For most people money comes in and it goes out just as quickly. We have all tried to budget at some point in time and probably failed miserably for the same reasons most people fail at dieting. (Me included). When we attempt to budget in a traditional sense, we are forced to sacrifice items we think we can do without or don’t need now. As part of human nature we want it all and we want it now. As a result, we can feel frustrated and hardly done by. So, to make ourselves feel better we convince ourselves it really is that important and go out and spend money anyway.

Before long we’re living from pay to pay again with the budget being ignored in a vertical file somewhere well out of harm’s way.

Then when we get a bill that has to be paid and there is nothing left in the bank account to pay it with, the thought process goes along the lines of, “she’ll be right mate, I’ll whack it on the credit card” and figure out how to deal with it next month. Then when you get the credit card statement and you realise you are going further into debt you phone a mate and go for a beer or buy a pair of shoes to make yourself feel better, the cost of which also goes on the credit card. Hey, I’ve been there done all of that (except for the shoes) and a lot worse. Then if the pain is big enough you might be tempted to drag the budget back out and repeat the process just to make yourself feel really good. Is it any wonder so few people get ahead financially?

Personal budgets are for the most part a waste of time and potentially do more harm than good!

The alternative is far less time consuming, a lot simpler and will go a long way to make you feel good about yourself. It’s so simple that you won’t believe it works but I dare you to give it a try for say three months and let me know how you go with it.

In your mind make $1,000 your zero account balance (or some other round number, you decide). If you can make this mental change you will already be well on your way to personal budgeting that works.

Here is how it works. Start with $1,000 dollars in your account. For some people even saving this amount will be a struggle. It will involve only paying for the bare essentials to keep a roof over your head. Minimum amounts on any debt and really thinking about what you are spending. Once you have your $1,000 zero account, you transfer in once a month at the same time each month 1/12th of the amount you are prepared to spend each year. This transfer should be a regular direct debit from the account your pay gets put in. For this process to work the $1,000 zero account has to be separate from your savings account and very separate from your offset account if you have one.

All your living expenses come out of your $1,000 zero account including the minimum debt payments, insurance school fees etc. By the end of the month you will either be left with more than or less than the $1,000 your started with. It’s that simple. Each month you know if you have spent more than you have budgeted for. Don’t be surprised if the balance falls below $1,000. Unforeseen bills happen. The idea is there is no going back to savings or the credit card for a top up. There is no hiding the fact the budget has been blown for that month and if you go down the same path next month, you will be in overdraft to yourself for a similar amount.

What happens almost at a subconscious level is that you will start challenging yourself to get back to the $1,000 zero level. It almost becomes a game. Keeping that account above $1,000 means after all you are getting ahead financially. Without even thinking about it, you’ll start to question if you really need to buy that coffee every morning on the way to work. In effect, you’ll look at your discretionary spending in a different light.

Suddenly almost effortlessly you find yourself spending less and earning more which is after all the most predictable way of getting ahead financially. It also gets that voice out of your head which says, “its ok to use the credit card to fund any shortfalls, its someone else’s money anyway and there is always tomorrow to figure out I will pay it off”.

If there is more than $1,000 at the end of the month, terrific! It means you’ve a got a buffer for next month when the council rates are due (for example). If the amount in your $1,000 zero account is consistently getting bigger at the end of each month, even better. Now you have options.

Additional debt repayments, more super contributions, accelerating your wealth accumulation efforts generally. Or you just might decide to treat yourself.

Instead of focusing on what you don’t have (which is what traditional budgeting encourages you to do) your sub conscious brain will be trying to figure out ways of getting your account balance back up to the $1,000 at the end of the month. Once you are at the point of consistently having a surplus $1,000 account balance at the end of the month you will be a huge step closer to financial certainty.

If you are working with someone towards financial goals this idea gives you the perfect opportunity to stop blaming each other for not sticking to the budget and to come together to find ways of keeping the $1,000 zero balance. You will have an opportunity to get back on the same side. I know from personal experience that throwing the traditional budget out whilst addressing over spending has the potential to save relationships. Replace the traditional budget with the $1,000 Zero bank account and feel good about achieving something together.

Give it go and let me know how it works for you.

One of the things I haven’t dwelt on here is that it is good to know what you are spending money on. It provides your subconscious something to work on when targeting the $1,000 zero account balance. These days we have excellent free tools to make this a quick and easy task. Let us know you are interested in establishing your $1,000 Zero Account and we will point you in the right direction.

Getting on the right track and staying there is so important when it comes to financial certainty. It’s what we help our clients achieve. Speak to us about getting some expert assistance.

When we were at school or university a great many of us believed to be successful financially and in life we need to work hard and get good marks so that we could get a good job. Then when we get out into the work force we find that everyone starts at the bottom on pretty basic pay levels. And so we begin our adult lives.

In our 20’s, we don’t tend to worry about anything. We’re all going to live for ever and besides, there’s good times to be had. Everything we earn gets spent.

In our 30’s we’re getting good at our trade and cementing our careers. The early starters if they haven't already, might even be considering settling down and getting mortgages.

In our 40’s our income is growing (finally/maybe), the kids are young and we spend big, the mortgage certainly isn't getting any smaller.

In our 50’s the kids are getting older and the rain making days kick in thank goodness because the mortgage is huge, the kids are still under foot and we come to the realisation that no one lives for ever. The idea of retiring someday is coming into view.

I won’t go any further. You get the picture. My guess is pretty much all of us fit into these broad generalisations – to some degree.

When you’re on the treadmill of life do you ever think about difference between your income and your net worth and the relationship between the two? Sure, your income is the thing which leads to your net worth but are the two really connected?

Think about a business executive earning $250k plus a year who actually had a negative net worth. At the other end of the extreme there is a public servant who has a net worth of over $500,000 not including her family home.

Who has more Wealth?

I work with some seriously wealthy individuals from varied occupations, backgrounds and education levels. Their level of wages income which is also hugely different, has very little to do with their level of wealth. It’s what they saved and invested during their wage earning years that made the difference.

The business executive client I mentioned above earns big money by most people’s standards but he also had big out goings so he could never get ahead financially. The public servant on the other hand, intuitively understood the illustration below and put it into practise.

A really rough calculation shows that someone who is 40 years old and contributing 15% of their $80,000 wage could be a millionaire by the time they are 67 and have $1.2 million by retirement. Considering the retirement age for a 40 year old is likely to be 70 it’s not a bad result. This assumes their wage grows at 2% pa and a 6% net of tax earning rate.

Anyone who doesn’t get this will probably retire broke or worse, have no option but to continue to work until they die.

Employer superannuation will help, but for most of us that’s only 9.5%. To get serious you’ll need to consider topping the total amount you are saving up to at least 15%.

Let’s have a look at your Net Worth.

Net Worth is simply everything you own less everything you owe. Assets minus liabilities.

[1]The average net worth for Australians 2015/16 was $929,400. Not bad and probably goes a long way to explaining why there are so many shiny new cars on the road. BUT….the average property value was $626,700. So if you take away the thing which keeps the weather out, the family home, you’re only left $302,700. Not that much when you consider this is all most households will have to put food on the table for maybe 20 years of retirement.

It’s made worse when you consider 74% of households were in debt. Of these, 27% were servicing a total debt that was three or more times their annual household income levels which is considered the point at which people are in financial stress.

How do you compare?

Now calculate Assets Total minus Liabilities Total

=……………………………….Your Net Worth.

Notice I haven’t included cars or your family home in this calculation. These are what I refer to as lifestyle assets. No one sells lifestyle assets to put food on the table and part of planning is making sure this is taken into account.

For most people, this exercise presents a stark reality. Regardless of how much you have (or don’t have) there is always the potential to improve your Net Worth and grow your wealth.

If your Net Worth isn’t where you think it should be or if you’re worried that there won’t be enough to retire with, the good news is you can make changes to get on track.

We help clients with financial certainty and it doesn’t have a lot to do with the level of income you’re earning. Chances are we’ll provide you with ideas and strategies you haven’t heard before and none of it involves taking crazy risks or getting you into crazy levels of debt.

Start by speaking to us. If you’re wanting to get on track, we’re are very serious about wanting to help you.

[1] Statistics provided by the ABS 6523.0 – household Income and Wealth, Australia, 2016-16