What I really enjoy about the festive season is spending time with family and friends, taking a break from work and recharging the batteries after a busy and hectic twelve months. And if I'm really lucky there might even be time for a holiday or at least a couple of days away.
What I don't like is the inevitable arrival of my January and February credit card statements with all my holiday spending conveniently itemised together with some large household bills like car registration and house and content insurance premiums to pay. So while I like the celebrations the holiday period brings, the first two months of the New Year are much less enjoyable, at least financially and I'm sure there are many other families in the same position.
Unfortunately I fear this initial financial pain will extend beyond recovering from Christmas spending and be felt well into 2011 because of the expected sharp rise in day to day living expenses forecast for this year.
The cost of living
For instance, for some time now we've been warned that our utility bills are set to significantly increase (I've already received letters from my gas, electricity and water companies to this effect), the economists are predicting that interest rates (and hence home loan repayments) are likely to go up (probably between 0.5% and 0.75% by the end of the year), and then of course there's inflation (not helped by the recent floods in Queensland and Victoria) which is likely to add between 2.0% and 3.0% to our cost of living.
So it looks like, despite the positive signs of an improving economy, the average Australian family is going to find things a little tougher this year. In fact, according to a survey conducted by Colmar Brunton around 3.7 millions of us will face severe financial difficulties due to lack of savings when this year's expected cost of living increases start to bite.
This is not a particularly rosy picture and is especially abhorrent given the struggles many of us went through as a result of the GFC. So how can we cope with yet more financial strain? Set out below is a five step plan to help ease the pain and hopefully find some extra cash:
Step 1: Prepare a budget
If you haven't already done so you must prepare a detailed annual budget setting out your after tax household income and expenses. This will give you a better understanding of your financial situation which can used to plan and manage your finances.
Budgets are powerful tools and relatively easy to complete. They'll tell you whether you're in a cash surplus (where your income is greater than your expenses), a cash neutral (where your income equals expenses) or in the worst case, a cash deficit position (where your income is less than your expenses).
They are not only useful in showing your current financial position but they also help predict what it might look like, thereby enabling you to take action today and avoid financial problems down the track.
For ease of use budgets are best prepared on a spreadsheet but if you can't create one yourself you can always download one for free from most mortgage comparison and larger lender websites.
Step 2: Quantify the increases
Start by preparing your budget based on your income and expenses as they are today. Once done, it's time to identify those items that have or may increase and reflect the increases accordingly. Effectively, you're doing a 'what-if' analysis on your personal finances. For example, your budget will show what will happen if your home loan interest rate went up by 0.5%, your electricity bill went up by 10% or your food bill went up by 15%.
Of course some of these increases might be guesses but you can make them reasonably accurate by, for instance, contacting your product or service provider (such as your utility companies) and ask them to estimate your new costs based on any planned increases. As far as your home loan is concerned, you can use online calculators to work out what you new loan repayment would be. You can also simply add a margin to your expenses and increase them by whatever you think is reasonable.
Step 3: Look for savings
Step 3 is where your budget really comes into its own. You're now in a position to assess the impact and how you'd cope with estimated cost increases.
If your analysis shows you're in a neutral or deficit position, you must take steps to either increase your income, or more likely, reduce your expenses. A neutral budget means you'd be in trouble if a big cost increase or one off expense occurred while a deficit budget is a sign of serious financial problems.
The best way to deal with a neutral or deficit budget is to run through your list of expenses and see where you can cut back. Sometimes this will mean spending less or looking for cheaper alternatives. I recently did this myself and was surprised at how much money I could save (or more correctly how much money I was wasting).
Running through my credit card statements I realised I was paying for a family gym membership that wasn't being used, a second telephone line previously used for faxes but that now lay idle plus out-of-contract Internet and home phone plans that were expensive compared with the current plans on offer. So after cancelling some services and renegotiating others, I was able to save $350 a month (that's more than enough to cover a 1% interest rate increase on a $300,000 twenty-five year variable rate loan!) as follows:
It's embarrassing the amount of money I was wasting but there's a good lesson here; always keep an eye on your spending and don't be afraid to negotiate and look for a better deal. You may be surprised at how much you can save without really changing providers or products. Having said this, you may have to cut back and look for cheaper and/or different products and services - your budget will help identify which items to focus on and what actions you might need to take.
Step 4: Separate wants from needs
Aligned to Step 3 is the task of separating out those things that are nice to haves (your wants) from those things that are must haves (your needs). A need is something we require to live - like food, clothing and shelter whereas a want is something we'd like to have but can do without - like designer clothes, expensive jewellery or a fancy car.
To help eliminate excess spending run through your budget and highlight in different colours spending that are needs and those that are wants and start reducing or cutting out the latter altogether. This is not to say we shouldn't buy nice things or indulge once in a while but when you're trying to save money, wants should be the first place to start cutting back.
Step 5: Monitor your budget
Once you've completed the first four steps you should see improvements in your budget. If not, go back and take a closer look at your spending patterns as it may mean your spending cuts need to be deeper and/or wider. And once your budget is set, it's important to regularly compare (at least monthly) what you've actually spent to what you planned to spend and investigate and fix any major variances.
Our financial wellbeing depends in no small way on how well we manage and plan our personal finances which in turn requires an understanding of our spending habits and capacity. Getting this right and under control is an important precursor to being able cope with the ever increasing cost of living.
Do you think 2011 is going to be financially tough for the average Australian family? Is the government doing enough to help keep cost of living increases in check? What plans do you have to cope with increasing costs? (Share your views below)
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