Budgeting one cent at a time

Perhaps the most important promise we can make to ourselves is to re-evaluate our budget.

It’s the traditional time for resolutions and re-evaluate our personal or family budget...

Ahhh… take a deep breath. We've made it to January and a New Year. It's the traditional time for resolutions – and perhaps the most important promise we can make to ourselves is to re-evaluate our personal or family budget.

Chances are, the plastic has taken a hammering over the past few weeks. Are you worrying about those credit card bills turning up in the mail or on screen, and thinking, "How am I going to pay that off?"

You're not alone. Dr Pushpa Wood, director of Massey University's Financial Education and Research Centre, notes: spending more than we intended happens to most of us at some time.

"The question is, what do you do now?" she says. "On one hand you still want to enjoy life and prefer not to tighten the belt (or wallet if you prefer), but at the same time you also want to be able sleep peacefully and not worry about your bills.

"If you do find yourself in this predicament, I suggest you remind yourself of an old saying: 'Keep calm and carry on.' Take it from me, it does work. So let us put it into practice."

Here's Dr Wood's 4-step plan for getting your finances back on track.

Step 1

• List everything that needs to be paid.
• Organise the list in order of priority – separate bills incurring interest and bills that have an interest-free period.
• Prioritise - place the highest interest-bearing bills at the top, and so on.
• Revisit your budget (assuming you have one. If not, then it is a good time to start) and identify the amount you can put towards paying off your bills. The general rule is, the sooner you can pay off the interest-bearing bills, the more money you will save yourself.

Step 2

• Create a schedule of payments. Apart from other details about the bill, this needs to include the amount you will be paying off each week/fortnight/month.
• Work out your final date of payment for each bill.
• Build in a small reward for yourself if you manage to pay it off ahead of the scheduled date. Cutting one coffee or takeaway meal per week and putting that money towards paying off your bills will help to reduce your debts faster.

Step 3

• Remember to keep the rest of your spending under check, especially if you are in the habit of using your credit card without pre-planning. You may need to modify your spending habits while you are paying off your overspend.
• If you have borrowed money from different sources over the past few weeks and all these bills are starting to haunt you all at once, the best strategy is to sit down, take few deep breaths, list everything and maybe talk to your bank to see if you can consolidate all your bills in one place. This will hopefully be at a much lower interest rate than what you are paying currently, taking away some of the stress.

Step 4

• Set up your savings account for this time next year. Start putting some money into that account regularly. It doesn't have to be a large amount – even $2 or $5 a week at the start will help. Once you have paid off your 2020 bills, you can start focussing on saving for the 2021 festive season!

Above all, don't get discouraged. Everybody falls off the wagon from time to time. It's what you do about it - staying positive and keeping your goals in mind – that's going to be important.

Make sense of your dollars

While you're taking some time out, it's a good chance to think about your spending habits and how you can be a smarter shopper this year. Look over your accounts from 2020 and identify where you can do better in the coming months.

• Online resources can help you compare prices, find discount offers and plan your shopping around key sale periods. Every dollar counts, so it helps to save them where you can.
• One in three Kiwis is expected to have used credit cards to fund their festivities this year. It's important to think about the lasting impact of this. Credit cards, payday loans and buy now-pay later schemes can come with sky-high interest rates. Make sure you know what you're getting into.
• Consider the 50/30/20 budget. Earmark 50% of your monthly take-home income to needs, 30% to wants and 20% to savings and debt repayment. If your debt has increased, you'll want to dip into your wants category to tackle it faster. Create a budget spreadsheet to point you in the right direction.
• Try to restrict frivolous post-holiday shopping, even if those mark-down prices look attractive.
• Your festive season spree could pay off. See if your loyalty cards have any points or miles to be be redeemed.
• Return or exchange any gifts or purchases you don't intend to keep. Let them sit too long and you could miss the return window. You may have a couple of gifts that are unwanted, redundant or not the right fit. Increase your cashflow a little bit by selling off unwanted gifts, returning to the store anything unused, excess supplies, or unnecessary gifts for some money back.
• Don't wait for a spring clean – have a summer one. Call it 'Clean Up January' and look around the house for anything you don't use that's simply taking up space. List them for sale online to supplement your cash budget.

*This article originally appeared in the NZ Herald/Westpac NZ magazine “2021” on January 1.