Understanding your budget is one of the key steps on your property journey and one of the first things you need to work on.
Budgeting allows you to measure your discretionary and non-discretionary spending.
Discretionary expenses includes all non-essential spending such as eating out and entertainment.
Non-discretionary includes groceries, electricity, rent or mortgage repayments.
It is important to review both to see where savings can be made. Eating out less often and finding a better deal by switching Internet providers can reduce your expenses and boost your savings.
Your budget reveals your current financial position which is used to determine your borrowing capacity.
Knowing your borrowing capacity narrows down your options to what you can comfortably afford.
Basically, you need to know how much the bank will be willing to lend you before you can go searching for a property.
Your borrowing capacity goes beyond saving for the initial deposit. It needs to demonstrate you can cover mortgage repayments, living expenses and other debt obligations, such as car loans, credit cards, etc.
Tip: Credit cards, car novated leases, car loans and personal loans are considered by the lender in their assessment, and they can drastically reduce your borrowing capacity.
For example, a $5000 credit card can reduce your borrowing capacity by as much as $30,000.
It doesn’t matter if you are paying the balance at the end of each month.
Banks will work on the assumption that you can max out the card and only pay the minimum monthly repayment.
To maximise your borrowing capacity, try to get rid of credit cards and loans where possible.
Borrowing Capacity
Your borrowing capacity is determined by:
- Income: Your regular income as well as other sources such as allowances, bonuses, commissions, overtime, rental income and government payments.
- Expenses: Your daily living expenses such as bills, electricity, groceries, fuel and other ongoing financial commitments.
- Debts: Credit cards, car and personal loans.
- Credit score: Your credit score is based on your history of borrowing and repayments.
- Assets: Property, savings and shares.
While banks and lenders vary as to how they work out how much they will be willing to lend, you need to complete your own budget to see how much you can comfortably dedicate to loan repayments.
Setting up your Budget
If you have not yet done so, setting up your budget will help track income and expenses, and also foster financial stability and paves the way for achieving financial goals.
A budget is a financial plan that outlines your income and expenses over a specific period, typically a month or a week.
It helps you understand where your money is coming from and where it’s going, allowing you to make informed financial decisions.
A well-structured budget helps you:
- Track your income and expenses: Monitor all sources of income and regular expenses.
- Identify areas for improvement: Areas where you can cut down on unnecessary spending.
- Set financial goals: Define and prioritise your financial goals, such as saving for a deposit, your child’s education, or retirement.
- Reduce financial stress: Provides a clear plan for managing your money and achieving your goals.
Download our family budget template to help you get started!
Tips for Effective Budgeting
Some essential tips for effective budgeting:
- Be realistic: Set achievable goals and avoid overestimating your income or underestimating your expenses.
- Track everything: Keep track of every dollar you spend, even small purchases. This can be done manually or with the help of budgeting apps.
- Involve the whole family: Make budgeting a family affair and involve everyone in the process, including children when appropriate. This promotes financial literacy and shared responsibility.
- Review regularly: Review your budget at least monthly to track your progress and adjust as needed.
- Use budgeting tools: Budgeting apps to automate tracking and analysis help to easily keep your budget up to date. They can help categorise expenses, track savings goals, and provide visuals of your spending habits.
- Set clear financial goals: Define your short-term and long-term financial goals to stay motivated and focused.
- Prioritise needs over wants: Differentiate between discretionary and non-discretionary spending. Focus on your needs first before your wants.
- Automate savings: Automate transfers to your savings accounts to ensure regular savings.
Once you have your budget sorted you are ready to see your broker and work out your borrowing capacity.
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