Broadly speaking our finances can be broken down in to four categories; assets, liabilities, incomes and expenses.
Most clients we see are able to rattle off the first three at the drop of a hat, but often falter when it comes to expenses. If you were going to buy shares in a company, but they couldn’t tell you what they spent their revenue on or whether there was any profit leftover, would you invest in that company? Yet, this is the approach most people take with their personal finances.
We prefer to talk ‘cost of living’ rather than budget. Having a budget generally involves placing limits on spending and requires accounting for every dollar, which people get bored of quickly and don’t stick to. Whereas, understanding your ‘cost of living’ is more about being informed and knowing what it costs to live your life, which can help highlight where your money is going and whether you are happy with that.
Without knowing what it costs to live, people fall into the trap of thinking they need all of their income to pay their bills. They get their salary paid to them, it sits in the bank and, as my mum used to say, it burns a hole. Before long the money is gone, you don’t know where it went and there isn’t usually much to show for it.
Breaking this trend can be easier said than done, as we tend to be creatures of habit and can easily get stuck in our ways. But, if you want to build wealth and be in control of your finances, it all starts with investing the time to review your expenses.
No matter what life stage you are in, reviewing your cost of living will help to ensure your income is going where it needs to in order to achieve your goals and objectives. Check out the great tools and apps available on the government’s ‘Money Smart’ website https://www.moneysmart.gov.au/ or arrange the time to meet with your financial adviser for help.