Regaining control of your finances
May 2021 – 7 minute read
Key takeaways from this article:
- Getting back on track financially
- Prioritising debt reduction
- Saving for your financial future
- Cost cutting tips
- Money planning
Getting back on track financially
Following a financial set-back there are many simple actions you can take to help yourself get back on track. 'Taking stock’ of your financial situation is the starting point to then identify changes you can make to your financial behaviours and spending habits that will help you get back on track and improve your financial situation. With a clearer picture of your current financial position the next steps are to look at ways you can maximise your income, minimise your costs, and start saving for your future.
If your income has been significantly reduced, look for any government benefits that you may be eligible for now. Also, check whether you may have income insurance as a standalone policy or within your superannuation. You may be able to increase the hours you work, take on another job, or even take up the challenge of a side-hustle. There are many opportunities out there if you’re willing to take the chance and make changes to improve your financial situation. In the meantime, you might need to focus on managing your money inflows and outflows while you get back on track.
Prioritising debt reduction
In terms of minimising costs, a significant, but often unnoticed, cost that could be having a detrimental effect on your finances is interest on loans. When looking at getting your finances back on track a good starting point is having a look at all your debts and prioritising which of them to repay sooner rather than later.
Set yourself up with a pen, paper, and calculator, or your favourite spreadsheeting program, and recent statements for all your loans, credit cards and so on.
- the amount owing,
- your repayments,
- how long the loan has yet to run (ie the remaining term), and
- the interest rate on the loan.
With all the information in front of you, now prioritise which of those loans you want to concentrate on reducing or repaying first, remembering you also need to meet minimum repayment requirements on all of them. While it makes most sense financially to choose the one with the highest interest rate sometimes it may feel easier to get the smaller ones out of the way first. If that’s what works for you then do it that way. The most important thing though is to get started.
This activity might also prompt you to think about consolidating some of those loans. If you can switch some expensive credit card debt to a lower interest rate with regular monthly repayments this may be more manageable and help to reduce the cost. Take care though not to convert short-term debt to long-term as this will cost more in the long run.
Saving for your financial future
The next priority is to get into the habit of saving money. A common question people ask is whether to pay off debt first or contribute to savings. This will be different for everyone depending on their personal situation, but, more often than not, it’s a balance of the two that suits most people. While debt will cost you more in interest, it’s more about having a healthy level of debt and repayments for your financial situation as well as having savings to meet future costs.
Many Australians claim not having sufficient savings to cover a couple of month’s costs, so getting yourself set up with an 'emergency fund' is a practical move.
- Work out how much you have in regular necessary costs (add these up),
- decide how many months you’d like to be covered for (multiply costs by the number of months),
- how long you want to take to save that amount (divide by the number of months/fortnights), and
- assess whether you can accommodate that amount in your budget.
If that's a bit of a stretch, then work out:
- how much you feel comfortable saving,
- how long it may take you to reach your 'emergency fund' goal, and
- decide whether that's acceptable or whether you want to dial it up a notch to somewhere between the two.
It's important to set stretch goals for yourself, but not unachievable so that it becomes demotivating rather than inspirational. Start with whatever you feel you can manage because even small amounts add up over time. If you're finding you have money left over each month then add that to your savings as well.
Cost cutting tips.
To help free up some cash to put towards your savings here's a few cost cutting ideas you may consider. Remember, these won't suit everyone, but they may prompt you to think of other things you can do too.
- Plug the money leaks - Money leaks are those little, regular, 'nice-to-have' spends that could be adding up to more than you realise. While you may not miss $4 for your daily soy chai latte, this can add up to nearly $1,500 a year. Your $30 takeaway each week comes to a similar amount for a year. This isn't to say don't have your 'nice-to-haves' but be aware of what it's really costing you and make an informed choice.
- Get your house in order - Reviewing your household costs such as utilities, internet providers, streaming services etc can highlight places where you may be able to reduce some of these costs. Comparing different service providers may help you find a lower cost provider, but even simple things like turning out the lights when you don't need them, having effective seals on your refrigerator, taking shorter showers can help reduce your energy consumption (which is good for the environment too) and costs.
- Pare back your food bill - A major expense, and a necessary one, for many families is their food bill. This often comes down to a balance between time and cost as making more meals at home and shopping around for specials adds more time to the process for already busy people. But with careful planning and perhaps sharing the job around there are ways to manage this expense too.
See our Cost-cutting Checklist for more ideas to help reduce costs.
Finally, let’s not leave the future up to chance but let’s put together a plan for how you’re going to use your money – a budget.
All the information you have pulled together in our previous steps whether as part of <taking stock> or getting back on track will help you to put together a budget.
Whether you choose to use a pen and paper, your favourite spreadsheeting program, or this template from the Davidson Institute, there are 7 steps to creating your own money plan.
- Cash in – Record the amount of all regular income and whether it’s received weekly, fortnightly or monthly.
- Cash out – Savings – Record the amount you will save each week, fortnight, or month.
- Cash out – Repayments – Record all the repayment commitments you have.
- Cash out – Living expenses – Record all essential expenses for Food, Housing, Transport, Clothing and Health
- Cash out – Lifestyle expenses – Record the amounts you will budget for optional spending on leisure and lifestyle.
- Cash out – Total – Add up all the amounts recorded in steps 2 to 5.
- Ending cash – Subtract the amount of Cash Out (Step 6) from the amount of Cash In (Step 1).
Aim to have a surplus of ending cash as this gives choices as to whether to save more or allocate more to a particular expense to make life easier or better.
You’ll probably need to play around with these numbers the first time you put together a budget and continue to juggle them around until you end up with a plan that suits you. But that’s the great thing … this is a plan. It’s not set in stone and you can continue to ‘repaint’ your picture as things change and your financial situation evolves. Helping you to get back on track and achieve the financial future you want.
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Things you should know
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice.
© Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.