The 101 of Money Management
We learnt how to do basic maths in school, but what we didn’t learn was how to apply that to managing our money.
Today, we spend a huge portion of our lives working hard to earn money, yet so few of us take the time to understand how to manage it.
Understanding how to manage your money is the 101, the foundation to financial success. After all, when it comes to money you can’t grow it unless you understand how to keep it - no matter how hard you work. Just like a good healthy eating plan requires you to measure how many calories in vs out, a good money management plan requires you to have a grasp of the income going in and expenses going out.
Despite its importance, a shocking 86% of Australians don’t know their monthly expenses and 82% don’t know the interest rate of their mortgage. Yikes! It’s no wonder Australians are struggling with their budget.
In my time as a financial planner, I’ve seen these statistics play out in real life. Asking clients to complete their budget in advance of our meeting was akin to pulling teeth - no one wanted to do it - and the forms would often come back in as empty as the day they were sent. With no choice, I found I had to resort to sitting with my clients in meetings and using up to an hour of our allocated time simply getting clarity on their budget. It always surprised me the number of incredibly educated and successful clients that had no idea on the gross earnings of their pay, whether or not it included superannuation, how much they owe in HECS/HELP debt or the kind of interest rate they were paying on their credit card.
With that lack of clarity, it’s no wonder people struggle to meet their financial goals. Saving is difficult when you have leaky financial taps all through the process. So let’s get those taps sorted and help you grow your wealth and financial independence!
If you’re not already, the first step is to get clear on your budget and then get together an easy to execute action plan to stay on top of necessary expenses and minimise wastage.
When it comes to creating your action plan, the secret really does lie in paying attention to how you structure your bank accounts and in this case, size - or rather the number of accounts you have, matters. Gone are the days of having just one bank account. Good money management means that each account you own should have its own purpose.
Have you ever questioned how some people manage to budget with ease and have money for unexpected expenses like an impromptu dinner, a car breakdown or even an emergency - no matter what they earn - well, you’re in luck. Here’s how they do it:
Instead of having your main account do all the financial lifting for you, use it as a ‘landing pad’ for your pay.
Map out your main expenses and financial priorities - and give each one a home.
- Create a ‘billing’ account for all your ongoing expenses. We’re talking about your rent or mortgage, utilities, subscriptions and other ongoing bills
- Set up a savings account - because if you save before you spend, you’ll find it easier to save some serious cash!
- Make sure you’re not caught out by things breaking down like your car, washing machine or even your job - by having an emergency account. Work out the amount equivalent to 3 months salary and transfer bite-sized amounts into your account to hit that target over 1 - 2 years
- Remember you’re human and you’ll want to splash out from time to time. So have a luxury account for your big ticket items. Whether it's Chanel handbags, designer suits or getaways that take your fancy... it's not about denying yourself, but delaying it, that helps you get what you want!
- And here’s the best part! Whatever is left in your ‘landing pad’ account is yours to spend as your everyday expenses - so you could in theory go ‘paycheck to paycheck’ without having to think about if you’ll still have the cash for what matters. You, just like the experts, have got it all covered!
You may think that managing all these accounts is hard work. Scrap that thought! Because, you can, in fact, automate it all and it won't cost you a cent!
You’re probably asking “well, how much do I transfer into each of these accounts?” Well, investing a little bit of time upfront definitely takes the stress out of this and builds the financial gains in:
- Give each account a ‘target amount’ it needs to hit to meet your expenses or goals
- Set up an auto-debit by asking your bank or doing it yourself online, and set up your transfer for the day after pay day in bite-sized amounts so you hit your target amount within the timeframe you’ve set.
That’s all there is to it. A little bit of planning and a few bank accounts can go a long way in making you an expert money manager of your own cash flow!
With all necessary bills, the important financial goals (like saving and luxury) and needs (like an emergency fund) all pre accounted for, the remaining funds become your personal slush fund so you don’t have to count every penny or think about each and every expense. It means that you can eat out, buy lunches or take money out of the atm without the risk of overspending.
Once the budgeting and bank accounts are sorted (the 101), we’re able to move onto the next steps of the hierarchy of good money management:
The next step of good money management is understanding the basic fundamentals of compound interest and how it really works. This means getting clear on what interest rates you're actually paying and not having your head in the sand. It also means understanding how it impacts you.
Really understanding inflation is also another basic fundamental - beyond what you hear on the 6pm news. Sure inflation rises by a certain percentage, usually between 2-3% - but what does this mean for you and how can you keep abreast of it without going backwards financially? Ask yourself this, do some research and take the guesswork out of the equation. You’ll thank me later!
So what’s next?
Now that you’re armed with the right information, get on top of your budget. Find out what is going where so that you can create ‘money buckets’ for your new account structure.
I recently went through the 101 of Money Management in my segment of Channel 7’s Your Money & Your Life with David Koch. You can catch the replay here.
If you’re a Signature Member of The Remarkable Woman, use our highly rated budget tool that enables you to fill in your current and proposed budget at the same time with prompts on the common areas we spend our money on, and work through your savings plan as a result.
You’ll also be able to access online training on all this and more as a Signature Member and give yourself the financial freedom and understanding you deserve! Make the most of our fantastic money calculators that will have you budgeting, setting and achieving your money goals in a flash! Sign up and join the community here.