Part 2 – The year of austerity budget and the new normal

So following on from part 1 Financial Psychology, today’s post is about the actual numbers during the year of austerity and how we determined the family budget.

We did it using a principle called zero-based budgeting. Zero-based budgeting is very different to shaving your existing expenses, like reducing your fortnightly food bill from $500 to $450.

Zero based budgeting works on the principle that every line item in your budget needs to be challenged. Only after every budget line item is challenged with a logical argument, then an appropriate amount can be determined for that line item.

I’ll give you an example of our own home budget. And don’t judge here – I’m openly sharing the budget for the purposes of illustrating an example that works for us. I completely understand that everyone’s financial situation is different and people place different values on certain types of expenditure. This was our budget before we went through our zero-based budgeting exercise nearly a year ago. It was excessive. It was absolutely a budget for the 21st century busy family where things were outsourced for convenience, like cleaning and home delivery shopping, when both parents were busy working. And for many struggling on one income, even our reduced expenditure will seem excessive. But anyways, for the purpose of the example, here was our budget….

Expenses   yearly monthly fortnightly
26 2
Car rego $ 2,200.00 $       84.62
Car insurance $ 1,100.00 $       42.31
House ins $ 1,100.00 $       42.31
Car repairs $ 1,000.00 $       38.46
petrol $       80.00
Sundry $     500.00
Child care $     378.46
fernwood $       24.00
internode $   75.00 $       37.50
mobile $   80.00 $       40.00
pocket money $       25.00
cleaning $     185.00
food $     800.00
electricity $ 1,200.00 $       46.15
gas $ 1,782.00 $       68.54
water $ 1,000.00 $       38.46
rates $ 1,300.00 $       50.00
primary school fees $ 155.00 $       77.50
piano $ 1,200.00 $       46.15
netball $     350.00 $       26.00
health insurance $ 1,600.00 $       61.54
girls clothing $ 1,000.00 $       38.46
movies $     100.00
red cross $   45.00 $       22.50
guitar $ 1,200.00 $       46.15
dancing $     800.00 $       30.77
Fred hollows $   35.00 $       17.50
World vision $   35.00 $       17.50
oxfam $   40.00 $       20.00
newspaper $     568.00 $       21.85
Boys school fees $ 4,624.00 $     177.85
Girls school fees $ 550.00 $     275.00
Girls mobile $   30.00 $       15.00
foxtel $   66.00 $       33.00
gifts $ 3,000.00 $     115.38
mortgage $     923.00
total       $ 4,545.96

And on top of this, my husband and I had amounts of cash deposited direct into our own accounts, for non-accountable spending – haircuts, clothes etc – our sanity allowances.

So as you can see with this budget – there was plenty of room for improvement.

From here, we went line by line and justified each and every expense. The conversation went something like this:

Cars: we still need two, because at times we are ferrying around 5 children and 2 adults, but let’s revisit once children start to get their own licences. Each car is getting on to ten years old, but serving us well. We will use the most economical car for the most amount of travel to reduce our petrol expenditure.

School fees – not negotiable. Not moving the kids from their schools for savings purposes. All kids are settled.

Food: ridiculous expenditure. Still a necessary budget item, but some significant savings can be made here. Resolution: shop only at Aldi and the fresh food markets and reduce to $500 per fortnight. No more home delivery… Savings: $300 per fortnight.

Utilities and rates – all still necessary expenses, but where possible, we will try and reduce our consumption. I’ll write about that later.

Kids extra-curricular activities – all not negotiable, and great for their health. No change.

Cleaner – loved having a great cleaner – and had a fabulous one. But with the risk of public service job cuts, we decided to save as much as possible and do the cleaning ourselves. I now pay the girls to help, we get it done in three hours and once I pay them, I save $120 per fortnight.

Sundry expenses: some sort of vortex going on here – a category for any other expense. Usually the case is money is spent because it is in my wallet. Coffees, the odd lunch out, kids school excursions, odd kid lunch money. Resolution: reduce to $300 per fortnight, savings: $200 per fortnight.

Girls’ clothing; instead of having a $1000 budget, we will only buy what is necessary to replace. No more weekend shopping-is-our-hobby. Anticipated savings: $500 per year.

Newspaper: can get it online. Saving of $568 per year.

Mobile phone; once my contract finishes this month, I will switch to an Aldi plan for $35 per month, savings $45 per month.

Health insurance: grrrr   – it stays.

Gifts: that stays, but we will look for savings.

Mortgage – this is our minimum repayment, and of course we pay four times this amount on our mortgage.

Ok, so for the year of austerity our zero based budget looked like this:

Expenses   yearly monthly fortnightly
26 2
Car rego $ 2,200.00 $       84.62
Car insurance $ 1,100.00 $       42.31
House ins $ 1,100.00 $       42.31
car services $ 1,000.00 $       38.46
childcare $     368.00
petrol $     100.00
Sundry $     300.00
fernwood $       24.00
internode $   75.00 $       37.50
mobile $   20.00 $       10.00
pocket money $       25.00
cleaning $       65.00
food $     350.00
electricity $ 1,200.00 $       46.15
gas $ 1,782.00 $       68.54
water $ 1,000.00 $       38.46
rates $ 1,300.00 $       50.00
primary school fees $ 155.00 $       77.50
piano $ 1,200.00 $       46.15
netball $     350.00 $       26.00
health insurance $ 1,600.00 $       61.54
girls clothing $     500.00 $       19.23
movies $     100.00
red cross $   25.00 $       12.50
guitar $ 1,200.00 $       46.15
dancing $     800.00 $       30.77
oxfam $   25.00 $       12.50
Boys school fees $ 4,624.00 $     177.85
Girls school fees $ 550.00 $     275.00
Girls mobile $   30.00 $       15.00
foxtel $   66.00 $       33.00
gifts $ 2,500.00 $       96.15
mortgage $     923.00
total       $ 3,642.69

Savings – just over $900 per fortnight, or $23,000 per year. Main reductions: cleaner, sundry items and food. We will suspend our Foxtel over the summer when football finishes, which will provide more savings. Another item that might get challenged next time we look at our zero based budgeting process again (it happens annually) is our movie night money, that usually is a cheap dinner out for the two of us and a movie. We might look to more eating at home and just the movie tickets, which is $35.

One of the interesting things that I will point out about this process, is that each stage of adjustment becomes the new “normal”. We had a higher budget that then first one a few years ago, let me tell you. I was easily able to justify our food expenditure at $1000 per fortnight because we have a large family. Our year of austerity for another family could be a year of luxury or a year of hell. It’s all relative.

By cooking with cheaper cuts of meat, using seasonal fruit and vegetables, and by producing my own fruit and vegetables, you can see our food bill has reduced substantially. But this reduction has been over time. As we got used to a new food bill level, we saw more opportunities to reduce it.

So – how do you budget and what do you find the most effective way of keeping control of your expenses?

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