‘Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.’
Charles Dickens, David Copperfield
This quote expresses the timeless wisdom that if we continue to spend more than we earn, even by six pence, financial problems will be on the horizon and invariably bring unhappiness with them. In Dickens’ time people who couldn’t pay their debts were imprisoned as was his own father when Dickens was a child. We live in a gentler age but we all know that we need to ‘live within our means’, we’ve heard it so many times, like ‘don’t eat too much junk food’. And just like dieting it’s not something many of us do well, particularly over the Christmas holiday period.
According to the Australian Bureau of Statistics total household debt was $1.84 trillion in 2013, higher than at any time in the previous 25 years. The upward trend appears to be continuing with recent figures showing consumer credit in Australia at $2.69 trillion. A bit more than six pence beyond our means! Personal debt, if carefully managed and able to be repaid, is not always bad and can in fact help us live the life we want. For example, most people need to borrow some money to buy a home. The sheer scale of our debt in Australia, among the highest level in the world according to data published by the OECD, must give us pause for thought.
The reasons for this growing mountain of personal debt are vast and complex, beyond the scope of this article. What is obvious though is that the constant advice given to us to do a budget and stick to it is falling on deaf ears. Perhaps this is because the traditional way many people approach doing a budget – as an exercise in micro-management – deciding exactly how much money they will spend on everything ahead of time just doesn’t work. Life happens. A friend you haven’t seen in years is in town and wants to catch up for drinks before moving overseas permanently. Do you say ‘no, sorry I have already spent my entertainment budget for the fortnight’? Hopefully not.
At this point you may be thinking that it’s all hopeless and that you should just spend money and enjoy yourself because budgeting is for oddly obsessive people with no life. Steady on, there is another way.
We recommend using a budget as a fact finding exercise rather than a strict spending plan. It’s a great way of working out where your money is going. Used this way, a budget can be very empowering because once you know what you are spending your money on you can look at it and decide whether what you’re doing truly reflects your own values and goals. Then you can make any changes you decide are worthwhile.
For example, you may be shocked to find out that you are spending $150 a fortnight on lunches from a local unmentionably low quality cafeteria, or on lifestyle magazines with pictures of people smiling while lifting weights. You may be happy spending your hard earned cash that way. Or perhaps you would prefer to save it for a car, an overseas trip or a deposit on a property? It is up to you, but if you don’t know where your money is going now it’s hard to change it. Knowledge is power.
The good news is that doing a budget is easier than ever thanks to the computer. The MoneySmart website provided by the Australian Securities and Investments Commission (ASIC), our corporate and financial services regulator, is an excellent source of information. The website has the tools and resources to help you manage your personal finances. For budgeting they offer:
Armed with these two tools you should have a good idea of what’s going on with your finances in no time and without too much effort. Then it’s the fun part, deciding what you really want to spend your money on.
ADF Financial Services Consumer Centre