This article was last updated on April 17
Rising gas and food prices, higher mortgage repayments and lower investment returns have punched a hole in household budgets with much more money going out than coming in. The only way to manage the higher outflows is to either earn more or spend less. Winning a pay rise or working an extra job is not always feasible in the current economy, so trimming spending is often the best and only option available to most people.
After so many years of economic growth and cheap credit, folks think about spending cutbacks and say, ‘I’m earning a decent salary, I shouldn’t have to live like this,”. But taking control of your household spending – via effective budgeting – can improve your quality of life, not detract from it. Before you can save you need to know exactly how much you are spending and what you are spending money on. As a first step, financial advisers suggest you carry a notebook around with you and jot down everything you spend for two to four weeks. Or keep a record of your expenses in a spreadsheet like I do. I call this approach active budgeting. Once you are comfortable with active budgeting, you can move onto passive budgeting – which I will cover in a later post.
Some people who are skeptical of budgeting, say that there are not many savings to be had as they think they already lead a frugal life. However, from personal experience and reading other peoples stories there are a number of cost savings in your every day life that you may not realize you could get with little effort. Here are a few ideas and examples:
– Your morning coffee and snack or lunchtime sandwich. Five takeaway coffees a week can add up to $15, or more than $700 a year (Even I have started to use the coffee machine at work, rather than Starbucks and local cafes like I used to). Add a bought lunch and the figure rises to more than $2000 a year. Taking a packed lunch to work just two to three days a week could save nearly $1000 annually.
– Changes in habits can make a big difference. Rather than buying bread and milk at the 7-11, shop at the supermarket and buy in bulk. You can freeze bread (so it can be used past expiry) and buy long life milk. Also, try Soy Milk. It is healthier and much cheaper than regular milk.
– If kids are putting on pressure to spend money, use cash on shopping trips rather than plastic (credit cards), so they learn that there is a limited amount of cash to buy what’s needed and, when it runs out, that’s it. The problem with plastic is that kids have no idea where the money’s coming from – they think you just wave a piece of plastic to get what you want. Having a talk with the family about the difference between needs and wants and involving the kids in the drive to cut unnecessary spending (hence the budget) will be a good financial life lesson for them as well.
– Turning off appliances. Standby [power] is the equivalent of a dripping tap and does add up. Our parents used to always make us turn off the lights before leaving a room. Well, time to get that habit back. Also check the thermostat on your heating and cooling. Every degree of temperature change increases power use by about 3 to 4 per cent.
– Many old second fridges running in garages or basements are actually faulty, although they still keep drinks cold. Switching one off can save $200 each year.
– Buy a water-efficient shower head, which typically repays its cost in less than a year. Most cost between $30 to $70 dollars. Shortening your shower time in half can also save on costs. Did you know the average American shower time is around 8 minutes!
– Cut down on your banking costs by combining all your accounts with one bank. If you have a mortgage with a bank, they will normally provide a fee-free credit card and premium checking account for no additional cost. With banks going through tough times put some pressure on them to ask what they can do for you. You will be surprised at what they may do to keep you as a customer. Also, don’t leave a lot of cash sitting in your low interest paying checking account, moving it to a high interest savings account could earn you 7 to 10 times more interest.
– Just as your health insurance needs change over time, so does your need for life insurance and various forms of car and property insurance. It’s worth checking all your policies periodically, not only to make sure you have the right level of coverage but also to check that you are still getting value for money. Most insurance premiums have come down in recent years so if you haven’t reviewed your policies recently you may be paying too much.
Budgeting and saving involves changing your mindset, as much as behavior. Once you know where your money is going you can identify savings but the experts warn against overdoing it. “Saving money is like exercising – if you overdo it you won’t stick to it”. They also go on to say, “Budgets don’t work unless you include absolutely everything, including an allowance for ‘unplanned spending’, which ought to be around 10 per cent of your income.”