Of all the people we come into contact with, there is no uniform approach to living expenses. It’s fascinating to consider how differently we treat our money with some people accounting for every dollar, and some at the complete opposite of the spectrum with very little regard or penchant for budgeting.
Why should you care? Beyond being as frugal as possible with your hard earned money for wealth optimisation and consolidation purposes, knowing where and how much money you are spending on a monthly basis is a very important element of the borrowing or refinancing process.
When applying for a loan, lenders will consider (and analyse) at least the previous three months of household expenditure, looking for any red flags that might put you in a high risk category.
How do banks calculate your living expenses?
- Use the Household Expenditure Method (HEM) based on your family size and income because it is considered unreasonable for someone to spend less than HEM each month.
- Ask you to self-assess your living expenses on your home loan application form.
- Review any bank account (cheque or savings accounts) or credit card statements they have access to in order to confirm your self assessment.
- Either accept or adjust your stated expenses to match your bank account history.
- Take the higher of the above living expense assessment methods to calculate your living expenses.
What is the Household Expenditure Method (HEM)?
The HEM is the benchmark that banks use for living expense allowances based on the size of your household, whether you’re a single applicant, a couple or you have dependents.
In addition to this, banks will cross-check this with whether you’re living in a metro area versus a non metro area for each state.
As you can imagine, it can get quite confusing and convoluted, but Dan can give you a quick indication of where you sit after a quick phone call or email.
The main takeaway is to get sorted with a basic household budget. Your smartphone could possibly help you, thanks to a list of six budgeting and savings apps compiled by Canstar.
Summary: Pocketbook analyses your spending habits to help you figure out how much you’re spending and where.
Potential pro: It’s a free way to help you manage your bills and to budget. This can be useful to see what you can cut back on and what you can be a little more relaxed about.
Potential con: Pocketbook allows you to sync a range of Australian bank accounts, including those of the big four. However, if you’re with a smaller bank, it may not be supported. You can still add in your information manually, but you’ll need to use the web version of the app to do so.
Summary: MoneyBrilliant offers a comprehensive look at your finances.
Potential pro: The app is equipped with the spending breakdown feature of other apps like Pocketbook, while also giving you a thorough picture of your assets and liabilities.
Potential con: To get the full range of features, you’ll need to pay for MoneyBrilliant’s ‘Plus’ plan, which could be counterproductive if you’re trying to be more budget-conscious.
Summary: Through Goodbudget, you can allocate portions of your income towards specific purposes.
Potential pro: If you’re looking for a simple way of saving money and budgeting for various expenses, Goodbudget might be worth a download.
Potential con: Unlike apps like Pocketbook and MoneyBrilliant, you can’t sync Goodbudget to your bank account. However, this might be appealing if you aren’t so keen on sharing your bank details with an app.
Summary: Splitwise could help you keep track of shared expenses and ensure you don’t forget about any money you’ve lent or borrowed.
Potential Pro: It could be particularly useful for situations like sharehouses and overseas holidays.
Potential con: To use the app with a group of people, it does require all users to download the app individually.
Summary: YNAB encourages you to think about how every dollar you earn will be spent and to prioritise and plan your spending.
Potential pro: YNAB encourages users to take a proactive approach to their money and provides a number of resources to help them do this. It focuses on your future spending, rather than just tracking what you’ve already spent.
Potential con: Unlike some of the other budgeting apps, YNAB does not come with a free version. While it does come with a free 34-day trial, after this time you will need to pay the full subscription amount.
Your bank’s app
Your bank’s mobile app may also come with a budgeting tool that automatically tracks your spending. A lot of Australia’s major banks have created apps and functions designed to help their customers save money. For example, some bank apps have ‘round-up’ features whereby purchases made with your transaction account are rounded up and the extra amount is shifted into a linked savings account.
Please note that this is just a selection of budgeting apps available. There are other budgeting apps out there and we are not making a recommendation about these platforms. It’s important to do your own research before deciding if any of these kinds of apps are suitable for you.
All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.