In her article “Ship Shape”, in Australian magazine “Financial Review Smart Investor” Jan 2009, Jackie Pearson suggests people take a snapshot of their current finances in order to create a template so they can use this understanding to manage their income and expenditure and so find ways of increasing their savings. Pearson suggests people start by doing an assets and liabilities assessment, then estimate their income and expenditure per pay period so they can work out what they spend in relation to what they earn. Having established a template, they can then start planning how to save for those extras such as holidays, entertainment, gifts etc.

Pearson’s advice makes perfect sense but so few of us put time aside to do a rational analysis of our income and expenditure. Probably the disincentive is that most people find this sort of activity time consuming and discouraging because so much of their discretionary income goes out in debt servicing.

Pearson continues by stating that, “You can’t pay off debts, save or invest until you have a positive cash flow. And there are only two ways to get out of the red - earn more or spend less.”

There would be few who would argue that Pearson’s principle isn’t a sound one but, in truth, there is a third and even more powerful way of accruing savings. Unbelievable as it sounds, most people are potentially much richer than they realize. The reason being that so much of most peoples’ income is committed to paying mortgage interest and they are unaware just how much of this is totally unnecessary.

I suppose it gets back to the fact that people find it almost impossible to imagine there’s an alternative to what they’re currently doing if you haven’t heard of it. The old adage that people don’t know what they don’t know holds consistently true. For instance, not so many years ago, no one thought to use seat belts when traveling in their car. Now, of course, people would feel unsafe traveling without seatbelts.

In New Zealand, most people have been educated into understanding that interest rates will affect the amount they pay over time for their home loan. What many people miss, however, is that the structure of their home loan significantly influences the amount of interest they pay and this necessarily dictates the time they spend in their mortgage. A correctly structured and properly managed home loan has the capacity to save people tens of thousands of interest dollars and significantly cut the time they spend in their mortgage.

Unfortunately, many people give away untold proportions of their income simply because they don’t understand the consequences of not having their mortgages properly structured and managed. However, if people are prepared to take the time to understand how structure and the right management work in tandem to benefit them then, it is entirely possible to recoup large amounts of interest and significantly reduce the term of their home loan. Management is key however because a properly managed exit plan will be necessary in order to provide the right template so that day to day cash flow can be monitored in the way Pearson recommends.

So to conclude, although Pearson’s article clearly illustrates how visualization enables people to predict and manage their expenditure in order to put a regular and responsible savings plan in place, it is perhaps only the first step in harvesting the true savings potential from an average income. In New Zealand, at least, mortgage structure is very much the key decider when it comes to the amount of savings achievable through the proper management of an income and expenditure template.