How to Cut Spending and Build Wealth

*By Greg Major, BA (AsSt) BE (Hons) MBA, GAICD FFIN FAIM, Director, Blueprint Wealth

There’s a common perception that the cost of living is spiralling out of control and families are at breaking point, but according to the latest AMP.NATSEM Income and Wealth report Australians are better off than ever.

The report, Prices These Days – The Cost of Living in Australia, revealed incomes have outpaced the cost of living by around 20 per cent since 1984, with the average household having an extra $224 spending money per week.

Households across all incomes and types are better off than they were in 1984, with even low-income earners experiencing gains of $93 per week. Pensioners also have an extra $61 per week in their pockets, while the much-discussed working families are $306 per week better off.

The cost of basic necessities isn’t what’s eating a larger chunk of our budgets but rather our desire to ‘keep up with the Joneses’.   We’ve become a nation of spenders, with the average household now spending 40 per cent on discretionary items, such as recreation, holidays and eating out.

While splurging on our bigger lifestyles might be fun today, it may not be the best path to financial security. If people want to reduce debt, save and create wealth for the future, they need to reassess their spending and make sure their money is working as hard as possible.

Here are some simple steps for cutting spending and building wealth:

  • Do a budget – Without a budget there’s no real way of knowing how much is left at the end of the week to save, invest or go towards reducing debt. A simple way of crunching the numbers is to use one of the many online budget trackers provided by financial institutions. Of course, once you’ve completed your budget, you need to stick to it. View our recommended financial calculators and resources here.
  • Reduce spending – Look for ways to cut your discretionary spending such as taking your own lunch to work and cutting back on take-away dinners or restaurant meals. There are also plenty of ways to make savings on necessities such as buying generic brand groceries and using discount petrol dockets. Learn to differentiate between ‘wants’ and ‘needs’. Don’t be too hard on yourself, but do you really need the $100 per month cable TV package? You probably don’t watch half the programs. While it’s nice to drive the latest and greatest, cars are a big trap too. Be sensible.
  • Target debt – Once you’ve cut back on discretionary spending, you can use that freed up cash to reduce debt. Pay off high-interest debt, such as credit cards, as quickly as possible. To do this, you will need to make more than the minimum repayments each month. If you have several cards maxed-out, consider rolling all the debt into one low interest-bearing card to save on interest costs. Once you’ve paid off the credit cards, tackle personal loans and the mortgage next. If you can, make extra repayments on your home loan to reduce interest.
  • Build an emergency fund – As a contingency for life’s unexpected expenses, it is essential to have an emergency fund or access to cash through a mortgage redraw facility or offset account. A good rule of thumb is to have at least three months salary in the kitty. This may seem a tall order for most, but it’s worth starting to build this up as a vital resource.
  • Saving for the future – While it’s important to create financial security for your family today, it’s also vital to set some medium and long term goals for the future. A financial planner can help you work out how much you will need to live the lifestyle you want in retirement. They can also assist with strategies to boost your super, such as consolidating multiple accounts to reduce fees and salary sacrificing.

At Blueprint Wealth we offer financial advice that’s right for you, no matter what stage of life you are at. Contact us today to set up a plan that is right for you.

*Greg Major is an Authorised Representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706.

Any advice given is general only and has not taken into account your objectives, financial situation or needs.  Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.