Beat the rate rise by rising to the budget challenge
12 November 2007
Following the Reserve Bank of Australia’s announcement to increase interest rates by 25 basis points homeowners are being urged to develop effective budgeting skills as a method to cope with the impact.
CUA’s (Credit Union Australia) Managing Director, Mr Graham Olrich said a recent report entitled Financial Literacy: Australians Understanding Money revealed 48 percent of Australians did not budget for their day-to-day finances and found dealing with money stressful and overwhelming.
“A comprehensive budget is the starting point of every secure financial future but not everyone knows what is involved and how to prepare one properly – this is worrying with the announcement of another interest rate rise looking to add at least $30 a week to the average home loan,” he said.
“Creating and sticking to a simple budget can save people a lot of money in the long-term which could be invested into their mortgage or other necessities rather than being misspent.”
“From my experience people don’t budget because they have preconceptions about it being too difficult and time consuming when it only takes about half an hour per week or fortnight depending on how often you get paid,” he said.
Mr Olrich’s tips for creating an easy and straight-forward budget:
- include income - make sure to record the amount of your regular income. If your income is erratic due to shift work or any other reason, work out what your average income is and include that amount
- decide on the frequency of your - you will need to decide whether your budget applies for each week, fortnight, month or other period of time. What works for most people is budgeting according to the frequency of their income period; so if you are paid fortnightly it is easiest to budget fortnightly
- identify your essential expenditures - this includes, rent or home loan repayments, transport expenses, electricity bills, home phone and mobile phone bills, car registration / insurance payments and many more. These amounts are often non-negotiable so you will need to know how much they are in order to know how much you have left to spend on social activities or other flexible expenses – or perhaps how much extra you can put towards your mortgage
- include expenses - try to include everything you regularly spend your money on and make sure to even include less-frequent expenses such as gifts or charity donations, hair cuts or beauty treatments
- save - if possible, try to set aside some money for savings. This will enable you to meet unexpected payments or emergencies in the future such as, dare I say, another interest rate rise. Some people find it useful to open a separate bank account or even a term deposit where their pay is deposited in order to save. Others choose not to save for emergencies but to invest in other important things such as their home loan or other loan, shares or superannuation
- start keeping a financial journal - it’s important to keep a record of what you spend your extra money on so you can prioritise your finances. A financial journal is an excellent way of doing this. Make sure you write down everything you spend for a month and this will show you exactly where your money goes. Some people go as far as keeping receipts to help them keep track of how they spend their money
- reassess your budget - don’t think that you can stick to the same budget for the rest of your life because the truth is your needs and priorities change over time. It is wise to reassess your budget every three to six months or at a minimum each financial or calendar year. You should also ensure you develop several drafts of your budget plan to eventually come up with a realistic budget
- put your written budget into action - make sure you’re not just putting your budget on paper but that you’re actioning it. You may find that your ongoing weekly or fortnightly expenses are quite substantial and are perhaps more than you thought which may mean you will need to sacrifice spending on things you want in order to pay bills or other necessities. Sticking to your budget may mean you can save a few extra dollars and put them towards your home loan or other important necessities
Mr Olrich said spending half an hour preparing a good budget would give people more control of their finances, minimise financial pressures and stress, help them meet regular expenses, allow them to find a balance between the ‘need’ and ‘want’ expenses, aid them to increase their savings, help them plan for the future and save them from having to use credit cards or loans in emergencies.
“Budgeting is the first step for anyone wanting a secure financial future and the results of a good budget can be astonishing.
“If you are worried about the interest rates rise, reassessing or creating a budget and actioning it may help you save a few extra dollars that you can put towards your mortgage.”
