Budgeting to manage personal finance is likely to be a waste of time if the starting point isn’t analysing past expenditure and, based on this, identifying ways where spending can be better managed, advises Jonathan Philpot, wealth management partner, at accountants and advisers HLB Mann Judd Sydney.
“Only then can a budget be set to give the disciplined approach needed. The next few weeks before the end of the financial year, or right at the beginning of the new year, is an ideal time to undertake the review program.
“Many people think creating wealth is based on the ability to pick a good investment, such as a share or property and while this will help, it is not the key ingredient.
“It is often overlooked, but the key to building wealth is the ability to save. If people are unable to save, they will not be able to build wealth over the long term.
“The formula for savings and the ways to increase it is very simple. Saving is putting away what is left over after all other expenditure and there are only two ways to increase the amount saved – increasing income and holding spending to less than the increase, or by simply cutting down on expenditure.
“This is where budgeting comes in – making a commitment to holding down spending – and a twelve month budget is an excellent discipline for savers.”
Mr Philpot said that undertaking analysis of past spending can be very illuminating and rewarding.
“Although it might seem a given that people know where their money goes, I can’t count the number of times I’ve heard people express surprise once they analyse expenditure and make a budget – and how much more money they can have once they realise where their spending goes.
“Another analysis people should undertake is to see what contributed to any increase in their wealth during the year.
“Many savers might be congratulating themselves that they have seen their wealth increase this financial year.
“However, it’s quite probable that this has come about almost entirely because of market increases in the value of assets held during the financial year – that is “paper gains” rather than any effort they’ve made themselves.
“As we have seen over the last few years, paper gains can just as quickly turn into losses the next year. With volatile assets, it takes time to build wealth.
“Thinking that there is more money to spend because a share portfolio has increased by 20% over the last year is not good planning.”
Mr Philpot added that anyone expecting a salary increase in July should include it in their budget to see how much of any new income can be earmarked for savings, or towards reducing debt.
“For example, an extra fifty or hundred dollars a month in extra mortgage repayments is a solid savings approach, reducing the total interest repaid over the life of a loan by thousands of dollars.
“However, while the aim might be to try to reduce expenditure, it is also worthwhile analysing what you may need to do to help achieve financial security.
“For instance, personal insurance cover is overlooked by many people. Anyone earning over $80,000 per annum should consider income protection insurance.
“They should ask themselves ‘who will financially support me for the rest of my life if I am unable to work due to sickness or injury?’
“Future income earning capacity is everyone’s most important asset, and this should not be put at risk. If organised before the end of the financial year, the next 12 months’ premiums can be paid upfront to receive a tax deduction this financial year,” Mr Philpot said.
For further information please contact:
Jonathan Philpot – Phone : 9020 4196
2 May 2013