By Thomas Kidd
When producing a financial plan, we rely on the information provided by our clients to provide good quality advice and to make long-term projections of their financial future. For most people, providing details of their income, assets and liabilities is fairly easy; most of this information can be recalled off the top of the head. Expenses, however, are a different story; most people cannot say with confidence how much they spend each year, let alone where that money is going.
Producing an accurate budget can be difficult, and there are always unknowns that can arise, but having a reasonable estimate will allow you to plan your financial future with greater confidence. In this article we share some tips to help you calculate your expenses accurately.
Getting started
The first step we recommend is to consider your income, since this is usually known, at least with a good amount of accuracy. What we want to do is account for every dollar of our income; anything that isn’t being spent is being saved, so making sure these numbers add up is a good way to ensure your budget is accurate. For example, if your income is $50,000pa and you calculate your expenses as $30,000pa, that implies you are saving $20,000 each year: if this doesn’t seem right, then most likely you need to revise your expenses.
Be generous
Because a budget is trying to account for future expenditure, we know that it will never be 100% accurate. However, people often make the mistake of underestimating their cost-of-living needs; we find it better to add a bit of wiggle room to account for the unknowns. For example, a calculation might look something like this: “I get a $4 coffee every morning during the week, so that’s $20 per week.” But what about those mornings you need an extra shot, or a breakfast muffin too? What about weekends, or leaving a tip for the barista? All this may seem like very little, but adding up all those sundries can make for a much more accurate budget, so be a little generous with your estimates. In the end, we’d probably rather be surprised to find we’ve spent less than we expected, than find we’re coming up short.
Use the tools
There are plenty of budgeting tools available online that can help you get the task done, including our very own expenditure analysis spreadsheet. Even just having a list of spending categories can act as a prompt to make sure all your expenses are accounted for. Many banking apps will automatically categorise your spending and provide a monthly breakdown that you can use as a jumping off point. Although you should always double-check these figures, having these tools at your fingertips can make this exercise a lot simpler.
Review regularly
As the old saying goes, “change is the only constant”, and this certainly applies to your budget. Your expenses can always be affected by changes in your lifestyle, whether it be your living circumstances, modes of transport, dietary habits or hobbies. Even when all else stays the same, inflation will constantly change the cost of goods and services you use. As such, it’s important to regularly review your expenses and see how things are tracking. A year after first calculating your budget, you can look back and compare your estimates to the reality. No doubt, there will be some inaccuracies, but that’s ok; you can factor them in now, and hopefully produce an even more accurate estimate to use going forward.
Thomas Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001292328)