Living Within Your Means
A smart way to manage your money so you don’t live beyond your means is to apply the 50:30:20 rule. This rule says that 50 per cent of your income should go towards essentials such as housing and food, thirty per cent on lifestyle choices such as entertainment and clothes and 20 per cent on financial priorities including paying off your debts, accumulating super and building your savings. It’s an easy to use method. Basically you would split your money into the various pockets and spend accordingly. Of course it’s not a hard and fast rule and the percentages will depend largely on your income but it is a technique that has worked for many around the globe. It doesn’t take much to live beyond your means so look out for the signs. For instance, if you use one credit card to pay off another then you are spending more than you should. According to Ibis World and the Australian Bureau of Statistics Household Expenditure Survey, the average weekly spend for an Australian family is between $1,044 and $1,536. Given these figures are from 2009-10 and annual inflation has been growing around three per cent, today’s average weekly spend would obviously be higher. Breaking down the weekly spend of Australian households, the study found that housing was the biggest expenditure, followed by transport costs and then food and drink.
Track your spending
If you want to work out how much you should allocate to each area for the 50:30:20 rule to work for you, it’s probably a good idea to discover how you actually spend your money. One way to do this is to track your spending. The Australian Securities and Investments Commission’s Moneysmart website offers an app TrackMySPEND which lets you monitor where your money goes on a daily basis. Often it is the small stuff that eats away at your money, rather than the major items. A cup of coffee costing $3.50 a day translates to $17.50 each working week and a hefty $910 a year. Cut out the coffee just two days a week and you will have saved $364 a year.
Build a buffer
It’s a good idea to create a buffer – say three to six months in savings – to cover essentials should you lose your job or be unable to work for a period of time. One smart tactic here is to put some money away as savings at the beginning of your pay cycle. It’s much better than waiting till the end of your pay cycle and seeing what you have left over as the chances are the sum will be nothing. Most people suggest you aim to save between five and ten per cent of your income for that rainy day. Having champagne tastes on a beer income can lead to problems but if you keep the champagne for special occasions then that will go a long way to helping you live within your budget.Gillian Bullock is a freelance financial journalist with more than 25 years' experience. A graduate of the London School of Economics, she writes regularly in metropolitan newspapers and magazines.