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Sleep at night money management

Ever wondered if there was a really simple way to avoid worrying about the bills each month?

Well this month I thought I’d share with you a tried, tested and simple model for money management for those who haven’t yet found a workable system. A quick word of warning, it takes a little while to get set up, but once it’s running you’ll have more time to focus on important things, like what your investments are doing, a sporting pursuit and/or the kids.

Step 1) Know your money:

Set yourself a budget for the year and break it down to whatever is the frequency with which you get paid (for example, weekly, fortnightly or monthly). It should be something like:

Income (total) less Expenses (total) equals Zero. Now it equals zero because you should be including money set aside for holidays, investing, saving or emergencies.

As we know, all money should have a purpose. I am yet to see a situation where a person’s income did not meet their elected expenses (this is because those who were saving were putting the money away for some future purpose and you have to treat this as an “expense”). If you require help with a budget tool, please refer to my most recent blog for details of a good one.

Step 2) Put a structure around your money

Once you have a clear budget you can break the budget down into four “buckets” if you like. (Buckets are where you keep the money and draw it from when needed for that specific purpose.)

You set these up by having direct debits to put income into them each period and then putting in place discretionary spending allowances to control the amount that is taken out.

  • Personal – this is where the money you live on goes. It’s what you spend on necessary items for living such as mortgage/rent, food, petrol, as well as what you spend on discretionary items.
  • Investing – this is where the money for current or future investments is placed.
  • Business – this is where the money for any business venture you participate in is maintained.
  • Super – this is where your retirement nest egg is held.

Each of these needs to have its own income and expenses plus its own cash reserve. How much cash reserve? Well you should have 3 months worth of “salary” in your personal and business “buckets”, 5% of your total debt in investments and 1 years worth of expenses if you are running an SMSF.

Step 3) Adopt strict policy as to how money will be used and the rules of the structure.

Essentially we are all a lot safer, when there are boundaries to our actions that are KNOWN and FOLLOWED. And when we are clearer on our goals and purposes. What I mean by that is that if we know we are not to do something and understand fully the consequence if we do, then we are a lot less likely to do it.

So with a full understanding of the proposed system and its purposes in our household, we can completely change the money game in our house. With firm agreements and keeping our word on spending habits, we can run a budget with an accurate estimate of expenses.

Step 4)  Measure and monitor

We recommend you keep an accurate measurement of money to ensure you minimise wastage and keep a note of when things improve.

Step 5) Have a constant demand for more income.

One of the most overlooked aspects of money management is that you must keep demanding of yourself a much higher income each year. Staying on a flat fixed income means you are going backwards, because the cost of living keeps going up.

Once you break down your financial situation using the above five steps, you effectively form a guard around your money to ensure that when you are reviewing your desirable cash flow position it is simple to administer.

I have noted over the years with everyone that I meet, that no matter what their income it always magically matches their expenses. So if they are not getting ahead then it is their spending that is the main culprit. So it makes sense that adding control to your spending is the main way to improve your overall financial situation.

If you would like a free, no-obligation discussion on how we can assist you with setting up such a system, please feel free to contact me at adam@investorsdirect.com.au Or call me on (03) 9868 7500.

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