave.
The festive season can be expensive. Presents can be a huge cost for families & buying for some age groups like teens, will tend to be more expensive than others. Then there’s food, kids holiday programs, decorations, travel, entertainment...
Here’s some ideas that can be a lifesaver, reducing both financial pressure & keeping spending under control so you can relax more easily & enjoy this special time of year!
Pre-pay for Christmas hampers.
Buy store gift card so you can decide in advance how much you can afford to spend.
Setting up separate bank accounts & depositing money into them fortnightly throughout the year will help make sure you have funds when needed & reduce the risk of resorting to credit - one of my best budgeting secrets!
If you have children or grandchildren, start them off on the right foot. Teach them how to budget, earn & save too! Teaching them financial literacy today will save them a world of hurt when they grow up. Check out apps like https://www.bankaroo.com/ & http://www.moneysavvy.com/assembled/savings_spree.html
Budgeting Apps & Tools
While we haven’t specifically road tested these & can’t vouch for any of them specifically, they look pretty good & easy. It’s important you do your own research to find a a system, app or method of budgeting & of tracking your spending that suits you. Some people are happy to use excel. Others prefer products with a “friendlier” interface. If it’s easy to use, you’re more likely to use it. Check these out.
ASIC Money Smart Track My Spend App https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mobile-apps/trackmyspend
Want to get your finances under control? Here’s some Important Contacts
National Debt Helpline 1800 007 007
Australian Government Rural Financial Counselling Service (RFCS) 1800 686 175
SA-NT Rural Financial Counselling Service 1800 836 211
Rowe Partners Accountants & Business Advisors 1800 04 7693
Rowe Partners Financial Planning 08 8397 0000 www.rowepartnersfinancialplanning.com.au