Six tips to help manage your cash in a cost of living crisis

Inflation may no longer trending upwards, but cost of living issues are still taking a toll across Australia, with Lifeline reporting increased volumes of people calling to talk about financial distress.

Currently, the biggest cause of stress is living costs, health, and personal financial issues – according to the NAB Australian Wellbeing Survey – as average household savings have plummeted from 20 per cent in 2020 to 3.75 per cent in 2023.

This same report found 70 per cent of mortgage holders are facing mortgage stress.

When inflation’s not an issue, the typical rule for personal household cashflow management is 50/30/20 – 50 per cent on non-discretionary expenses, 30 per cent for discretionary and 20 per cent for savings.

Now, the cost of living has increased so much due to rising interest rates, higher rental costs and essentials price hikes, that a more realistic figure for many Australian households is 70/25/5.

If you can try to save at least 5 per cent, it gives you a buffer if something goes wrong, and helps ensure that you come out the other end of these trying economic times with some savings set aside for the future.

By doing these things you can help maintain your financial stability and hopefully thrive in the face of rising costs.

If saving is not an option, and you’re finding it hard to meet your current expenses, you’re under financial stress. This can be mentally overwhelming, and there are a number of options providing professional help including phoning Lifeline or accessing their financial stress support toolkit.

If you have some wriggle room after essential spending, here are six useful strategies to manage household cashflow and still be able to save:

Create a budget and stick to it. This is one of the most effective ways to combat the rising cost of living and will help you keep track of your expenses and ensure you are not overspending. Make sure to include all your expenses, including housing, food, health, transportation and entertainment.

Set up a bucket strategy. These days, it’s easy to tap your phone or use debit cards, but the risk is you can overspend. By setting up “bucket accounts” for specific needs or goals, you’ll have a much clearer idea of what money you need for bills and specific goals and what is available for discretionary spending.

What you can’t access you cannot spend. Have one “bucket” for day-to-day expenses, linked to your digital wallet or debit card. Create a second or third “bucket” for specific needs – monthly or quarterly bills or saving for a holiday.

If you have funds you don’t need immediately, consider a higher interest bank account or an account that is not easily accessible. For the longer term, consider putting the funds into appropriate investments and seek professional advice about what is suitable for your circumstances.

Be clear on what is discretionary and what is essential spending. There’s a big difference between “must haves” (expenses such as food, utility bills, insurance premiums, health care and fuel costs) and “nice to haves”.

Beware of discretionary expense creep – this can be controlled by cutting back on eating out, reviewing your entertainment and digital subscriptions and opting out of other direct debits where you can. Small expenses all add up. You only need to do the math on the cost of buying takeaway coffee each month.

Review your insurance policies. Rather than cancelling and having no cover if something bad happens, speak to an expert or do online research to review your insurance cover and premiums, cutting extras you don’t need.

Don’t fall into the credit trap. Credit cards typically have very high interest rates. Pay the full amount back each month or as much as you can – paying the minimum required each month can take you years to pay back in full.

Save by investing for the longer term. This may not always be possible if your cashflow is really stretched, but where possible set up a savings plan for longer-term investments. Managed funds or a share portfolio are types of investments which can still be accessible in case of emergency but allow you to “lock away” funds and not make it too easy to access.

It’s important to seek financial advice on what investments may be appropriate to your needs and align this to your investment timeframe and goals.

Just make sure that you’re seeking credible advice, in light of ASIC’s crackdown to protect people from “finfluencers” and the proliferation of market manipulation and unlicensed investment advice.

By creating a budget, reducing your discretionary expenses, cutting down on unnecessary costs and saving and investing for the longer term, you can help maintain your financial stability and hopefully thrive in the face of rising costs.

Grace Bacon is the Director of RSM Financial Services Australia (AFSL 238 282), advising clients on wealth management, retirement planning and succession planning.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact Grace Bacon or your local financial adviser.

This article first appeared in The Sydney Morning Herald.

Note: past performance is not an indicator of future results.

This article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.

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