Manage Money

Why Is Budgeting So Important?

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Why is budgeting so important? While people often associate the word budget with ‘restrictions’, that’s simply not the case. It is a financial tool that allows you to objectively look at your financial position, and gives you an easy way to plan how you can achieve your financial goals. No one creates a budget for the fun of it (ok, maybe some people do), but it is an important step if you want to achieve financial freedom. It is important for you to know how much money is coming into your bank account every week/month, and how much money is going out. But there are much more benefits to budgeting that you probably aren’t aware of. Benefits of Budgeting Financial freedom Achieve your goals Retire early Reduce your stress Makes you happier Helps you avoid or get out of debt. If you’re a budgeting noob, click here where we take you through the process of building a budget step by step.      1. Financial freedom Financial freedom is when your assets produce enough income to cover your expenses. In other words, your passive income generates enough money for you to live comfortably without working. But in order to be financially free, the cash that flows into your account must be greater than the amount that leaves. But how do you know if more cash is coming in than going out? That’s why you need a budget. A budget will give you a clear picture about your financial position. Once you know what your financial position is, you can plan a strategy to help you be financially free, whether that’s by increasing the amount of money-producing assets you own or by reducing your expenses. But you can only know what to do once you can see the picture clearly. That’s what the budget is for.      2. Achieving your goals What’s your goal for this year? What’s your goal in life? Is it to travel more? Or to buy a house? Or something entirely different? But setting goals is easy. Anyone can do it. But achieving your goals can be difficult. Which is why budgeting is so important. A budget can help you stay focused and keep you on track. You can easily tell if you’re on track, or moving away from your goal.      3. Retire early Building on the last point, a budget can help you retire early if that’s one of your goals. If your goal is to retire early, you need to know how much money you’ll need when you retire so you don’t have to work again. To do that, you’ll need to know how much you need in passive income and savings to cover your expenses. A budget will simplify that for you. Furthermore, because you have a financial goal (to retire early), you can budget accordingly so that you can make that dream a reality. A budget will tell you exactly how much you should save in order to meet your goal, and which expenses can be reduced in order to support your goal.      4. Reduce stress One of the most common causes of stress is financial issues. That’s because most people don’t have a budget and they don’t know if they can survive until the next pay day. They’re worried if they have enough money to pay off their mortgage or for emergencies. By having a budget, you can combat the stress by eliminating financial worries. If you live your life on a budget, you’ll never spend beyond your means and you will be well prepared for any unexpected expenses. With a budget, you will sleep peacefully at night knowing that you have got all your finances covered, even in unexpected circumstances.      5. Makes you happier Have you ever felt only wanting more? Are you ‘keeping up with the Joneses’? If you spend all your time focusing on the materialistic objects of other people, you’ll never be happy. You will spend money you don’t have, to buy things you don’t need, to impress people you don’t even like. Without a budget, you’ll find yourself in a negative spiral. But every time you sit down to record your expenses, you are making a conscious effort to focus on yourself instead of everyone else. And after a while, you’ll completely lose focus of what others are doing with their money. Instead, you’ll be focusing on yourself and what you have. And trust me, you’ll begin to appreciate what you have and you will no longer care about other people’s things.      6. Helps you avoid or get out of debt. If you want to build wealth, then you need to stop accumulating ‘bad debt’. Bad debt is any debt that you accrue buying things that you don’t need or doesn’t make you money. We’re not saying that you shouldn’t buy things that you enjoy, we’re saying that you shouldn’t buy these things with debt. Bad debt itself is bad. What’s even worse is that you’re paying interest on top of it. So you’re paying more for things that you don’t need. You shouldn’t confuse ‘bad debt’ with ‘good debt’. Good debt is any debt you accrue in order to increase your passive income. For example, you might get a low interest loan to buy a commercial building that will reward you with passive income. If the commercial building generates passive income that is greater than your loan repayments, then you’ve got an asset without actually paying for it. If you’re serious about building wealth, you first need to take a moment for self-reflection. Click here to find out if you have the right mindset to build wealth.

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Credit cards are a form of instant gratification, the complete opposite of delaying gratification.

Delaying Gratification: The Most Important Step To Becoming Rich

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What is the difference between the people who become rich and those who don’t? Delaying gratification. What are we talking about? Currently, there are more than 13 million credit cards in circulation in Australia. The average credit card has an accrued interest of $1382. This means that Australia has a national debt accruing interest of nearly $19 billion. [Source] Why do we say this? Have a guess at how many people who hold a credit card are making smart purchases using their card? Purchases that are either a necessity like food and utilities, or purchases that are building their wealth? Probably not. They’ll most likely use it to book holidays, buy the latest gadgets, and clothes straight from the runway. Maybe not on a credit card, but most people buy a new, fancy card on credit as well. Why are we telling you all this? Accruing bad debt is a guarantee that you’ll never become rich. But delaying gratification will. One of the most important requirements to becoming rich is delaying gratification. Don’t buy luxuries until you’ve built up your worth to afford them. “Keeping up with the Joneses” is a terrible mindset to have if you want to be financially free. As Dave Ramsey said: “We buy things we don’t need with money we don’t have to impress people we don’t like.” That’s all it is. It’s so simple in theory, but extremely difficult in practice. That’s why few people apply this simple principle in their lives. They don’t have the discipline. And that’s why they’ll never be financially free. Build up your net worth first. Buy assets that will work for you and produce passive income. Invest in stocks, bonds, crypto, or even businesses before you buy shiny toys and fancy cars. It doesn’t matter which investment vehicle you use, but just make sure that you have enough passive income to buy whatever luxury you want. It sounds so simple, yet difficult to follow. Because most people aren’t disciplined. Just remember to follow this simple concept, and you’ll be able to afford whatever your heart desires in the future.

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The little expenses that end up costing a lot

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How would you like to see an extra $100 in your bank account each week? Well keep reading to see how you might be throwing hundreds of dollars away each week. Think of what you can do with an extra $100 a week. An extra holiday each year? More money for your first home deposit? More money to spend on your hobbies? What might seem like small purchases here and there can actually add up quite quickly. You might not realise it since it seems so small, but it can add up to thousands of dollars saved up every year. Money that you can better spend elsewhere. We understand that you probably want to treat yourself here and there. You probably also have hobbies that you enjoy which requires money. We’re not saying you can’t do those things anymore. We just want you to be aware of the little expenses that could end up costing a lot. 1. Daily coffees Caffeinated beverages have been a staple for office workers in Australia for over a century. While it definitely tastes good and gets you going, is it really worth the $5 every day? A $5 coffee every day is $25 a week. Assuming that you work 45 weeks a year (excluding public holidays and paid time off), that’s the equivalent of $1125 a year, or close to $100 a month. What could you do with the extra $100 a month? You can still have a daily coffee without paying an arm or leg for it. Most offices and workplaces offer free tea and coffee that you could take advantage of. If not, you could always make it at home and take it to the office with you. (We know that instant coffee doesn’t taste as good, but at least it costs a fraction of café-made coffee) 2. Daily lunch takeaways We know, life gets in the way sometimes and you don’t have enough time to pack a lunch. Or maybe you think that packed lunches are only acceptable for kids. Either way, going out to have lunch everyday is eating you alive. Let’s say a lunch costs you about $10 a day. Using the same assumptions as above, that’s the equivalent of $2250 a year, or close to $195 a month. If you truly don’t have the time to make yourself a packed lunch each day, why not bulk prep at the start of each week? (Or maybe take a time-management class? Who doesn’t have 10 minutes everyday to make themselves a quick lunch?) Otherwise, you can also make extra dinner and take the leftovers for lunch. 3. Streaming and other subscriptions Back in the early days, there was only one streaming service available: Netflix. But these days, it seems like there are more content streaming services than there are stars in the universe. It doesn’t help when there seems to be a new streaming service popping up each month. A quick Google search reveals there are currently 27 streaming services in Australia. Let’s say you are currently subscribed to the top 5 streaming services: Netflix, Disney+, Paramount+, Hulu, and Stan. Their cost per month for a standard account with no ads are: Netflix: $16.99 Disney+: $10.00 (for a yearly subscription) Paramount+: $8.33 (for a yearly subscription) Hulu: $12.99 Stan: $14.00 We know that most people out there share their passwords with their friends and family so that you’re spending less each month. But let’s not forget we haven’t even mentioned AppleTV, Youtube Premium, Spotify, and sport streaming services like Foxtel, Optus Sports, Stan Sports, and Kayo, all of which also cost money. Let’s assume that you only subscribe to Netflix, Disney+, and Paramount+ (and get the rest from your friends and family). That still costs you $35 each month. And let’s not forget other common subscriptions as well. Australians spend an average of $95 a month on gym memberships, or over $1140 every year. Amazon Prime costs $6.99 a month. PlayStation Plus Essential costs $79.95 a year, or $6.67 a month. Xbox Game Pass costs even more at $15.95 a month. All in all, that’s a lot of money you’re spending on streaming services and subscriptions. 4. In-app/In-game purchases Another common money grabber. Most people think that $1.99 here and $4.99 here doesn’t really matter in the long run, but these small expenses actually add up quite quickly. It’s very tempting to make these in-app purchases. After all, that’s how these games make money. Stuck on candy crush? Purchase to keep playing. Pokemon taking forever to level up in Pokemon Go? Make a purchase to get them to level up faster. Want a more badass looking character in Fortnite? Buy a skin. And that’s how these games are designed to get you to spend money. You always want to progress in the game quicker, or customise your player to suit your tastes. A dollar here and a dollar, and suddenly you’ve spent an entire paycheck on in-app purchases. 5. Rideshares Uber, Lyft, Didi, and Ola have made it incredibly easy for us to get from A to B. But are they putting a strain on your bank accounts? Let’s say you have plans to meet up with a friend. You have three choices: walk the 30 mins, take a 20 minute bus ride for $2 or take a 10 minute Uber for $10. Which option do you choose? If your first instinct was to say Uber, you might want to take a quick look at your rideshare history to see how much you’ve spent in total on rideshare apps in the past. Hint: it’s probably going to surprise you. Plus, these little expenses will quickly add up. 6. Food Delivery Apps Similar to ridesharing apps, apps like Ubereats, Menulog, and Deliveroo have made it incredibly easy for us to stay at home while our meals come to us. However, the average Australian spends about $44 per month on food delivery services every month. However, most restaurants add a markup

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Should I Focus On Making As Much Money As Possible?

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“It’s not how much money you make, but how much money you keep.” This quote by Robert Kiyosaki made me realise that most people’s approach to money and their finances is wrong. Most people focus on making more money. That’s all they focus on. They’re looking for a raise, or a promotion, or a bonus. They’re simply looking to get more money in their bank accounts. You might be thinking to yourself, what’s wrong with that? After all, a pay rise is a good thing, right? Yes, a pay rise is definitely a good thing, but focusing on making more money is the wrong mindset. Here’s why: Most people, when they make more money, simply buy more stuff. It’s easy to get carried away. Once you make more money, you want to upgrade your car to a nicer, more sleek, more luxurious model. Once you get another pay rise, you’ll want a bigger house to compensate. Another pay rise means you get to buy another car, or boat, or motorcycle. It’s a vicious cycle of “Keeping up with the Joneses”. And how do you finance your purchases? Probably using debt. So soon your debt starts to accumulate, and accumulate, and accumulate. Your stress levels increase because you know that as soon as you lose your job, you will be living in hell. You’ll lose your grandiose house, your luxurious sports car, and everything else you’ve accumulated to then. You’ve never realised it until now. All your life, you’ve been working for money. You’ve been working to accumulate stuff. You’ve never been accumulating any wealth. This is a very common phenomenon. People confuse money with wealth. But making a lot of money does not mean you are wealthy. Once your income goes, so does everything you own. So what should I focus on, if not money? Instead of solely focusing on how you can get the next pay rise, focus on where you’re spending your money. What are you doing with your income? Are you buying assets, things that will increase in value over time and possibly make money for you, or are you buying liabilities? People who earn a high income are not wealthy. Only those who own assets are wealthy. Assets like land, buildings, patents, royalties, and stocks to name a few. These assets typically increase in value over time, and the best assets even make money for you. For example, JK Rowling made a reported $54 Million in 2018 according to Forbes. As your income increases, you should put more and more of your attention to how you’re spending your income. If you keep buying liabilities like flashy cars or expensive suits, then you’re never going to be wealthy. But if instead you choose to buy assets like real estate and businesses, then you can become wealthy even if your income isn’t all that impressive. Maybe someday, when you’re in your 40s or 50s, the income from your income-producing assets will become greater than your paycheck, giving you the opportunity to retire from a 9-5 job and still receive income. Wouldn’t that be nice? This isn’t just a dream, it can be reality. You just have to make the right choice. So in conclusion, focusing on a bigger paycheck is only one half of the story. And it’s not even the important half. Instead, you should focus more on where you’re putting that money. The thing that you should be most concerned about is where you’re spending your money.

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Why Saving Money Is A Myth

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So you’ve just landed your first job and received your first paycheck. You suddenly have access to a lot more money than you have previously. So what do you do with your money? Well, you’ve got two options. Spend it, or save it.  Most people, including you, will probably do a combination of both. You spend some of your paycheck now, for necessities and for pleasures. And like most people, you’ll probably save the rest for a rainy day.  But now is where it gets interesting. I can say with 99% certainty that the first place you think of putting your hard earned money is in the bank. But is putting your ‘savings’ in a bank really the best idea? Here’s what I mean. You’re Losing Money Every Year Inflation is the general increase in the prices of goods and services. When prices increase, your dollars are able to purchase fewer goods and services. In other words, you can buy more stuff for $100 in 2000 compared to $100 today.  To measure the inflation (or deflation, which is negative inflation) rate, the Consumer Price Index (CPI) is used. The CPI measures the weighted price change for a basket of common household purchases. This includes goods such as food, housing, and recreational activities. (You can see all the items included in the CPI and their weights here) What this all means is that you’re essentially losing money every year in the form of reduced purchasing power.  Is ‘Saving’ Money A Big Lie? Here’s where it gets interesting. According to the Australian Bureau of Statistics (ABS), the average inflation rate for the past five years has been 1.98%. So unless your bank has been offering you interest rates greater than 1.98% per annum for your savings account, you’ve been losing money, not saving money.  The Big Four  However, that doesn’t seem to be the case. According to finder.com.au, over the last five years, the average interest rate for savings accounts among the Big Four Banks (Commbank, Nab, Westpac, and ANZ) was only 1.54%. Which means that although the money in your savings account has increased in absolute terms, you are only able to purchase fewer goods and services with the money in your savings account compared to five years ago.  Pandemic-Induced? However, it’s also important to note the effects of the pandemic. Due to the pandemic, a lot of actions were taken in order to stimulate the economy. Firstly, the Reserve Bank of Australia reduced the cash rate to a historic low 0.1%. By reducing the cash rate, it also caused banks to reduce their interest rates. While low interest rates are good for borrowers (they pay less interest to the banks), they are bad for savers as the amount of interest paid by the banks to savers is reduced. By reducing the cash rate, it encourages people to spend their money now rather than later.  Secondly, the pandemic also caused a lot of supply chain disruptions and shortages. Right now, there is a shortage on graphic cards and computer chips. As there is a computer chip in almost everything (smartphones, cars, and whitegoods to name a few), a chip shortage causes flow-on effect on the supply of other goods as well.  Lastly, the large stimulus provided by the Australian government intended to stimulate the economy during the pandemic introduced a lot of ‘new money’ into the money supply. As the money supply increased, the availability of some goods and services also declined (remember the toilet paper hoarding of 2020 anyone?). This increased demand caused the prices of some goods and services to go up as well.  So back to investigating whether savings account are a myth. If we note that the last two years were anomalies due to Covid and exclude their data, the inflation rate for the five year period before Covid (2015 to 2019) was 1.75%. The average interest rate for savings accounts among the Big Four during the same period was 2.32%. So if we exclude the wild events from the past two years, saving money is most likely not a myth.  Other Sources to Consider But high interest savings accounts are not the only place where you can put your savings. There are other avenues available, like term deposits, bonds, stocks, and even crypto.  But that’s a story for another time. 

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