(Australian Associated Press)
Are you in dire need of a financial detox?
We will see how adept Treasurer Scott Morrison is at balancing the nation’s books when he delivers his second budget in May, so perhaps it’s prudent to check up on your own financial health.
Far from a pretty picture? You’re not alone if you resolved to stick to a household budget but have already slipped.
MLC senior financial adviser Mark Plaskitt prescribes a financial detox, where you allocate as small amount of money as possible to discretionary spending for a month.
For it to work, you need to cut yourself off from access to all other funds, especially credit cards.
“This makes them ponder everything they spend during that time frame and heightens awareness,” Mr Plaskitt says.
“Though its obviously not sustainable long-term, it could be the shock to the system they need to modify their ongoing behaviour in a positive way, or at least help them prioritise better.”
If you have yet to draw up a budget, realise that it won’t work unless you are realistic about your goals from the outset.
Australian Government Financial Literacy Board chairman Paul Clitheroe says the biggest mistake people make when devising a budget is making it difficult for themselves from the start.
“Many budgets fail as we set unrealistic expectations, few of us will actually live like a Buddhist monk!” he says.
“Not setting a ‘real’ budget leads to the budget being a failure and we give up on the idea.”
Mr Plaskitt suggests a modest spending reduction target to start with, which can then be built on in the future.
There are several options you can use to work out exactly where you spend your cash. One option is to review your bank and credit card statements, or you can go for the old receipts in a shoebox trick.
You can also use mobile phone apps to help you stay on track, like Goodbudget or Wally.
Once you’ve determined where you are spending money, the next step is to decide on expenses you can either reduce or ditch entirely.
Mr Plaskitt recommends investigating how you can slash large expenses, like getting a better deal on your mortgage interest rate, for example, rather than focusing on smaller items.
“Sometimes people might spend hours researching something that is only going to save them $5 a month but put no priority at all into something that might save them many hundreds of dollars per month,” he says.
Mr Clitheroe says it is important to allow room in your budget for surprise expenses like medical bills or replacement of major household appliances.
“Those unexpected expenses are a budget wrecker and often end up on the credit card at a high rate of interest,” he says.
Once you know how much you spend and where you can cut back, you’ve got room to save, but make sure it’s for something specific like paying off a credit card or saving for a holiday or home deposit.
“What is critically important is why you are budgeting; we need short, medium and long term goals,” Mr Clitheroe says.
“Unless we have a solid target, we generally will fail to hit it.”