If you've ever looked at your bank account and wondered where your money's gone, this is a sign you are not in control of your finances. Let’s start gaining control, starting with a budget!
Your budget is one of your most profitable tools, telling your money where to go.
If you’re following our coaching process, once you've done your bucket list and set your goals, it's time to do your budget.
Start with a zero based budget. This is a method of budgeting in which income minus expenses = zero. So, it means that every dollar received into your bank account or cash received into your hand is allocated.
It doesn’t mean you have no money left in your account. It means you are instructing every dollar where to go before it leaves your account.
So, if you earn $1,500 a fortnight, you want everything you spend in your household such as loans, insurance, groceries, savings and investments to add up to $1,500.
1. Allocate all your income
First, you account for all of your income, including salary, wages, child support, tax credits i.e. working for families, dividends and bonuses and other forms of income. Don't include business and/or trust income.
2. List all your expenses
Next, you list all of your expenses. They should include things like rent, rates, insurance, loans, clothing, petrol, vehicle expenses, doctor, dentist, hairdresser, weekend activities, sports.
3. Allocate residue
The residue is what you have left after expenses (income – expenses). Allocate this to your goal – is it to become debt free?
Then reduce all your consumer debt to the minimum repayments and direct all your residue to your smallest debt until it is repaid and closed.
Then move onto the second – this is called the snowball effect, repaying your debt from smallest to largest (refer to step 5).
4. Save $1000
Before you start repaying your debt set up an emergency fund. Ensure you have enough insurance cover to protect your largest assets – YOU (life insurance) and YOUR INCOME (income protection)! Then save $1,000 as quickly as possible.
Once you've got this there's no reason to rely on debt if something goes wrong. You're in control now. Don't rely on a credit card for these emergencies. Want to have a larger emergency fund? Go for it! A minimum of $1,000 is a nice buffer and should be sufficient if you have enough insurance in place.
5. Smash your debt
One by one, smash your debts from smallest to largest. Why do the smallest first? It provides a sense of accomplishment and you are more likely to stick to it because you can see the results quickly.
It’s like being on a diet if you're told to lose 10 kgs as fast as you can compared to 5 kgs – you’re more likely to achieve and stick to the 5 kg goal because you will see results faster. Once you have hit that goal, you’re ready to achieve more. The same goes for finances.
So, that's how you do it. Think you're ready? If you’d like help with your own budget, contact Jen for personalised help.