Benjamin Franklin once famously said, “If you fail to plan, you are planning to fail”. From a financial perspective, whether we’re talking about your business, or your personal life, perhaps no truer words have been spoken…
So how do you start your plan? Regardless of the stage you’re at in your personal or professional life, if you don’t have a plan, you’re like that proverbial rudderless ship – you’re not in control of where you’re headed.
You’ve no doubt heard that other saying, “Money is the root of all evil”. That might be true, if you let it control you. But money does help you achieve many of the goals you set yourself.
So let’s delve right in, and talk about monetary goals, and the importance of budgeting.
Is a budget really that important?
Absolutely! Budgeting is critical because it helps you control your outgoings (spending), track your expenses, and save more money so you can achieve the future goals you’ve set for yourself. It can help you make better financial decisions, prepare for emergencies, get out of debt, and stay focused on those long-term financial goals.
There are numerous benefits to living on a budget:
- Helps ensure you don’t spend money you don’t have.
When you live the life you want to live, and spend money without any (selfimposed) limits, there’s nothing holding you back from spending every last cent you earn. You shouldn’t let the size of your bank balance determine your level of expenditure (or whether you can afford that AU$250 pair of boots). Rather, you should work to a budget that helps you keep a close eye on the small expenses you don’t really notice, but really do add up. We’ll talk about your daily cup of coffee later… oh, and the good news is you can have those boots, you just need to plan and budget for them.
- Keeps you focussed on your end goals.
Your budget helps you work out your longterm goals, and what you need to do to work towards them. Additionally, it helps ensure you’re not distracted by those ‘bright shiny objects’ along the way. Your finance broker should be able to assist you in creating a plan to save a deposit for your home, using equity in an investment property, etc.
- Helps you prepare for the (not-so-nice) surprises in life.
The reality is, in life, the unexpected happens. From medical bills and hospital stays, to home repairs, possibly legal bills or even major mechanical repairs on the family car. Squirrelling a little away each pay, into a dedicated ‘Emergency Fund’, means you’re at least prepared (financially) for when these little surprises pop up. As a general guide, aim to put aside three to six months’ worth of living expenses for this fund.
- Helps build towards a happier, more comfortable retirement.
It’s one thing to follow your daily budget religiously, but it’s also important to save for your future. Your budget can help do exactly that. By setting aside a little each pay cycle to put into an investment (or superannuation) fund, you will build a nest egg for the future (and if you get into the habit early, you won’t even miss it coming out of your pay).
- Helps identify your bad spending habits.
It’s easy to fritter your money away on multiple insignificant and unnecessary expenditures. This is why it’s important to track your spending, and then retrospectively review this against your budget, each month.
- Beats the heck out of counting sheep.
Been lying awake at night, worrying about your bank balance, and how you’re going to pay the rent/mortgage? Having a budget helps you track your spending, and manage your cashflow so you can close your eyes and drift off with ease.
- Can help you get out of debt.
Some of the readers of this article may well be in a bit of ‘financial pain’ at the minute (perhaps compounded by COVID-19); with bills, loans and credit card debts absolutely overwhelming them. Having a budget (and sticking to it) can help you map out a plan and navigate your way out of this debt. It can also ensure you don’t purchase things on finance that you can’t afford (read – are not in the budget).
PERSONAL BUDGETING AT YOUR FINGERTIPS
Given we spend so much time nowadays on our smartphones and tablets, this could be a good place to help keep track of our spending with a downloadable app. A recent review by Canstar (a leading research agency and Australia’s biggest financial comparison site) in April 2021, identified the following seven best budgeting and savings apps worth looking at this year:
- Canstar App,
- Splitwise, and
- Your own bank (most of the major, and second and third tier banks have developed apps to help their clients budget and save money).
If, after reading this article, you’re still not sold on the benefits of budgeting, you can set up an ‘anti-budget’, whereby you ‘pay’ yourself first (and even allocate a portion of your pay to an investment fund and an emergency fund), then spend the rest as you please – at least you’re starting to take better control of where your money goes.
A DAILY COFFEE CAN’T HURT, CAN IT?
To quote David Bach from his book The Latte Factor; Why You Don’t Have to Be Rich to Live Rich, “The solution to your money problem isn’t more money; it’s new habits”.
This is a wonderful, quick and easy read about a young woman named Zoey, earning a good income, but not having the money to invest, or achieve her goals of travelling (remember when we could do that?) and taking a photography course. One day, the barista at the café where she bought her daily latte explained that all she needed to do was make small sacrifices (giving up the $5 daily coffee) and save that money to get what she was dreaming of. For example, investing in the share market can yield as much as 8–10% (you can have experts do this for you). That $5 per day could easily become $11,000 in five years, $339,000 in 30 years and $948,000 in 40 years (more about the compounding effect of interest in a later article).
Still want that daily coffee? Maybe you could reduce the two cups down to one?
WHAT ABOUT A BUDGET FOR THE PRACTICE?
Your practice’s financial budget is an integral part of any business plan and key to its success.
The purpose of the budget is to enable the business owner to:
- Meet goals and objectives, and make confident financial decisions,
- Control the cashflow to meet day-to-day financial commitments,
- Manage the finances to meet financial (loan) commitments, and;
- Ensure the business has adequate cash reserves to fund future projects.
The benefits of maintaining a budget (and reviewing actual financial performance against that budget) are numerous. The financial business budget:
- Estimates revenues, plans expenditure, and restricts spending that is not part of the budget,
- Ensures cash outflows align with the objectives of the business,
- Helps team members understand business goals and objectives (so long as it’s well communicated),
- Successfully engages team members in developing the budget, thereby helping them embrace the company’s vision, and
- Provides valuable insights to team members when analysing actual financial performance against budget.
The practice that does not review its cashflow against budget may find itself ‘chasing its tail’, and becoming distracted from achieving the long term goals and objectives set, when the doors were first opened.
So give it some thought… do you want to live ‘pay-cheque to pay-cheque’, spending everything you earn without any plan, or will you adopt a budget and take control of your financial destiny?
Paul McKinley is the Managing Director and resident Chartered Accountant of Optometry Finance Australia, an independent finance broker that works with optometrists Australiawide. With over 30 years relevant commercial experience in the finance, automotive and accounting industries, Mr McKinley specialises in commercial funding with a strong focus on personalised client service and retention. Visit optometryfinance.com.au.