Do you find yourself at the end of a pay period wondering where all your money went? Don’t sweat it, you’re not alone. Now I am not here to force a budget down your throat, if budgeting worked and was so easy; everyone would be doing it. Instead I want you to spend some time thinking about where your money goes, and have a think about what habits could be changed.
Have a think about an ordinary week for you, and think about where your money goes. Try and pick the easiest to measure outflow first. Rent or mortgage payments are probably the biggest, most important and the easiest to measure; it’s the same amount every time, we absolutely must pay it and if you’re smart you have an automatic transfer setup. So scribble down your rent or mortgage repayments and the frequency you pay them ie:
Rent: $560 per fortnight
The next one on the list is non discretionary debt payments. Things like your car repayments, store finance contracts and personal loan repayments. These are usually fixed amounts and you absolutely must pay them, lest the bank repos your precious consumer goods. So take a minute and list your debt repayments and their frequency. Before I go any further I need to explain that these are bad debts; they generate no wealth, they clog up cash flow and you’re paying exorbitant interest to the bank. The idea here is to pay these suckers off and then we can focus more on saving and investing.
Car Loan: $200 per fortnight
Lease Contract: $25 per week
You’ll note that credit card repayments are not listed above, that is because they are discretionary payments. The minimum payment on credit card is so small it’s not worth mentioning. Moreover, the idea behind a credit card is that it is supposed to be paid off every month. If you are carrying credit card debt, you are probably paying an absolute rip off interest rate, and you need to pay this one off before you can even think about saving. We’ll talk about this some more later.
Moving on, the next on the list are those pesky direct debits. These are usually non discretionary, but occasionally variable finance contracts that such as: car insurance, house insurance, health insurance, gym memberships, phone bills, internet bills. Make a list of the amount of these direct debits, their frequency and what day they fall due.
Car Insurance: $80 per month
Health Insurance: $60 per fortnight
Phone Bill: $50 per month
Internet: $70 per month
Gym Membership: $40 per fortnight
Now multiply the amounts you’ve got to they all equal a year and then add them all up eg:
Rent: $560 per fortnight x 26 = $14,560
Car Loan: $200 per fortnight x 26 = $5,200
Lease Contract: $25 per week x 52 = $1,300
Health Insurance: $60 per fortnight x 26 = $1,560
Phone Bill: $50 per month x 12 = $600
Internet: $70 per month x 12 = $840
Gym Membership: $40 per fortnight x 26 = $1,040
TOTAL: $25,100 per annum
So at this point you may find your self a little overwhelmed by how much money is flying everywhere and you haven’t even bought food, clothes, petrol, bus tickets, electricity and entertainment and so on. These are what I call everything else expenses. They are variable, in that the can be varied if you change your habits. Some of them are discretionary in that you don’t even need them.
Now I want you to take your net that annual amount of cash outflow that you’ve calculated and divide that by the frequency of your pay; weekly, fortnightly or monthly (obviously this is going to be a little harder for contractors, self employed and commissioned staff). Now take this amount from whatever your net take home pay is;
Cash Outflows: $25,100 ÷ 52 = $483 per week
Cash Inflow: $600 per week
Balance: $117 per week
This is how much money you have left for food, clothes, petrol, electricity and everything else. And hell we’re expected to save money after this as well! No wonder that credit card’s taken a beating.
No the objective of this exercise is to find out what our “savings capacity” is: how much can we afford to save without crippling your lifestyle. The second objective is to establish our: “Burn Rate” our basic living expenses.
Your base savings capacity is the sum of your debt payments, mortgage payments and believe it or not rent (because this money can be used to pay a mortgage if you want to buy a house).
Rent: $14,560
Debts: $5,200
Primary Savings Capacity: $19,760
Your secondary saving capacity comes from any money that you can afford to save from your expenses (but we’ll figure this one out later).
Now your burn rate is the sum of all your expenses excluding debt repayments, mortgage repayments and rent. Now if you aren’t saving any money what so ever, then it will be your net pay less rent, debts and mortgage (ie less your savings capacity).
Net Pay: $31,200
Less Saving: ($19,760)
Burn Rate: $11,440
If you are spending more than you make; take your outstanding balance divide by the number of years since you first accumulated the debt. For example a $4,000 debt that has accumulated over six months which is half a year so: $4,000 ÷ 0.5 = $8,000. Now add that amount to your net pay and subtract your capacity:
Net Pay: $31,200
Credit Card: $8,000
Less Saving: ($19,760)
Burn Rate: $19,440
You are burning more than you’re earning, and some things got to give; lucky you’re reading this then.
That’s all for now, we’ll revisit these figures later on. In the mean time ask your self how you can increase you savings capacity and decrease your burn rate. And here’s a tip you’re not allowed to just earn more money; get resourceful.
Chris Hooper
(Shut Up and Save)