A successful personal finance strategy has these three parts: building wealth, managing expenses and protecting what you’ve built. The first lesson of sound financial planning applies to managing expenses and it’s this: Spend less than you earn. It sounds simple and obvious, yet increasing numbers of Australians are living beyond their means, with serious consequences for their long-term financial health. Read on for 5 easy to implement tips on how to live within your means.
* In the eighties the average Australian household had debts totaling around 40% of their disposable income (income after tax). In December 1986 the ratio was 43% and just 20 years later in December 2006 the ratio accelerated to 152%, an increase of two and a half times. Australia's average debt-to-disposable income ratio was at 147% in 2012, a 28% increase from 10 years earlier.
This growth in household debt accelerated, in the period leading up to the GFC. Households double-mortgaged their homes to either invest in property or share portfolios, or simply to buy lifestyle toys such as nice cars and boats in an endeavour to ‘keep up with the Jones's’. For those who’d been living beyond their means for years, it suddenly got a lot harder to make ends meet. Although the government tends to encourage spending during economic downturns and statistics may lead us to think that overspending is normal, it’s often a risky choice.
This is the most common financial mistake that leads people to major financial hardship – failing to manage expenses. If you don’t budget and live within your means, how can you invest in your goals? There’s simply nothing left.
This is why the first lesson of sound financial planning is simply to spend less than you earn. While using credit cards to buy essentials is convenient, be careful not to fall into the trap of spending more than you can afford. When using your credit card to buy essential purchases, make sure that you clear the card monthly in full. If you cannot clear it in full, this is a clear indication you may be living beyond your means.
It may not seem like a big deal when you pick up that double skinny flat white each morning, stop for a pack of cigarettes, buy your lunch, have takeaway or eat out, but every little item adds up. If you were to add up your weekly spend on these small items, you would be surprised just how much it adds up to. A coffee each morning and lunch each day from the local shop can add up to $75 per week. This equates to around $3,900 per year. This is quite a sizeable amount of money that could go towards an extra mortgage payment or other household payments like rates or utilities.
If you're enduring financial hardship, avoiding this mistake really matters – after all, if you're only a few dollars away from default on your mortgage or credit card payment, every dollar will count. So taking your lunch and making a coffee at work can save you money and might just be enough to help alleviate some financial pressure. Here are some other tips:
You wouldn’t believe the number of first-time clients we meet with credit card debts above $50,000 and all they pay is the interest. At an average interest rate of 21%, that is $10,500 in interest alone each year. Surely, that makes the price of the charged items a great deal more expensive?
By being modest in your spending, you will have more to put towards saving and investing in your goals.
* This post is an extract from our book,They said the World was my Oyster but someone Stole the Pearl, A Baby Boomer's guide to living a life of choice not compromise by Markham Collins & Russell Mann, available from mid-2016.
Please contact Collins Mann on 07 3251 3200 or email email@example.com to find out more about managing your expenses as part of a successful personal financial plan.
Collins Mann ABN 88 098 705 152 is a Corporate Authorised Representative of Hunter Green Pty Ltd AFSL No. 225962. Managing Director Russell Mann (Authorised Representative No. 273590) is an authorised representative of Hunter Green Pty Ltd ABN 12 087 491 629 which is the holder of Australian Financial Services Licence No. 225962.
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