Review your Budget

The following conversation is so predictable between myself and a client who tells me the purpose for our meeting is to cash out and pay off personal loans and credit cards – in other words, to consolidate debt:

Me: “So why am I here?”

Bashful client: “I’m afraid our credit cards are out of control and we want to pay off the car loans and start again”.

Me: “Ok, so tell me about the credit cards.  Who are they with and how much do you owe?”

Bashful client: “I have a Westpac card which I owe, $10,000, she has a NAB card that she owes $8,000 on, we have a Virgin card with $3,000 and oh wait, there’s another Westpac card with $7,000 owing.

Me: “Ok, got it.  Now tell me about the car loans?”

Client: “there’s a BMW finance loan for $23,000 and hers is with Esanda and we still owe $13,000”

Me: “Great!  It’s really important to be clear about who you owe and how much you owe.  Is there anything else?  No?  Now obviously I’m here for the quick fix and we should be able to sort this out, but my experience tells me that unless we don’t cover off how to budget, I will be back here in two years doing the same thing again.”

Client: “I don’t know how to budget.  I never learnt that. Not from my parents, not from school.”

Me: “you are right, and if we don’t have a quick lesson, it will be remiss of me to sort out the effect if we don’t address the cause.  Would that be okay?”

At this stage, both clients usually lean in.  They hate the feeling of the grey cloud above their heads.  The keeping up with family and neighbours has taken its toll and there’s unspoken pressure on the marriage because the blame game has crept in.

Me:  “Ok.  The simplest way I know how to budget is to get out your previous bills/bank statements/credit card statements and break down each expense.   This will take around an hour.  Download a budget spreadsheet – (email us and we’ll send you one).  Record all your expenses and tally your annual expense.  These are your fixed costs.  They are payable regardless of how much money comes into the household.  Divide that number by the frequency that you get paid.

Next, open a new account and call it the bill account.  Transfer the fixed costs amount to run the household to the bill account every week/fortnight.  THIS MONEY NEEDS TO GO OUT OF THE ACCOUNT FIRST.  Whatever is left is your savings for whatever you WANT; this by the way, is the difference between needs and wants.

Once you know what your monthly fixed costs are, compare that to the income you bring into the house.  Are you spending more than you’re bringing in?  Chances are that if the cards are maxed out, you are.

Now review the expenses and cut what you can.  Are we bringing in more than we’ll pay out?  If not, it’s time to make some serious decisions.  If we are, but can’t seem to make it work, I challenge you to the cash diet.

Now that you know that know that you’re allowing $250 for groceries each week, go to the ATM before you go into the supermarket and pull the money out in cash.  Spend only $250 – like our parents did on a Friday night shopping after work.  If you’re over, put stuff back.  Banks weren’t open after 4pm so they couldn’t get more cash, we shouldn’t either.  Same for coffees/lunches.  Pull the cash out on Monday and if it’s gone by Thursday, don’t buy a coffee on Friday.  Simple. 

It’s hard to remember which expenses you’re allowing for and for how much, so keep receipts and stick your budget on the wall in a prominent place – in your bedroom or kitchen if you prefer.  Check your receipts to make sure you’ve allowed for that expense.  If not add it if you need or stop buying it if you don’t.

Hold each other accountable too.  If you didn’t budget for coffees every day and right now you can’t afford them, don’t let your partner down – don’t buy them; you’re in this together.

Now for the tricky bit.  If you decide not to refinance and clear out the debt and start fresh, but rather, decide to bootstrap it and pay them off without impacting your equity (and I applaud you because this is the best long term option), then pay the minimum on all your commitments to hold them at bay while you pay out the smallest debt like mad.  So following the example above, pay out the Virgin card for $3,000 first.  You’ll feel great when it’s gone.  Cancel the Virgin facility and start on the $7,000 Westpac card.  Now you’ll be in the habit and you won’t have a minimum commitment to Virgin, so you can add that to the Westpac repayment.

Remember that the scenario above is not uncommon – I see it around once a week and it has little to do with how much money is coming into the house.  The key is to own the situation and make a joint decision to change the future. 

Finally, remember that whatever you save in equity or real cash as a consequence of changing your daily habits will make a real impact to your financial success.  That extra $64,000 on top of the home loan could mean the difference between you being in a position to purchase an investment in the next two years or not. 

It takes 21 days to form a new habit they say, let’s allow a month.  Please remember that good budgeting involves a bit of education and the formulation of a few new habits.  It’s really not hard, just different.  Happy budgeting!