Time to Make a Budget

Article by Rhys Campbell

There has been a significant amount of talk recently about household debt, house prices, the ability to make mortgage repayments, the ever increasing ability of consumers to keep spending.

On the 30th of March, www.theage.com.au ran an article stating that Australians borrowed at such a fast rate and that another interest rate rise was therefore inevitable. Data from the Reserve Bank of Australia (RBA) showed that total credit provided to the private sector by financial institutions rose by 1.4 per cent in February.

Increasing interest rates, higher petrol prices and a fall in housing prices has lead to a doubling of households struggling to meet mortgage payments. This further indicates the importance of completing a budget. If you are struggling to make mortgage repayments in a time of increasing costs, you ready need to manage how you spend your disposal income to ensure you stay in control of your finances and make your mortgage repayments on time in full.

People do not know how much they are spending until they really know how much they are spending.

What do I mean by this? Well people think they know where their money goes each pay period but when pay day comes around and they're regularly struggling, then it's obvious that they don't know where they are spending their money. The only way to truly stay in control of your finances is to ensure you regularly budget.

Understanding how much you are spending and where you are spending your money is the first step to being able to save money. By regularly completing a budget you regularly understand where and how you plan to spend your money over the coming period. That way you can determine which areas of your spending can be better managed i.e. where you can save money.

If you can save money by budgeting, it means you can reduce your debt quicker and stay on top of mortgage repayments. Here's an example of what I mean:

Loan amount $300,000
Interest rate 7.99%
Loan term 25 years
Weekly minimum repayment $533
Total interest payable over 25 years $394,038

The table below indicates the time and interest saved by increasing the weekly mortgage repayments by $20, $50 and $100.

Increase weekly repayments by $20, Time saved 2 years, 6 months, Interest saved $48,565
Increase weekly repayments by $50, Time saved 5 years, 5 months, Interest saved $100,307
Increase weekly repayments by $100, Time saved 8 years, 8 months, Interest saved $156,782

The table above proves that small savings per week applied against your mortgage can make a big difference to your ability to do what all Australians want to do, pay off their mortgage as quickly as possible.

Once you complete the 12 month budget, you may be surprised to see how much you spend each month and where you are spending you money and possibly how little you are saving.

Budgeting is a process which helps you control your finances so remember it is very important to make sure you are honest with yourself when you complete the budget process. Really think about how you spend your money and make sure you include all regular expenditure, no matter how small you think it is.

Here's another example:

Daily lunch spend $10
Days per week 5
Work weeks per year 48
Annual spend on lunch at work $2,400

You buy a sandwich and a drink for lunch every day you go to work and next thing you know, you've spent $2,400 per year on eating lunch. You wouldn't know about this spending unless you completed the budget process honestly and accurately.

To get back in control of your finances, create a budget now and then you'll find ways to increase your savings, reduce your debts and lower the stress levels!