Managing your financial life

February, week 3 in The Simple Home

The Gender Pay Gap

Throughout the developed world, there is a significant difference between what men and women earn. In Australia the gap is currently around 17 per cent. All through their working lives, women usually earn less than men even when doing the same type of work; they move in and out of employment during the years they have babies and often work part-time when they do return to work. As such, a woman’s overall lifetime income is much lower than a man’s. As well as being unfair, this means that women’s superannuation is much lower than their male counterparts, putting them in a precarious situation as they age. I wish I had a solution to this problem. I wish we had politicians who were strong enough to stand up and work towards a solution. I don’t have the answers, but I do have some suggestions. 

The list below is mainly targeted at women who have chosen to be at home to raise children or those who leave the workforce when a baby is born.  It could also cover men who choose the same path.  The main point of this list is to protect people who are working within a relationship for the mutual benefit of the couple and their children, who do not get paid.

• Retain and develop your skills by working whenever you can. If you keep up with the changes in your field, you’ll be able to get back to employment or your career when you’re able to or you need to.
• If you are married or in a de facto relationship, it’s wise to have a joint account with your partner. If you do want ‘your own money’, have a separate account that only you can access.
• Have or share control of the budgeting so you get a full picture of your finances. List your assets, know what you spend on groceries and monthly bills, know how much you owe on your mortgage as well as how much you’re paying in interest.
• You should both have life insurance, with each other as the beneficiary, so that in the unfortunate situation of one of you dying early, the surviving partner and the children will have some funds to carry on. 
• Make sure your name is alongside your partner’s on the deed to any property you buy and that you’re officially the co-owner of your car. Have your own credit card. It will help you build a credit history. Always pay it off on time and don’t get caught up with buying just because you can.

None of this will completely protect you from the financial problems that might occur if your partner dies or you separate, but it will help you get on your feet again because you won’t have to start learning everything from scratch.

MANAGING YOUR FINANCIAL LIFE

If you’ve never felt the need to make up a budget before, or think it’s too difficult, I hope to change your mind. Being honest and sensible about your own economic situation and thinking about your values and what you dream for your future is important. If you combine that with your own customised financial plan you’ll have the best way to live your dreams. 

You must fully understand your own financial situation. You should know how much money is coming in, how much you owe, how much you spend, and on what. I hope you get to the point where you pay your bills every week and still have money left over to save or put aside for something you really want. Because this way of life is not about being miserly; it’s the first step towards living well and controlling your finances instead of them controlling you.

Track your spending 

Tracking your spending is recording everything you spend money on, from the mortgage payments right down to a cup of tea at the cafe. You must know what you spend in order to make up a realistic budget, but a good side benefit is that you’ll also know just how much you’re spending on things you don’t need. It can be a confronting exercise, especially if you’re doing it with a partner in order to create a combined budget, but I encourage you to be truthful, no matter what your truth is. You also have to be thoughtful and kind because if one or both of you have been overspending, blaming each other does no one any good. Start your budgeting in a positive frame of mind and agree there will be no blame. This is a new beginning.

Three ways to track your spending: 

1. Use an app - these are very easy to use and take just a few seconds to add each amount.  I use this free one supplied by the Australian Government, but there are a few to choose from here.
2. Keep a small notebook and pen with you and whenever you spend, write it down. 
3. Collect every receipt and when you come home, add them up and record the totals in a spreadsheet or book. Remember to include online purchases and bills, which might not give you a paper receipt. 

Once you’ve tracked your spending for a month, you’ll be able to identify two important things: 

1. What you spend money on. 
2. What your non-essential spending is. 

Non-essential spending is the money that you don’t have to spend, but do. It’s the dollars you spend on magazines, coffee, movies, chocolate, iTunes, shoes, clothes, accessories, taxis, fast food, convenience food, soft drinks or bottles of water. If you can identify the money you spend on those non-essential things and add up what you spend in a month or a year, I'm sure you'll be surprised (or shocked). 

Cut back non-essential spending 

Changing your spending behaviour is rarely about the big things. The big-ticket items stand out and we notice them. They make us stop and question whether we can afford to buy them. The small things like coffees and magazines are such a part of modern life, we take them for granted. We buy them without thinking and it’s only when we add up the cost over a month or a year that we realise just how much we’re spending on throw-away products that don’t give us value for money. Those throw-away products are robbing us of our potential to be debt-free. If you can harness that money and put it towards debt repayment, or even to buy the groceries you need this month, then it's a step in the right direction. 

Let’s make one exception to this. The road to being debt-free is long and we all need to enjoy life as we work towards our goals. If there is something special you enjoy or something that means a lot to you, keep doing it, mindfully. Occasional date nights with your partner is an investment in your relationship. Coffee with a friend that you don’t see very often helps maintain that friendship. It’s wise to keep those rituals going and in doing so, you feel like you’re looking after yourself.  But don't hijack your own attempts to be debt-free by thinking you can continue to buy everything you want.  There is a choice to be made here - you're either debt-free and living with the memory of all those coffees, cafe lunches, new shoes, books and handbags or you're living with increasing debt.

Once you’ve decided where you can cut back, then you go to the next step: working out a budget. 

Creating a budget 

When I came to this point many years ago I was in a bit of a panic about it. I thought a budget would restrict me. It soon became obvious that instead of restricting me, my budget showed me in the most realistic way, how much cash I had, what I needed to pay and how much was left over for spending or saving. That budget was like a map that showed me a way forward. No more not knowing if I had enough money but spending it anyway. It was all written down in black and white. 

Here are the steps to take when creating a budget: 

1. Decide what time period your budget will cover – a week, fortnight or month. Matching your budget period to your pay period will make things easier, so if you get paid monthly, do a monthly budget. 
2. Write a list of all the spending categories: mortgage/rent, electricity, gas, food, fuel, entertainment, insurance and so on. 
3. Estimate how much you spend on each category, using past bills and the information you gathered when tracking your spending. If you don’t have past bills, make an estimate. Your first year’s budget isn’t always accurate but it can all be adjusted as you go through the year. 
4. Add it all up, and see whether it is more or less than your income for the same period. 
5. Work out if there are any expenses you could do better with – your phone plans, internet and car/health/home insurance, for example – and if there are any expenses you can cut out completely, such as a second car, Netflix or pay TV. 

Your budget will be your personal spending map from now on. Refer to it often and make sure it’s accurate and that you’re sticking to it. Update it whenever there is a change to your income (for example pay rises, parental leave, job loss, retirement) or expenditure (changing mobile phone plans, interest rate adjustments, new loans), or every few years.

Building an emergency fund 

Unfortunately for all of us, even when we decide to follow a more frugal path, unexpected expenses still crop up. I remember when we first became much more prudent with our spending, an emergency trip to the vet with both our dogs ended up costing us $800. Your car might need new tyres, the fridge might break down or you might have to cover the cost of travel and accommodation if a relative becomes ill. It could be anything. Having a stash of money put aside for these emergencies will ensure you don’t end up putting the cost onto your credit card. You don’t want those added debt repayments when you’re trying to create new habits. 

Even though saving for an emergency fund might seem like an added burden, when it’s established it will provide a feeling of comfort and security. And remember – when you use some or all of your emergency fund, you’ll have to rebuild it.

To get it started you’ll need to decide how much you’re going to save. It could be $1000 or $5000; it might be enough to cover your living expenses for a certain period of time, maybe three months. I can’t tell you how much you need – it’s your decision and you need to be comfortable with what you decide. 

Open a bank account specifically for the emergency fund, then decide how much you’ll add each week or month and how you’ll come up with that money. If you get any birthday money or windfalls, put that money into your emergency fund until it’s at your desired level. If you don’t have any extra cash, can you find it by giving something up? 

When you have the money saved, don’t be tempted to spend it. It’s your safety net. It’s there to help you through the sudden and unexpected things that life sometimes throws your way. 

Saving 

After you’ve built an emergency fund and that safety net is ready to support you with unexpected expenses, it’s a good time to think about saving.

If you are disciplined in your saving and sensible in the goals you set, you will be able to achieve these goals without increasing your debt. For example, you’ll be able to pay for a modest family holiday upfront instead of putting a more lavish one on a credit card and then taking months to pay it off. Or if you know you’ll need to upgrade your car in a year or so, work out how much you can save in that time and make your decision about what to buy according to your budget, rather than buying whichever car you like the look of and then carrying the resulting debt burden for years. 

Paying off the mortgage (or any large loan) 

There is one simple exercise that I hope will convince you about the merits of paying off your mortgage early. Enter your loan amount and interest rate into an online mortgage calculator, then play around with the loan length and see how much interest you will save by paying it off more quickly. You can also change monthly payments to fortnightly. Now add an extra payment every three months, or an extra hundred dollars to each payment, and note the huge reduction in the amount you have to pay back. I think you'll be surprised at the amount you'll save by adding extra payments or increasing your payments by $50 to $80 a month. If you can’t commit to increased payments, try to put any spare money – a tax rebate, for instance, or a payment for extra work you took on – towards the mortgage. Every bit helps. 

Imagine being mortgage-free and living in your own home when the children are ready to go to work or university, when many of your friends and neighbours still have many years of payments ahead of them. I know people tend to have much bigger loans now, but Hanno and I paid off our twenty-five-year home loan in eight years. It was tough at times, but worth all of it when we came to that final payment. If you knuckle down and pay it off faster, you’ll give yourself options. If you’re not tied to a mortgage you won’t be tied to a job either.