The value of having a budget
Written on the 7 June 2022 by Arrow
The cost of coffee made headlines a few weeks ago when it was reported prices could reach up to $7 a cup.
Although counter reports came out sceptical of such a price hike, it's undeniable that Australians are experiencing a creeping rise in expenses across the board. From petrol to groceries to travel, things are feeling more expensive because, well, they are.
So, it's understandable that the rising cost of living is on the minds of many investors.
In times like these, creating a budget could prove to be an invaluable source of comfort. Not only can it help keep you on track to achieve your long-term goals, but it can also help reduce any feelings of financial anxiety that comes with spending above your means.
A good place to start is setting up a budget that corresponds with your pay cycle. If you get paid fortnightly, then a fortnightly budget will be easiest to manage. From there, you can figure out how much money comes in every fortnight (salary and other income), how much goes out (fixed expenses such as rent and bills and debt expenses such as loan repayments), and ultimately how much of what's left you can spend, save or invest.
While that's the crux of a budget, you can also consider these factors to help you find the right balance between spending and saving:
1. Do I have an emergency fund that can cover at least 3 months of living expenses?
An emergency fund is money set aside to cover the financial surprises life throws your way. These unexpected events (such as job loss, medical emergencies, car troubles, unexpected home repairs) can be stressful and costly.
Having an emergency fund can keep your stress levels down and give you confidence that you can deal with any unexpected events. It also keeps you from making poor financial decisions in times of stress, such as borrowing funds at high interest rates or racking up extra fees and penalties for late payments.
2. Am I setting money aside to put towards my larger goals (like houses, cars, education)?
It's hard to think about saving more when you have other financial priorities competing for your attention. But remember that every bit of money you add to an investing account can go further than you think - your invested assets can benefit from compounding over time.
Factoring into your budget a manageable amount of money to invest each fortnight or month will set you up to reap the many benefits of regular investing.
3. Am I auto-paying for subscriptions that I don't use?
You might have money disappearing out of your accounts every month for an online game you never play, a magazine you don't read, or a box-of-the-month club whose boxes are sitting untouched somewhere in your house. Doing some subscription housekeeping can free up more of your money to put toward other goals.
4. Do I spend money out of FOMO - fear of missing out on the newest trend or gadget everyone is talking about?
Sometimes when we read about people camping out for days to get the newest phone or smart watch, it can create the illusion that we need to have it in our lives because it's that cool and exclusive. Take the time to make sure you're making big purchases for the right reasons, and not just to keep up with the Joneses.
5. Do my unplanned purchases fit into my budget?
It's always a good idea to build room into your budget for some spontaneous spending every month. As long as you're taking the time to thoughtfully weigh your recreational spending against your long-term goals, you're looking out for your financial wellness - and that can make a world of difference!
Source: Vanguard April 2022