For most of us ‘spending’ is the first thing that springs to mind when we have money. So when a financial adviser suggests the idea of having a ‘budget’ most of us recoil in horror.
It’s because many people believe that budgeting is all about sacrifice – in other words, having to cut back on life’s luxuries we enjoy today to pave the way for a future lifestyle in retirement.
However budgeting isn’t really about sacrifice, it’s more about gaining a clear understanding of where your money is coming from and where it is going, so that you can begin to prioritise and plan for those things that are really important to you, both in the short term – such as an overseas trip or saving to buy a car – as well as longer term goals such as paying off your mortgage sooner or buying an investment property.
Regardless of whether you are rich or poor, our ability to create wealth is not so much determined by how much we earn, but to what extent we can spend less than we earn. In other words, it’s our ability to save that largely determines the value of our wealth in the long term.
Of course, prudent investing also plays a part, but if you are unable to save, it’s unlikely that you’ll have enough money to invest.
If you find the term ‘budget’ too difficult to stomach, then perhaps think of it as a ‘savings plan’ or even a ‘spending plan.’ Regardless of what you call it, a budget is a simple financial plan that can tell you at a glance whether you’re spending too much on the things that you want, rather than on the things that you need.
When you go through the process of preparing a budget, you may identify opportunities to save money on those unavoidable ‘fixed’ expenses such as power bills, phone and internet plans, and insurance, as well as ‘discretionary’ spending that just eats away at your income.
Budgeting involves reviewing your income and expenses and when you take the time to go through this process it can often reveal surplus money that could be used for wealth creation rather than just ‘evaporating’ through frivolous spending.
Devoting a few hours to mapping out where your money is going may give you a bit of a wakeup call and identify opportunities to rein in some unnecessary spending and devote these savings towards more meaningful, worthwhile pursuits.
For example money spent on impulse shopping or entertainment may be more wisely allocated towards increasing your contributions into super, or regular investing into a managed fund.
The most important step is to make a start. Take the time to prepare a workable budget and then stick to it, even if it’s just a trial period for 3 to 6 months – you may be surprised at how much you can save in just a short space of time.
A budget shouldn’t be a penance. It’s about making small incremental changes to your spending behaviour that will help to improve your financial position in the long run, and help you to reach your goals sooner.
For help with a savings plan, speak to your financial adviser.
Source: Capstone
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