Andrew Zbik

Welcome to 2018. Another new year to set new goals, make New Year’s resolutions to change some bad habit you feel guilty about and to start saving more money! Right?

The start of a new year is always a good time after holidays to rethink what you want to achieve in the year ahead. I often hear many people say they intend to save more money.

In an expensive city like Sydney “Murphy’s Law” often says expenditure equals available income. Research by the ABS shows the top three expenditure items for Australian households as a percentage of net income are housing costs (e.g. rent or mortgage payments) at 20%, food and non-alcoholic beverages at 17% followed in third place by transport cost at 15%.^[1] Already that’s over half of a households expenditure spent on important stuff.

Average Weekly Household Spending on Good and Service

(Based on average weekly expenditure of $1,425)

Looking at the expenditure items lower down the list such a recreation, clothing and footwear, alcohol (yes – it warrants its own special category) and personal care – surely there is room to chop some fat?

Let’s look at coffee. At $4.50 a pop in the Sydney CBD a daily coffee will set you back $1,080 a year. Over a 40 year working career that will add up to $72,794.76 allowing for inflation of 2.50%. WOW.

Now, are you thinking that I am saying you should cut out coffee?

Get real! I’m writing this article sitting in a café in Sydney sipping a flat white. With two young children my $4.50 day habit improves my productively and attentiveness – I’m sure I could complete a cost-benefit analysis that this little habit provides a far greater level of productivity far beyond the cost.

So what am I getting at? If you did drop your coffee habit and save that money, after 40 years of depriving yourself of one of life’s little pleasures, the money saved and kept in the bank would provide an extra annual income of $4,640 at retirement. Really not much extra for such great sacrifice.

Here are my three tips on how to properly use a budget in 2018:

1. Use a proper budget tracking tool such as MoneySoft or MyProsperity (Both which we use with our clients at Omniwealth). This will help you understand where you spend your money. Once you know exactly where you spend your money it will help you better prioritise what spending habits you will change. I always remember the first year I properly tracked my expenditure. The amount I spent on alcohol on my first year of University was enough to pay for a trip to Europe. The following four years of Uni my alcohol consumption was reduced and I travelled overseas EVERY year.
2. The real crux of budgeting is to then set aside a percentage of your net income to go towards an investment plan. My personal budget allows 10% of my net income to go towards my investment plan. This money is put aside each month without fail and what is left over is what is available to spend on our household necessities and discretionary items.
3. Seek advice on what your percentage of deliberate contributions towards investing can achieve. Is it enough to service the loan on an investment property? Or to make regular contributions to a diversified investment portfolio in shares, property securities and bonds? Using cash flow to purchase assets that grow in value and produce income over the long-term is what will help to grow your wealth.

In summary, saving money alone will not make you wealthy. Life is also a journey and should be enjoyed on its way. Having a deliberate plan to take some of your net income (i.e. income available after tax) to go towards a dedicated investment strategy is what will help you build wealth and achieve your personal and financial goals.

By Andrew Zbik, Senior Financial Planner

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[1] 6530.0 – Household Expenditure Survey, Australia: Summary of Results, 2015-16 Released 13th September 2017.
SOURCES:
http://www.abc.net.au/news/2017-09-13/household-expenditure-survey-cost-of-living-burden/8939984
http://abs.gov.au/ausstats/abs@.nsf/Latestproducts/6530.0Main%20Features32015-16

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