Is your budget in surplus or deficit?

18 Jun 2013

By Shadforth Financial Group

Over the last year there has been lots of talk about the federal budget. With headlines such as 'Budget needs tough choices' and 'Surplus? You already spent it' – there is no denying that achieving a budget surplus is a very important issue.

While we can't control the federal budget, we can control our own. By managing both your budget and your debt you can get on the right path to achieving your own surplus.

But how do you get ahead of the game and what should those looking to grow their wealth look for? 

Track your income and spending

The first step in budgeting is to create one. There are many budgeting planners available free online including one on the Shadforth website.

These budget planners request detailed information about the income you receive including your take home pay, government support payments and any other income such as dividends and bonuses. As well, they go through a range of different expenditure categories including utilities, financial commitments, education and health, shopping and transport and entertainment and eating out.

Alternatively if you want a planner that is more accessible download the MoneySmart TrackMySpend app onto your smartphone. Easy to use and available in both Apple and Android version, this app allows you to track your spending, set goals and view your spending habits over time.

Some words of wisdom: Be honest with the reality of your expenses. If you do spend a lot on eating out or retail therapy don't deny this when putting your budget together. The only person you are cheating is yourself! Also if you want to keep within your budget, look at your expenses and trim those 'extras' such as entertainment and retail therapy. Don't cut out too much though, or you'll find your budget too hard to stick to.

Managing your debt

So now that you've figured out where your money is going it's time to get on top of your deficit. It's easy to accumulate debt these days with financial institutions offering you credit cards and personal loans and retail stores offering interest free loans or their own store cards.

So how do you manage your deficit down? Firstly look at what types of debt you have. Is it good debt or bad? Borrowing to invest in shares or property which is known as gearing is good debt as there is the potential of claiming a tax deduction from the borrowing. Bad debt however is non-deductible such as borrowing to purchase a car or go on a holiday.

To reduce the amount of bad debt you should look at the ones that are costing you the most, that is the ones with the highest interest rate. These are usually credit cards and personal loans and you should consider paying these off first or at least consolidating them at a lower interest rate.

Also make extra repayments on your credit card and home loan. By making these you can save on interest and pay the debt off faster. Importantly though, if you have a fixed rate loan, check with your credit provider to ensure there are no penalties for any extra repayments you make.

Put your surplus to good use

Once you have your budget and debt under control, then you can turn your attention to building a surplus. There are several investment strategies you can consider to help build your surplus, but firstly you need to establish your goals. Are you saving for your children's education, getting back into the sharemarket or increasing your superannuation?

You also need to consider the level of risk you are willing to take on. Will you be able to sleep at night if your investment portfolio were to drop 20%? This will help you determine the right type of investment strategy for you.

Salary sacrificing is an easy and tax-effective way to top up your super by adding extra contributions directly from your gross (pre-tax) salary. You should however check that your employer will allow you to salary sacrifice and that adopting a salary sacrifice strategy will not reduce the amount of super contributions your employer pays on your behalf.

Most importantly, keep abreast of your investments and review your plans and goals frequently. In particular when your circumstances change, make sure that your investment strategy and goals change with it.

So go ahead and set up a budget, sort out your debt and a surplus should emerge if you have got your plan right. Alternatively if you need help in any of these areas, seek advice from your Private Client Adviser. They can help you get on the right track to achieving your goals.

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