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The Business of Photography

Do You Need A Household Budget?

I get quite a lot of calls from clients and readers wondering where their money goes, so I thought it timely to visit a subject close to our pockets: family finances. Although you will have read all this before, are you actually doing something about it? If not, read on!

So, does your mortgage seems to be bigger than ever, the credit cards bulging and the business has more leases and hire purchase agreements than computer monitors? In short, is your cash in seriously short supply and is there a little ‘stress' creeping into everyday life?

The stress is not so much about the money as about doing something about it. With the recent increase in property prices, many of us could sell our homes and pay off all our debts. There might even be enough left over to buy a modest home elsewhere, but most of us don't really want to sell and move.

The ‘stress' comes from not having a plan, of not doing anything about the problem, of not feeling in control. The solution is easy: work out a family budget to get yourself out of debt.

In this issue we cover setting up a family budget. The family budget links in with your business planning.

You might like to download a copy of the family budget before continuing to read this article. Two versions are available. The first is a .pdf (Acrobat) file which you can view or print as you choose. Download the Acrobat file by clicking here.

However, the best way to do a budget is with a computer and a program like Excel. You'll find an Excel worksheet for preparing your own family budget by clicking here. It's based on the template reproduced with this issue and you can download it with my compliments. Please check all the calculations as you go.

Family budgets shouldn't be so stringent you don't keep to them. Like business plans they should be reviewed every six months or so. If you're feeling a bit uncomfortable or would simply like to tighten up the personal side of your finances, I hope the following suggestions form the basis for a useful starting point. And as usual, the advice in this newsletter is general only - please contact your own financial planners and accountants for advice specific to your circumstances.

Pay Yourself A Fixed Salary

Many people use their business bank account as a personal bank account. If they need personal spending money, they simply do an internet bank payment or get the business to pay for it some other way. At the end of the year, it's the accountant's job to allocate these expenses as personal expenses - and herein lies the problem with this system for most people. It's not until your accountant finishes off the year's accounts that you know how much you've actually spent.

If you simply draw out money from the business as you need it, at the end of the year you can find you've spent far more than you planned - and saved much less than you wanted to. Drawing from the business can be like drinking from a bottomless glass - you simply keep sucking. Unfortunately, few of us have a bottomless bank account and so we end up spending more than we should.

While there's nothing wrong with paying personal expenses from your business account (although the tax office has said it would prefer you not to), if your objective is personal wealth creation it is probably not doing you any favours.

Look back over the last five years and reflect on your spending patterns. If your income was higher in any of these years, what was your personal spending like? Chances are it was higher, too. On the other hand, what was your personal spending like in some of the lower income years? You got by, didn't you. The main difference between one year and the next isn't what you need to spend, but what you wanted to spend or chose to spend - and there is a difference.

Let's begin with the assumption you want to save some money - for a holiday, school fees, superannuation or to pay off your mortgage. The best way to save for these things is to limit your spending elsewhere. Pretend that you have a fixed salary and that you have to live on that. This way, if you do have a profitable year the extra money should accumulate in your business account, rather than being spent by you. At the end of the year, you can save it carefully for something important (after tax, of course). All you need to do is discipline yourself to live on your fixed salary.

This isn't to suggest you live a frugal and miserly lifestyle. A household budget doesn't have to be tight, it can be quite lavish (assuming the business is doing well), but you have to make a decision. The more lavish your lifestyle, the less you have for saving. There's no way around this, so when you set your salary you should ensure it is a comfortable amount that you (and your family) can live on.

Setting Up Your Salary

It doesn't really matter whether you trade through a company, trust, partnership or as a sole trader, you can set up a ‘salary' system. (Technically, sole traders and partners can't pay themselves salaries, but they can take fixed monthly or weekly ‘drawings' which to you and me can be the same thing.)

If you are a sole trader or you are in a partnership, you don't have to pay PAYG W tax on your ‘salary', but you should put some money aside for your tax anyway. If you're paid by your company or trust, you will probably have to pay PAYG W monthly or quarterly.

Here's what you have to do:

STEP 1 The first step is to work out what salary you can comfortably live on. In a perfect world, you would sit down and work out a family budget, then set your salary accordingly.

This system will work just fine for readers who have a healthy, profitable business, but for other readers who are just starting out or finding times a little difficult, your salary might be all the profits the business earns. There's no point paying yourself $48,000 a year if the business only generates profits of $32,000 - you'll end up with a huge bank overdraft or reduced savings (the money has to come from somewhere).

STEP 2 Work out your monthly payments. Let's assume you've decided on $48,000 a year. That's $4000 a month, but don't just transfer the whole $4000 from your business account to your personal account, first you must withhold income tax.

If the $48,000 is just for you, your income tax will be around $11,500 or $875 month. If the $48,000 will be paid to you and your partner, perhaps $24,000 each, the tax is going to be closer to $6000 or, say $500 a month. Ask your accountant to work out how much tax is involved.
You can also pay yourself weekly or fortnightly if you wish, but this may incur additional bank fees for each transfer - see next step.

STEP 3 Set up an automatic bank transfer. It's easy enough if you have internet banking or your local branch can arrange it for you: transfer your net salary from your business account to your personal account automatically each month. Obviously you need two bank accounts.
If your salary is $48,000 per annum or $4000 per month, you need to transfer the net amount - in the example above this would be $3125 a month and you keep the other $875 in your business account for tax.

If you have a mortgage or need to save for your tax, you could organise multiple transfers, one to pay the mortgage, another transferring your tax to a holding account, and a third which deposits the balance of your salary into your personal bank account.

The advantage of setting up a system like this is you know how much you have to spend each month. Then, when you have a better than expected year, rather than spending the money as you go, it accumulates in your business bank account. (Well, that's the intention - it works as long as you don't lash out and buy that new camera outfit.) It's a form of forced savings.

Setting Up A Family Budget 

Setting up a budget is really just writing down a list of what you will spend over the next twelve months. There are some essential expenses you have to pay (your rent or mortgage), and others you want to pay (a weekend holiday, a night at the movies). A budget will show you how much you can afford to spend on the non-essentials in life.

If you have more income than you really need, then set your budget at a lower level and save the rest. However, if you feel you need every cent of what you earn just to get by, then still prepare a budget and live within it so when your earnings increase, you can maintain this budget and keep the extra for savings.

A budget isn't set in concrete. It will change during the year, but it shouldn't be so flexible you just change it because you want to buy a new toy. It's a matter of balancing the importance of your savings goals and your day-to-day spending.

A good idea is to build in some flexibility for ‘unexpected' expenses when deciding how much salary the business will pay you. Others will take all the money their business can earn because it only just covers them, so they need to watch what they spend more carefully.

While writing up your budget is important, reviewing it and updating it is more important still. There's no point spending a couple of hours writing up a budget and then hiding it in a drawer. You need to keep it somewhere prominent so you can refer to it and use it to plan your spending. For instance, if your monthly income is $3125, and you have expenses of $3500 in a particular month, you will need to save the extra $375 in earlier months. This is the cashflow side of the budget - having the money to pay your bills when they become due. Essentially a budget can double as a cashflow analysis.

While this newsletter includes a Yearly Budget Planner template (it's over the page and we suggest you use a pencil, not a pen), the best way to create your budget is with a computer and a spreadsheet program (such as Microsoft Excel). The spreadsheet doesn't has to be sophisticated because all the budget needs to do is add up a few numbers.

Making changes to a manual budget with a pencil is very time consuming, especially when you have to re-calculate all the columns, so it really is best to use a computer. You can often find inexpensive Shareware or Freeware programs around - look in a computer magazine for some clues as to exactly where.

Filling In The Budget

Expenses are generally weekly (food), monthly (rent), quarterly (electricity) or annually (insurance). All you need to do is write the expenses in the respective months, but you will need to multiply your weekly expenses by 4.3 to get a monthly equivalent. If you do, your shopping every Monday, you will find that there are four Mondays in most months, but five Mondays every now and then. Don't worry about this, the budget will still work out over the term of a year.

When you write up your expenses, don't estimate wildly but refer back to your previous bank statements and receipts to calculate as precisely as possible how much you really spend.

For instance, there's not much point saying you spend $180 a week on food if you really spend $200. It might only be $20 a week, but this adds up to over $1000 a year. A few errors like this can see your budget being blown out of the water!

Note there is room to pay off your credit card in the budget, but the idea is to pay it off, not continue adding to it. Don't use your credit card to extend your budget. Once it is paid off, you will have freed up some money to do other things.

At the end of the budget, hopefully all months will have a positive bank balance or be even. If you have a deficit, then you should look at earlier months to see where you can make some savings so that when you reach the critical month, you can cover it.

How Do I Stick To My Budget?

There are all sorts of ideas around to help you keep to your budget, like cutting up your credit cards, only visiting the shops once a month, and robbing a bank (so they put you in jail where you can't spend any money). The most effective solution is to want to stick to your budget.
If your budget can show you how you can save enough to move to a new house or take an overseas holiday, this in itself should be sufficient encouragement.

Another helper is your spouse. There's no point you wanting to set a budget if your other half doesn't. It has to be a team effort. Of course, this could be a difficult sell job for the kids, so you might need to keep pocket money as an ‘essential' expense!

Some experts recommend using cash wherever possible and forgetting the credit card. However, if you use your credit card for EFTPOS, as long as you're drawing from your personal account and not the business's bank account, there's no reason why a card can't be helpful. The danger only appears when you start using credit over and beyond what your budget allows.

One good suggestion is to have only two credit cards, not half a dozen. You could have one for personal and one for business - that can make a lot of sense - but if you're weak of resolve when faced with a shopping bargain, steer away from lots of credit and store cards that only lead you into temptation.

Some readers might write up their budget only to realise they are spending more than they earn. If this is you, somehow you need to fundamentally change your spending patterns. If you have been overspending, chances are your lines of credit are also pretty high.

If business remains tight and the kids are going through high school, you may have no choice but to continue overspending for a year or two, but once the schooling is over, somehow you must bring your spending into line - or increase your income.

People with champagne tastes and beer budgets can only survive for so long.

And you must ensure you put some money aside for your future or you will be reliant on a government pension for your twilight years. This is where superannuation comes in, but fortunately for the purposes of this article, superannuation usually comes out of the business budget, not your household budget.Please ensure your business is putting super aside for you (or an equivalent savings regime for those who are adverse to super funds). While money isn't everything, a little bit more than the pension will generally improve your quality of life significantly - and now is the time to put something away for this.

So, it's the beginning of a new year. Are you going to do this, or are you going to read this article again in another three or four years time - when you have three or four fewer years of working life left?

There's a book you can still find at most good bookshops called The Richest Man in Babylon. It as actually written by an American last century in an attempt to show disinterested people how to save money. The theory is simple - put aside ten percent of what you earn first, then live on the remaining 90 percent.

Let's face it, most of us can survive on 90 percent of what we earn. It's just a matter of whether we choose to do so or not!


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