At the end of the day we all understand saving is a necessity to achieving financial independence. A good money management program is about having a structure to help you make more confident, smarter decisions around what you do with your money.
In our most recent episode of Making Cents of It All, we highlighted some actionable strategies to improve your savings ability. Additionally we discussed the importance of being able to see where all your hard earned dollars are being spent, and more importantly, if this spending is actually aligned with what you value.
Your financial success will be highly influenced by your financial behaviour, “Money Mindset” and your ability to control your savings vs. lifestyle inflation.
Why we don’t like ‘budgets’
The use of a budget, in isolation, simply does not work for the majority of people for two main reasons. Firstly because it is retrospective, in that once you have ‘set’ your budget you then go back and assess how you are tracking over a monthly/quarterly period. This can only show you if you are either under budget (successful saving) or over budget for the specific timeframe. This then leads to the second reason, you have no ability to adjust your spending behaviour on the go (no live feedback). You need constant feedback so that you can make conscious spending decisions.
Three cornerstones of great money management
Implementing a Savings Plan is about alignment and consideration of both your current desired lifestyle and long term financial goals. This balancing act is imperative to ensure long term sustainability and engagement with your plan. At the end of the day you decide on what sacrifices you are willing to make to reach your goals and in what timeframe you will achieve these.
Step 1 – Confirm your Income from the various sources, this may be; your salary from employment, business income, income from existing investments or side hustles and pension income.
Step 2 – Next clarify your expenses which are to be broken into 2 groups being Living Expenses and Lifestyle Spending.
Living Expenses (fixed expenses) is what it cost you to survive, the must haves in life just to survive, such as; food, accommodation, healthcare and utilities.
Lifestyle Spending is the discretionary spending in our lives, these are the little extra’s that make us feel like we have a decent lifestyle. This spending includes; dinning out, entertainment, shopping on clothes and beauty, as well as holidays. The Lifestyle Spending is the variable expenses you can choose to wind-up or down to improve your savings objectives.
Step 3 – So once we know what comes in, what goes out, we know what surplus is left as savings, and can allocate this towards our financial objectives of building wealth or paying down debt.
This process reveals a direct link between your current spending and your ‘savings rate’ which can be aligned with future savings goals.
The key element with a banking structure is knowing that you’ve got enough to cover your living expenses, seeing your savings grow (or debt going down), and importantly being able to see what you’ve got to spend for lifestyle.
Simply, this is about spending what you’ve set aside for Lifestyle and Living expenses and leaving the rest alone.
There is no one size fits all when it comes to a banking structure because all of our circumstances are different (renting v home owners, singles v families). You need to align a structure which works best for you, including consideration of the benefits and pitfalls of having credit Vs debit cards given your existing spending habits. The structure highlighted in the podcast and discussed below can be seen as a foundational structure for adaption to your unique situation. The focus and importance rests on segregation of account for their specific purpose, and then automating transfers so that you can maximize your savings capacity.
The basic structure utilises following account framework;
- Spending – is separated into Living Expenses and Lifestyle Spending. This way you only spend what you’ve got, especially for the discretionary spending in the Lifestyle Account.
- Storage – is where spending money is parked, waiting to be spent later, on things such as travel and gifts.
- Savings – this should be one way traffic accounts, money goes in and doesn’t come back out until you need it. For example, for a home deposit or kids education funding.
The key to success is not about the number of accounts you have but making sure they only serve a single purpose (e.g. no blending of spending/savings accounts)
Next, step is to automate you transfers between various accounts.
- Always pay yourself first. This means on pay day a predetermined amount (based on your Savings Plan) goes directly from the account in which your income is paid and transfers into your savings.
- Then transfer the appropriate amounts to your Lifestyle, Living and Storage Accounts.
From here the system should take care of itself. You will hit your savings target…because it has gone in straight away and you won’t overdo it on discretionary lifestyle spending as this is capped.
Things to consider here for those with loan obligations may be to use other bank facilities, (not just savings accounts) which can store savings and reduce interest expenses on debt.
Through the correct establishment of a banking structure you will have the important feedback loop. Reporting provides real numbers back to you, so you can keep on track towards your future goals and remain accountable to yourself.
A review of your bank accounts should provide a spending snapshot highlighting areas of concern. For example a check-up of your ‘Lifestyle Account’ should tell you if you have remaining funds to, have an evening out.
Additionally, if you are dipping into your ‘Savings Account’ to fund Living Expense such as groceries or the electricity bill, then you need to reset your savings plan to a more realistic amount and wind back on your savings goals until you can improve your income.
The purpose of implementing a money management program is to put you in complete control of your financial decisions, future savings goals and create a lifestyle by design.
- Savings plan – setting a plan to suit your desired lifestyle but balance and align this with your longer term financial goals.
- Bank structure and automation – Spending (Living and Lifestyle), Storage and Savings Accounts are a framework to build around your unique circumstances. Then pay yourself first and cap your discretionary spending. This way you get in the habit of only spending what’s left after you have allocated to your savings.
- Feedback and accountability – A review of your accounts should provide the insight into how you are tracking towards your savings or debt repayment objectives.
Having a money management program isn’t about punishing yourself or a process of simply tracking your numbers. Building awareness through the implementation of a money management program will help with clarifying how your spending habits are impacting your long term financial objectives, and gives you the opportunity to make changes to suit your lifestyle.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.