How many of us know what it actually costs us to run our lives? Such a simple thing but the answer is often unknown, I am inviting you to have a think about it. Because, at the end of the day, it gives you certainty and there’s comfort in that – and it lets you know what opportunities you can consider taking.
This crucial question is a huge part of considering any new loans, it’s a question I am going to ask you.
I know ‘budget’ sounds like a dirty word, but, doing a ‘budget’ will allow you to really understand your costs and your ‘negotiables’ (discretionary expenses the stuff that makes life fun, but, can be cut if we need to tighten our belts), and what is left over. Kind of like a business would look at its profit and loss statement, as a guide to how they’re traveling, where they’re spending their money & what can be adjusted. I’ve written about this before, it’s a helpful guide to understanding what a budget is.
So I recommend you do do a budget simply from the point of view of understanding – not because we want to cut to the bone.
With that in mind, lets break things down into broad categories:
Basic living expenses
This is the stuff we cannot live without. Lenders suggest that we include as a minimum:
- Utilities (electricity / gas / water),
- Property maintenance/repairs,
- Basic education
We will be using this figure in our calculations when we are working out what is affordable or not. Your basic living expense may include stuff from the other categories, thats ok, its what is important to you – but understand it can impact on what you could be able to borrow, so don’t add too much that you would be willing to give up for your dream home or goal.
The next consideration is Discretionary expenses, things like:
- Phone (home or mobile);
- Pay TV
- Sports and other activities
Other living expenses
Finally the stuff that we love, but can totally negotiate to follow our dreams and goals
- Gym membership;
Hopefully there’s something left over..
But how do we work out what these are? I have a couple of methods:
1 Try looking through your bank account / credit card statements. Most banks have the facility for you to download your transactions into an excel worksheet and if you’re familiar with excel you can add a little note in a column at the end – so – a transaction for Woolworths is probably groceries, electricity should be pretty obvious – etc.
Of course you wont know exactly what you spent at each location but its a good start. The way I treat things like Myer or Target is either clothing, or assume it’s a discretionary item & this works for most entries.
At the end you can sort based on these columns and then add them up. I warn you though – it can be a wakeup call.
2 Or, try keeping your receipts for a week or two & look for what information you can find regarding your billing history – things like your electricity bill often have graphs of your previous bills (to encourage you to look for changes).
3 Look at your savings history – what do you save vs what you earn, this gives you an idea of what you spend although it doesn’t break it down into your basic expenses and other, but it’s a start.