Savings 101: knowing your expenses

Whether you’re planning a Champion-the-Wonder-type adventure or not, you’re unlikely to regret putting time and effort into a savings plan. For us, savings made this trip – when we started considering it – an actual possibility instead of a pipe dream.

If you’ve read our How much does it cost to travel Australia? Three months in post you will know that these days we use a mobile app to track our spending. This is a relatively new discovery for us and one we’d highly recommend for anyone wanting a comprehensive overview of their finances.

However, when it comes to savings, there’s something to be said for forming a plan of attack. Part one of our strategy was calculating how much of each pay packet was being consumed by expenses. Part two was setting up our bank accounts to do the rest. We diverted some of our income to cover expenses, some to savings – and could spend the leftover, knowing that we were doing so within our means.

Disclaimer: The information in this post is based purely on our personal experiences. In no way, shape or form do we purport to be finance experts.

Knowing Your Expenses

OVERVIEW

  1. Make a list of your Automatic Debits. Calculate how much you spend on these (a) per year and (b) per pay cycle*.
  2. Make a list of your Other Expenses. Estimate how much you spend on these (a) per year and (b) per pay cycle.
  3. Combine the totals of your Automatic Debits and Other Expenses and compare these figures to your income. Hopefully you will have surplus money in your pay packet, which means you can set up a sustainable savings plan.

* Your ‘pay cycle’ is how often you get paid (for example weekly, two-weekly, monthly). After calculating a yearly cost, you will divide this by 12 if you get paid monthly; by 26 if you get paid two-weekly; and by 52 if you are paid weekly (or by 26.1 and 52.2 depending on how pedantic you are).

AUTOMATIC DEBITS

Check recent bank statements and make a list of your Automatic Debits. Include weekly, monthly, quarterly and annual ones as well as any others you can think of. Then calculate the total spent on each expense per year before breaking the figures down in relation to your pay cycle.

The following is by no means an exhaustive list but here are some Automatic Debits that come to mind: insurances (health, car, pet, life, home and contents, income protection etc), mobile phone, child care, school fees, council rates, rent, mortgage repayments, credit card and/or loan repayments, yearly credit card fees, gym membership.

TIP: For regularly debited expenses it’s worth checking with your provider whether you are paying extra for the privilege of monthly repayments. For example, it’s usually more expensive to pay your car insurance in monthly instalments than it is in one bulk sum. If you can save money by paying upfront then do your best to do this. It will save plenty in the long run.

OTHER EXPENSES

You’ll also need to create an Other Expenses list. Other Expenses qualify as anything you spend money on that isn’t automatically debited from your account. It’s an almost impossible task to think of each and every item you spend money on so don’t worry if you feel like you have missed things. However, don’t avoid putting an item on the list because you don’t want to admit to spending money on it. Be realistic.

Examples include car servicing and registration, public transport, household utilities and bills (gas, electricity, internet), hobbies, fitness classes, babysitting, buying groceries, household items, gifts (birthdays, weddings, Christmas etc), clothes, cosmetics, textbooks, alcohol, cigarettes, going to the doctor/dentist, hairdresser, vet etc.

When estimating how much you spend per expense don’t be too concerned about getting the figures spot on (adjustments can be made later). In some cases (ie groceries) it will be easier to estimate how much you spend per pay cycle and then calculate what this equates to yearly. In other cases (ie gifts) it will be easier to do it the other way around.

COMBINING THE TOTALS

Next, combine the totals of your Automatic Debits and Other Expenses and compare these figures to your income.

Assuming your total expenses come to less than what you earn, great – you’ll be able to dedicate most of this overflow to your savings. If the totals come to more than what you earn, at least you now have a clear idea of where your money is going.

WHAT’S NEXT?

Part two in our savings process was to set up our bank accounts to work to their potential. We didn’t want to have to count every outgoing dollar (this is where a budgeting app would have come in handy!). Instead, we gave ourselves a weekly budget based on our Other Expenses estimates and diverted funds to make sure we didn’t overspend.

EXAMPLE

The following is based on a weekly pay cycle:Expenses table

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