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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The family finances – Financial Psychology part 1

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It’s a scary thing putting your family finances out there for all to see, but in the interests of encouraging others, I have developed a five part family finances series.

Part 1 – Financial psychology

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

Part 3 – Where to from here now that our income has been halved

Part 4 – Net worth tracking

Part 5 – Retirement planning

So the starting point for us:

We were both in the public service in middle to senior management levels. I’m not prepared to disclose our family income, but suffice to say that in household surveys we were always ticking the $250 000 and over box – and it was substantially over.

We moved in together with our blended family of seven in 2009, both reeling financially from two divorces with some superannuation and a mortgage of $350k against a house now worth about $700k.

Then we kind of financially dicked around a bit. We put in a new pool (above ground, but with a fancy deck); renovated some rooms, bought a second hand seven seater car and I realised mid-way through 2014 that we were still sitting at $140k on the mortgage some five years later, and had only managed to get through just over $200k, despite our reasonable income earning reality.

So – the year of austerity was born. Just like Greece, we decided to cut back on expenses and knock over the mortgage within a year. I can happily report that we have achieved our goal, which has enabled me to take the next year off work and spend some more time with my children, as well as potentially go back to work after that on a part time basis.

So what was the psychological shift that enabled us to make the transition? I read Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence by Joe Dominguez and Vicki Robin and in a nutshell, I realised that each time I purchased a new item of clothing, something new for the house or bought a convenience meal that I was trading my life hours for money.

The premise is this: everyone only has a certain number of life hours available to them. Each time you purchase something, you are trading some life hours away. EG I could buy this nice $200 shirt that will bring me immediate pleasure, and perhaps the next two to three times that I wear it; but to get that enjoyment, I have to work for four hours (of half a day) to net that kind of cash. You add this up over a whole wardrobe, a new car, brand new kitchen appliances – you get my drift and you realise that you will need to work for most of your life to achieve short-lived consumption happiness.

The other thing I realised is that purchasing new things each pay day is like being on crack cocaine. It feels good at the time, and even the first few times that you use or wear your new thing – but then the “thing” you have purchased becomes a part of your new “normal” and you find yourself still craving for more. This is called hedonic happiness – short lived, but leaves you wanting for more. And it’s insatiable.

So the shift in gears in my mind has been two-fold:

  1. Each time I want to buy something, I think about is it worth the life hours – adding an extra half day/year/five years to my working life; and
  2. Is this purchase just for hedonistic reasons, or is it something that we actually need.

What have you learned about your financial self?

Cosmetics shame and empties challenge

So we went to the States in 2013, the AUD was holding up strong and everything was cheap including make-up and I wasn’t considering minimalism back then.

Oh and I am a GWP junkie. At least I was. A Gift With Purchase offer would have me hovering over a David Jones counter, pronto.

Consequently, in a small cupboard in my bathroom, I confronted a shameful fact today:

  1. I have 23 lipsticks
  2. I have over 50 containers (small/medium/large) of various moisturisers, creams, body lotions, shampoos and conditioners, facemasks, exfoliates, toner, makeup remover AND THEY ARE MY SPARE ONES.

It’s funny – simple living and paring back to the essentials is a process and not a project. Six months ago, I would have been proud of myself that I had organised them into neat little zip lock bags into their little categories.

Now, six months on, I am looking at them in horror. So much consumption. No end in sight in terms of getting to the bottom of the storage bin and just having one of everything, like a real minimalist.

Possibly, if I was hard core, I would think about donating them just to clear my clutter immediately. But I’m not hard core. I know I will use these products at some point in the very near future. So I have set myself an empties challenge. The challenge is:

No more makeup or moisturisers until all of the little bottles are used. I am going to set up a little bucket in my wardrobe to put the empties in, to remind myself of the challenge, and I will post on progress.

Here is some shameful before evidence:

all lipsticks

hair products

What is your shameful hoarding secret? (PS I’m sure I will continue to horrify myself as my expectations are reset with this simple living process).

I’ll follow the sun…..

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I’m chasing the sun around my house…..

Hard to believe that I’m chasing the sun in a week of -6 and -7 overnight in the Nation’s capital. Freaking freezing.

This week I have had some time off work – with headaches and fatigue (yes, yes, all clear signs).

So I have had the time to watch the rhythm of our house, and think about our electricity and consumption use

And this is what I found out.

We have heavy curtains to reduce heat loss, but with the two of us working, opening and closing the curtains to maximise sun and reduce heat loss just isn’t high on the priority list. What I discovered is when you have time, you can care about these important factors. And remarkably, the house does not require heating between 9am and 5:00pm if I play my cards right.

I need to:

Draw the curtains at night when the heating comes on, to retain the heat as much as possible.

Open only the drapes in the morning and leave the shades down until the sun starts to stream though the windows. Between getting the kids off to school and when the sun streams in, I sit and write on the couch where the sun is captured through the front windows. It’s so yummy and toasty to sit with the sun heating up my back.

During the day, I get out and do some physical work in the garden while the sun is shining. This keeps me warm, reduces our heating costs and gets me being productive. Plus plus plus.

When the sun starts streaming, open up the shades and let the sun shine on the floor and heat up the slate tiles. It’s delicious. And the house keeps a cosy temperature of 19 degrees in side all day.

I sit and meditate in the afternoons, in the front window with the sun at its warmest.

Finally, I manoeuvre the clothes horse around to get the clothes dry.

All the while, I’m watching the Wattson click over our net power usage, once we take into account the solar panels.

Wow. Without the experience of chasing the sun, I would just have the heater on all day.

What do you do to maximise the sun?

We’ve just pressed STOP on the treadmill of life…

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Yep – we’ve done it. Metaphorically at this stage. We’ve hit the button and are reassessing our life choices.

I’ve reached that critical half way point in my working life, at age 42, and a series of questions have started to emerge in my mind:

  • What am I working for?
  • How much do I actually need to work?
  • What will be the big expenditure items that I need to save for between now and retirement?
  • What do I need to live comfortably in retirement?

As part of slowing it all down, my husband and I took some proactive steps to find out the answers to these questions. And the results have surprised us.

We can actually work much less than we are currently

YIPPEEE!!!!

(cue fireworks)

To get to a point of knowing an answer, we went through the following process.

  1. We have virtually paid down our mortgage over the last year of self-imposed austerity measures.  We have set a pretty rigid budget since last September, and it has worked.  Our mortgage will be paid down in November.  I’ll post more detail on how we achieved this at a later stage.
  2. We have taken time to understand, and have sought advice on our superannuation funds.  My husband’s fund is a defined benefits scheme, which means he receives a multiplier of his final average salary as a lump sum, as well as an indexed pension for life (I didn’t just marry for love alone….).  To understand these figures, my husband contacted his superannuation fund and was provided access to a calculator that spelled it all out.
  3. My superannuation fund is just an accumulated benefits scheme, but I have been making some voluntary contributions in the past few years and I have accumulated a reasonable amount that will “top up” any further living expenses that we might require in retirement.  I found a useful calculator at www.industrysuper.com If you plug in your super balance, and adjust for your anticipated weekly expenses, you can work out how long your super will last you for.  For my purposes, I just added on what we would need on top of my husband’s pension, and we will be able to live until we are 104.
  4. We then went through a process of understanding what our retirement income will need to be in today’s dollars.  To do this, we went through a budget that included a little overseas holiday each year and worked out a budget of $75k per annum, in today’s terms.  We also benchmarked this against other retirees of today (our parents, for example) to understand whether that was reasonable.
  5. Between now and retirement – we have worked out what are major items of expenditure will be:
    1. Small house renovation ($100k)
    2. Savings funds for each of the kids and their homes or educations ($100k)
    3. A couple of car upgrades ($80K)
    4. Downsizing to a nicer, solar efficient home ($300k extra)
  6. We are now working on a spreadsheet to develop just exactly how much we need to earn between now and retirement, so we can achieve some balance between what we do to earn money, and how we want to live.

I’m no financial planner – I’d suggest you absolutely get your own advice, but this process has been completely liberating. Instead of thinking that I would need to maintain or increase my current salary levels and keep working forever, I’ve actually learned that I can decrease my salary. I can take a career break. I can earn less. I can do less.

The family finances

When we moved in together with our big family in 2009, we had $350k worth of debt – all our home mortgage.  I tend to have a penchant for stylish clothing and nice holiday accommodation, so suffice to say, our mortgage reduced at the usual rate until this time last year when…I ….said……

STOP

(and hilariously, my husband had been saying “stop” for ages…)

At the time, making a decision to reduce our spending in this way, I felt like our dog Izzy, when we first gave her a shave. She went from this:

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To this:

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And it felt very…..exposed.  No more Sunday-shopping-is-my-hobby time.  No more pre-order clothing before public release.

So we decided 2014-15 would be our year of Austerity, just like Greece, and we would cut down on the “non-essentials” like….my main hobby of clothes shopping and would convert to (GASP) shopping at Aldi.  Anyhoo, this blog will trace our psychological journey of discovery and self-discovery as we graduated from Colesworth (Careless Whisper on the over head loud speaker and a Zen experience at the checkout) TO Aldi (crazy cult culture and panic attacks as our shopping fills more than the counter will cope with) and other wild savings adventures…..

Well it couldn’t get much more complicated than it already is…

OLYMPUS DIGITAL CAMERATurn your oven to a moderate temperature (say 180 degrees).  Add one blended family of five children, two professional parents with busy jobs, a large house and then crank the oven up to 250 degrees…

This blog is a record of my journey to achieving simplicity within a modern context, where obligations, expectations and commitments are overflowing. Journey with me to loving a simple life.