The Power of Knowing Your Weekly Budget

Overview

This month (and day) I have resisted the urge to discuss a personal finance topic purely dedicated to Halloween...however, what I will say is this, 'According to the National Retail Federation, American's this year are anticipated to spend $74.34 per person on costumes (adult/child/pet) and of course candy!' - Happy trick-or-treating!

Halloween aside, I would like to spend a little time on budgeting because understanding your financial situation via keeping a budget can be a very powerful tool in taking the step towards financial freedom. A budget does several things, it highlights to you and other household members:

1. What are you currently earning?
2. Where is your money going? 
3. How much do you have left?

So, let's look at an example of something as simple as having $25 leftover each week after meeting your financial commitments and some of the options available to you after this discovery.

Spending It

Tax returns, money found in a pair of jeans, or $25 leftover each week - It appears to be human nature to think...spend. Here are some competing spending opportunities:

1. Food, you don't feel like cooking on Friday night (who can blame you!) so you head for the CBD to treat yourself to a Canadian Breakfast (for dinner) at that Tex-Mex restaurant you love so much.
2. Alcohol, you had a hard week at work and are now persuaded towards a non-H2O beverage; Chris Ringland's 2013 CR Shiraz for $24.99.
3. Short/medium-term saving plan, you realise $25 a week does not buy much these days so you start putting it into the bank with the intent of purchasing something larger in the near future; a trip to the garden outlet for those box hedges you have been thinking about for the last six months.

Reducing Debt

One of our biggest assets is our home, however before it can fully become our asset it is a debt that needs to be repaid. We all have our weekly minimum repayment that we need to meet to keep the lender happy. What would happen if we decided to use that $25 to make extra repayments to our mortgage?

The average house price in Bathurst is $345,000. Let's assume you have an LVR of 80%, interest rate of 7%, loan period of 30 years and weekly P&I repayments. By increasing your repayment amount by an extra $25 per week you saved $72,894 in interest and reduced the loan period by 4.9 years.

In addition, those extra repayments that you have been contributing to your mortgage, on top of your minimum repayments, can be withdrawn in emergency situations via your redraw facility (if applicable).

Contributing to Super

What if you have already paid of your debts?...And, you just happened to read an article from the ASFA Retirement Standard that stated a couple will need $58,606 per annum in retirement to maintain a comfortable lifestyle. In this instance, you decide to start taking an active involvement in your retirement planning and begin utilising the extra $25 per week to make a non-concessional contribution to your superannuation fund.

Before we get to the results, let's assume the following:

1. You are 35 and expect to retire at 65,
2. You are currently earning $77,194 plus superannuation as per the '1 November 2014 – 30 April 2015' AWOTE Rate,
3. Superannuation Guarantee Contributions are set at 9.5% per annum,
4. Your superannuation balance is $41,200 as per independent research conducted by Rice Warner in the average superannuation balance for the 35-39 age bracket,
5. Your superannuation is paying 0.50% in product/investment fees and $1,000 in insurance premiums per annum,
6. Your superannuation is invested as per a Balanced Investor with average returns of 5.70% per annum,
7. And, inflation has been factored in at 2.5% rise in cost of living and 1.5% in rise in living standards.

So, the big question is what is the difference in superannuation balances between contributing that extra $25 to superannuation and not? The answer is $327,352 versus $283,403 = $43,949 extra in retirement.

Please note: Unlike a redraw facility on your mortgage, money contributed to superannuation can only be accessed if you meet a trigger of release such as:

1. Reaching preservation age and retiring,
2. Ceasing employment on or after age 60,
3. Reaching age 65,
4. Permanent incapacity,
5. And, severe financial hardship. 

Where To From Here?

It is Saturday, maybe set aside some time this weekend to sit down and work out your financial situation. As a guide, the average weekly spending of a couple with kids (eldest is under 5) is $1,484 consisting of:

1. $364 in housing,
2. $28 in fuel and power,
3. $224 in food and drink,
4. $54 in clothing and footware,
5. $67 in medical and health expenses,
6. $26 in alcohol,
7. $220 in transport,
8. And, $132 in recreation.

The above may not be your current situation so here is a link to get you started, https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner. 

References

1. ASFA Retirement Standard, https://www.superannuation.asn.au/ExternalFiles/rs/ASFA_RetirementStandard.html 
2. ATO 'Super Conditions of Release', https://www.ato.gov.au/Super/Self-managed-super-funds/Paying-benefits/Conditions-of-release/ 
3. Australian Government 'AWOTE Rates', https://eac.csc.gov.au/your-toolkit/current-awote-rates/ 
4. CNBC 'Halloween Spending', https://www.cnbc.com/2015/10/30/halloween-grows-in-popularity-beyond-us-market-morphcostumes-ceo.html 
5. IRESS/XPLAN Calculators.
6. Real Estate 'Bathurst House Pricing', https://www.realestate.com.au/neighbourhoods/bathurst-2795-nsw 
7. Challenger 'Retirement Income Research', https://www.challenger.com.au/funds/TechnicalUpdates/CRIR_How_much_super_do_Aussies_have_Apr12.pdf 

This publication provides an overview or summary only and it shouldn't been considered a comprehensive statement on any matter or relied upon as such. This publication doesn't take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser. You should seek advice from a qualified taxation adviser when making any decisions about taxation matters.