Freaking out about rising costs? How to build a budget to stay afloat
I vividly remember the day about three years ago when I began applying for my first home loan. I hit the local main street and walked into three different banks, where staff immediately began bombarding me with questions about my cost of living.
How much do you spend on food? Clothes? Transport?
If you’ve ever had a home loan, you, too, will have been asked the same questions. What did you say? Do you remember? My strong guess would be most people don’t.
Many recent borrowers are about to discover that their lenders expect them to be able to actually live to this meagre standard of living.Credit:Dionne Gain
But it’s about to become very important. When potential borrowers don’t have a good idea of their actual living expenses, it’s common for lenders or mortgage brokers, after making reasonable inquiries, to default to using a rather stringent estimate of living expenses to gauge your ability to service a loan.
The lower the estimate of expenses, the bigger your calculated monthly cash surplus, the bigger the loan repayments you are deemed able to make, the bigger your loan.
Many recent borrowers are about to discover that their lenders expect them to be able to actually live to this meagre standard of living – it’s the price you will pay to have stamped your foot onto the property ladder.
Making matters worse, inflation means many estimates will have been much too low.
So if you’ve borrowed money in the last few years – even if you’re still on a low fixed interest rate – it’s critical you start to pay more attention to your outgoings. Like, yesterday.
If you’re spending too much to be able to afford your higher loan repayments out of your existing income, you need to know now. You can then start taking diversionary action to either boost your income, tackle your expenses or begin negotiating with creditors.
No one saw this cost of living crisis coming. No one knows how long it will last.
The one thing I do know is that tracking my own spending and having a rock-solid knowledge of my monthly and annual expenses gives me the confidence to know I can survive whatever the Reserve Bank throws at me.
So if you’re freaking out about rising rents, mortgage costs or just the general squeeze on living expenses, here’s how you can do the same:
Step 1. Go to my website and download my free Annual Budget worksheet (available in both Excel and PDF versions). My book ‘Money with Jess’ goes into even more detail, but the worksheet gives you a broad checklist of expenses to consider when assembling your budget.
Step 2. List out your sources of income on the annual budget worksheet, including salary, business income, dividends, estimated net rental returns, child support etc. You want to list the dollar amount that actually hits your account and is yours to keep, so exclude tax you must pay and any salary sacrificing, such as to super, that you do. This is your ‘disposable income’. If you have variable or irregular income, you can estimate by averaging from previous years or the minimum you expect each month.
Step 3. Take a stab at estimating your annual expenses under each category of the worksheet. Spoiler alert: if this is the first time you’ve done this, you will get it wrong. But don’t despair: Treasurers make federal budgets all the time that are wrong! And they’re always very proud of them. The point is to give yourself a baseline to refer to later when you begin to track your actual spending to see where your money really goes.
Step 4. Commit to tracking your spending for a period of at least a week – preferably an entire month. I write everything down manually with a pen (and highlighters) on my paper Spending Tracker because studies have shown this leads to greater information retention. I also just find it fun and believe the manual process slows things down so you’re more mindful. But you do you. Others have adapted my worksheets into their own digital spreadsheets. I’ve never found an expense-tracking app I like, but if you have, use it!
Step 5. Become aware of the large lumpy expenses that hit your budget only annually or quarterly, such as car registration and servicing, strata fees, water bills and council rates. Also consider larger discretionary purchases that only occur infrequently, such as birthday presents, Christmas expenses and holidays. I set up ‘future funds’ – or ‘sinking funds’ – to set aside a bit each month to make sure I’m covered for these when they arise. A future fund can be as simple as a sheet of paper on which you earmark some of your money sitting in one account (such as a mortgage offset) for certain purposes. Or, you can actually set up multiple bank accounts for each fund (I don’t do this as I think it mentally locks you into wanting to stay put with one lender when you should be shopping around for a better deal).
Step 6. At the end of your tracking month, prepare a one-page summary of all your monthly incomings and outgoings. Calculate your monthly surplus or deficit, which will be your total disposable income minus your total expenses (including your provisions towards larger expenses that fall outside the month). Are you in surplus or deficit?
Step 7. Now, go to the MoneySmart mortgage calculator and run scenarios for your mortgage costs at 5 or 6 per cent interest. If you are concerned about your ability to meet repayments, call the National Debt Helpline on 1800 007 007 (think James Bond!). They can help you negotiate with banks and other creditors regarding your bills. If things are manageable but looking tight, it’s time to get cracking now on identifying expenses for the chop or ways to boost your income.
Unprecedented times call for perhaps unprecedented measures, like starting a budget to help you stay on top of rising costs. Good luck out there.
Jessica Irvine is author of the book Money with Jess: Your Ultimate Guide to Household Budgeting and co-host of the new podcast It All Adds Up. You can follow more of Jess’ money adventures and see her budget on Instagram @moneywithjess and sign up to receive her weekly email newsletter.
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