Knowledge Hub

Wealth Planning13.03.2018

By David Andrew

Are you living within your means?

By David Andrew

I remember as a kid regularly overhearing the conversation between Mum and Dad as to who was going to withdraw cash from the bank teller before the bank closed at four o’clock on Friday afternoon.

On occasion we’d get caught short and on Saturday morning I would accompany Dad as he cashed a cheque with one of his friends who was the local pharmacist. The banking system meant that people really had to think ahead and plan their spending in ways we wouldn’t even consider today, and as a result people were more in control of their finances and budgets. The adage ‘you can’t spend it if you don’t have it’ was the norm, particularly for those families with Depression-era memories.

From the mid-1970s all this changed. The introduction of Bankcard in 1974 was quickly followed in 1977 by the first ATM. Automatic teller machines meant we were never short of cash, and credit cards meant that for the first time we could have whatever we needed or wanted, whenever we felt like it. Whether we actually had the money or not became the least of our concerns – there was always a credit card company willing to issue a new card.

A recent study reported on by the   indicates that “29 per cent, or the equivalent of 2.9 million households, were classed as “over-indebted” in terms of their debt-to-income ratio or debt-to-asset ratio”,  and the nations household debt is among the world’s highest.

Access to money and retail marketing are so compelling that consuming has never been easier. One of the consequences is that it is easy for spending to get out of control. This just means that to enjoy financial success we need to define our spending rather than have our spending define us.

Understanding your spending and having a plan

Taking a closer look at habits, we know that most people just spend and then at the end of the month look at their statements to see how they have gone. If they have overspent that month there is nothing left to invest or save. String many months like this together and it is easy to see how people don’t make the progress they should!

The first step is to complete a spending analysis to establish where your money is going. Once this is complete it will be clearer whether any lifestyle and spending trade-offs are necessary to make your goals achievable.

Now you need a spending plan. This outlines how much money needs to be allocated to achieve short and long-term goals and therefore how much can be set aside for lifestyle. Let’s say an agreed amount has been allocated for all lifestyle expenses each month. If you allocate that sum to a bank account for everyday living it will be much easier to gain a daily picture of whether you are living within your means.

This continual feedback loop creates awareness and empowers your decision-making.