As the focus shifts to living expenses, do you really know what it costs you to live?
Sadly, in Australia, our financial literacy is very low. Even sadder, this isn’t taught to our kids in schools and so generation after generation we seem to keep slipping into bad habits. And those habits are learned from our teachers – in most cases our parents and guess who taught them, that’s right, their parents. This isn’t designed to take a shot at them – you only know what you know, right but surely it’s time for Australia as a country to grow up and take responsibility for our earning and spending habits.
The reality is most people don’t have a handle on their income – plain and simple.
They think they earn a certain amount via their salary, but they also have all of these deductions that they’re not completely across.
Once they do understand what’s going out, they realise that they’re not doing as well financially as they thought.
When they do sit down to do a budget, they say, “It costs me $2,000 or $3,000 say a month a live”.
But they often either have no idea OR they are in denial about their actual spending habits are. And to be honest, these almost certainly always lack discipline and therein often lies the problem.
So if I doubt (based on our analysis) that this is actually their spending, then I usually ask them, “OK. Why is it that every month their credit card debt is going up, you can’t save, and at the start of the month you have $1, but at the end, you have negative $1? Do you really think that you’re only spending $2,000?”
Budget reality
The best website I’ve ever seen to help people budget is ASIC’s MoneySmart.
It goes into all of the areas that people often neglect or forget about such as pet care, which might seem inexpensive but it costs money to own a pet.
The main problem with most people is that they don’t understand their discretionary costs.
They have their basic living costs such as food, electricity, rent or mortgage repayments and mobiles, but they don’t understand all of the other things that they spend their money on every month.
I’ve had clients come in and tell me they earn $5,000 a month, but they spend $6,000 a month and then they ask me how much they can borrow! REALLY??? There is no comprehension here.
It’s all about recalibrating people’s thinking about their spending.
You must understand your basic living expenses but also your discretionary spending.
For example, most people wouldn’t forfeit their home to go on a holiday, but many aren’t prepared to go without a holiday to save for a home.
Australians, in particular, have an amazing desire to own their own home and once we’ve got it, we don’t give it up easily.
So getting a grip on your living expenses is imperative if you want to get into the market because most people spend far more than they realise.
Changed goalposts
And that’s because previously some lenders used a generic living expenses calculation and not an individualised one.
The impact of that could have been that some borrowers were saddled with more debt that could actually afford to repay because they spent far more every month than the banks had included in their calculations.
As I stated earlier, the vast majority of Australians are disgraceful at budgeting, which is partly because at school we’re not taught useful skills such as sound money management and financial literacy. Instead, we’re taught Pythagoras theorem! Tell me the last time you used that? Then tell me the last time you had an open discussion about money?
Mid- and high-income earners are the worst at budgeting because they have more money to spend – and spend it they do! If they get pay rises, they just spend more rather than saving or investing it.
But lower income earners generally are better at budgeting because they have to be.
I’m not saying we shouldn’t all enjoy life, but there needs to be more focus on making the most of the money that we earn and investing it wisely.
That’s always a better strategy than getting a personal loan for a new car that we can’t really afford and never budgeted for in the first place.
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.
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