Why you need to get a friend to go over your budget line by line

Balancing your income against your expenses is the first rule of budgets. Write down what money you have and what money you're expecting to come in; then write down what money you owe and who you owe it to. It sounds simple enough, yet several studies show Australians fail to budget.

Nobby Kleinman, money mentor and author of Money Rules, says during his 30 or so years working in personal finance, Aussies have always known how to create budgets. They know to spend less than they earn and to pay the highest-interest debt first - but they don't always know how to go about it. And it's where the best-laid plans come undone.

He says budgets fail when you only concentrate on the piece of paper in front of you. "People think budgets are only money in and money out, and if that's all it is then they're not giving up their glass of wine on a Friday night."

But budgets are so much more nowadays. And it's time to remove the stigma that budgets mean you have to lose significant parts of your lifestyle.

A common conversation Kleinman has with couples and families includes reducing their monthly expenses. Instead of spending $100 each week on takeaway meals delivered to your home, why don't you spend $150 one night a month and make it a date night?

"We've just saved them $250 a month or $3000 a year," says Kleinman. "You don't have to cut going out for a meal. You don't have to cut out spending on clothing. Whatever it is you enjoy, you keep doing. But if you're prepared to make [lifestyle] changes, think about what impact it will have."

Serina Bird, money blogger and proud "frugalista", wrote in April that she believes a frugal lifestyle is the new normal. She says her frugal lifestyle choices - such as baking at home, cycling and playing games with her family at home - have been embedded for years and proven fruitful during the pandemic as frugality enjoys a renaissance.

Matt Morrison, author of Freedom, Lifestyle & Legacy and financial adviser at The Practice, says the frugally natured are in many ways better positioned as we rebound from the pandemic because they're making better decisions about what's necessary from an expenses point of view. "And if they maintain that simpler lifestyle, they might have greater savings ability when we're out of this current situation."

With a little help from your friends

Finn Kelly, financial adviser at Wealth Enhancers, says there's more to be gained by having a friend or an adviser look over your budget line by line. This can include checking bank and credit card statements too because there will be expenses you've forgotten or overlooked.

"Straightaway you can identify some easy wins," says Kelly. "We're in a subscription world these days and when times are good we just rack the subscriptions up and then suddenly we realise, 'Oh, I didn't even know I was paying that anymore' or 'Wow, that's a really big phone bill and I saw an ad on TV the other day that's offering an unlimited package for $30'."

He says an independent person looking over your budget can be a great way to also have proper conversations about where your money is going. They're likely to tell you you're paying way too much for a certain product or service. Once you have that clarity, you have to draw a line in the sand on your expenses, says Kelly.

The line becomes even more important for the millions of people living payday to payday. Kleinman says the pandemic has also shown how close people have lived to the poverty line and the full effects of financial trouble won't be felt for at least another three months as government support winds down and loan deferments lift.

Morrison says studies have shown that more than 80% of people spend everything they earn and 9% spend more than they earn through credit cards and personal loans. Now the pay has stopped and quarterly bills are about to arrive, there are people who are going to need a plan B ... and fast. (See table, left).

He says the quarterly, half-yearly or annual bills are the ones that often derail the best laid plans.

"You think you've got your cash flow under control and all of a sudden you've forgotten this annual bill," says Morrison. "I do encourage people to think in terms of their monthly cash flow. Most financially successful people really think in terms of monthly expenses and monthly cash flow. They certainly have a longer-term view, but they break it down to monthly instead of weekly and fortnightly expenses."

His tactic to make this work involves liaising with your utility providers (or whoever you pay bills to) and making monthly payments through direct debit. He says this evens out expenses over time rather than getting hit every few months with bigger bills that could eat into your savings. It also saves checking up on bills weekly or fortnightly.

Kelly prefers a weekly budgeting method - and if you become even more in tune with your finances, you can break them down into daily micro-budgets.

He still likes the idea of having three accounts (or buckets) where your income is divided into savings, investments and personal spending. However, he feels a month can be too long if you're really trying to get on top of your finances.

"The damage is already done within a month. One bad month and you can wipe out your savings," he says.

Collectively the advisers say that budgets are more about placing positive constraints on your lifestyle and empowering you to take control of your money.

Budgeting gives you more financial freedom because you know where you're money's going and it's not being wasted.

Put your budget to work

Nobby Kleinman says if you've put every dollar to work in your budget and there's no more income on the horizon, then it's time to start thinking about alternative sources of income.

He asks clients what they know from the training, education or experiences they've had over the years. He then asks whether the client can create a course that teaches other people and whether they could sell it.

"Even if it's producing $20 a day you start adding that back into your budget and you can see what it'll look like," says Kleinman. "You could work more hours and get another job or create ebooks - do something where you can charge people for your knowledge and ask yourself what that would be worth."

He says people often work tirelessly just to maintain an income, but this doesn't mean you can't find other streams of income in your regular job - and employers would generally be grateful.

Matt Morrison says the temporary shutdown of businesses has forced several of them to finally go online or accelerate other projects that had only just started or were hanging on to be completed.

Financial adviser Kelly says he has seen people with corporate skills share their knowledge and expertise with others who have different skill sets, and vice versa.

He sees the post-pandemic period as a time for the mini entrepreneur.

"You need to learn these skills right now because, unfortunately, bigger companies won't necessarily bring back a lot of people."

Get stories like this in our newsletters.