Get to the details already! – What do I have to do?

The first step to improving your financial situation is understanding your financial situation.

You need to identify all of your income and expenses.

Every cent you earn and every cent you spend must be accounted for.

This means you need to collect all of your financial records. Luckily you should already have electronic records of everything you need just by checking your last couple of bank statements.

If you only have one transaction bank account this will be easy. In fact it is so easy I am going to do it with you.

I am going to use my income and expenses for 2011 for reference as this was the first year I had a mortgage. If you currently rent just use that cost instead.

Start by working out how much you are paid each year at your job.

My annual salary in 2011 was $61,000AUD. Which was $48,440 after tax.

Now the expenses. When I calculate my household expenses I like to group things as essential and discretionary.

If you imagine a bulls-eye target the most important expenses are at the centre while the less important things are on the outside rings.

The mortgage repayments/rent, utilities and food are the most important expenses. These are what I consider to be the essential things needed for survival.

My actual 2011 essential expenses were as follows:

Bill Type

Cost per interval

Yearly Cost

Mortgage

$1746.72 per month* $20,960.64
Unit Strata $628.33 per quarter $2,513.32
Council Rates $186.00 per quarter $744.00
Water Bill $159.20 per quarter $636.80
Electricity $316.86 per quarter $1,267.44
Gas $48.68 per quarter $194.72
Groceries $90.00 per week (budget) $4,680.00

Total

$30,996.92

The next most important expense is the transport that gets you to and from work. Only transport expenses for this purpose are included in this section. Weekend joy rides on a motorcycle are not transport expenses.

For me this expense was public transport.

It cost $26.40 for ten trips on the bus. Over the course of the year it averaged out cheaper as I didn’t use all 10 trips every week but I still assumed 48 weeks of bus travel a year. That is 52 weeks minus my 4 weeks of annual leave.

Bill Type

Cost per interval

Yearly Cost

Work Transport $26.40 per week $1,267.20 (48 Weeks)

This gives us a grand total cost of $32,264.12 per year to attend work and feed ourselves at our own home.

At this stage of my life I earned $48,440 after tax which means I had $16,175.88 ($48,440 – $32,264.12 = $16,175.88) of “spare” money every year to spend on whatever I wanted.

Hopefully when you do these calculations you end up with some spare money as well.

If you do, this is your discretionary money.

And this is the money most people have trouble with.

If you want to:

  • gain and maintain control of your financial situation you have to spend less than you earn.
  • improve your financial situation you need to pay off any debt that you have and start saving/investing.
  • not go crazy you have to find some kind of balance between saving all your discretionary money and spending some of it.

In my next post I will explore the difference between needs and wants and hopefully give you some help in separating the two.

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