Following on from last week we are going to be talking about how to organise your money flow. Now that you have a budget and know what your expenses are and what you want to spend your money on- how do you organise your money so you have the money to cover your expenses as they arrive?
I feel like I might have said this before but it’s a good point and worth saying again. Every money book that I have read all have a slightly different method for managing your money, there are certainly some common similarities that I will mention in a moment but the point is they all have a different way and that is because we are all different people with different circumstances what works for me wont necessarily be the best method for you. So it’s good to be clear to take what I say with a grain of salt. Use what works for you and change what doesn’t.
If you’re in Australia where I am unless you have been living under a rock I’m pretty sure you would have heard of Scott Pape the Barefoot Investor. I would recommend his books if you are just starting out with managing your money and want to learn the basics of managing your money in a very simple way. He is all about simplicity which is great and I highly recommend him but you know what despite some similarities with what I do, his money allocation method doesn’t quite work for me and that is totally fine. And the reason I’m bringing this up is because I want you to be clear there is no one way that is the best way or the only way or the right way to do something when it comes to money, and many other things in life for that matter. I want to encourage you to learn from what I do and adapt it to suit your life.
Many financial experts say a similar variation of the following. When it comes to spending your money. Don’t spend more than 70% on your living expenses, save 10% for long term savings and investments, save 10% for the short term big expenses like a new car or home deposit. Spend 5% on whatever you want and give 5% to charity. There are no hard and fast rules but this is a common formula you can use to allocate your income. I don’t follow this allocation of money to the letter but I use it as a guide when I review my finances. I have moments of doubt when I worry I’m spending too much on an area of my life or not enough in another and I find this allocation a useful yardstick to measure against.
I’m going to reference last week’s post on budgeting so if you haven’t read that already you might want to pause this and go back and read How do you spend your money? or listen to podcast first.
By now you should have a clear idea on what you spend your money on. So how do you organise it?
You will need to open the following accounts
Expense account
This account is to cover all your essential fixed and variable bills.
Buffer account
This account is for savings to cover you in an emergency.
Savings account
This account is to accumulate money to use for long term investing.
Holiday account
This account is for the fun things like holidays or special events that need to be saved for.
Spending account
This is your personal account to spend on whatever you want.
*Special savings accounts
This or these accounts are to save for other specific things not covered above
Ok let me break each account down for you and explain how to allocate your income into each account
Firstly the Expense account
This account is for all your essential expenses and regular discretionary expenses that you know you want to and will spend money on throughout the year such as gym memberships or haircuts. In fact we actually have two expense accounts one for all our annual bills and one for everything else. I will explain why in a moment.
Now I’m sure you would have noticed from your budget that you will have a combination of regular weekly and monthly expenses as well as yearly ones.
Once you have completed your budget add up the yearly cost of all your essential expenses and then divide it by the frequency of your pay. For example if you get paid every week divide it by 52 and then you know how much you have to put aside for your bills each week.
We get paid fortnightly so I like to work out all our expenses on a fortnightly bases.
That’s why I like using an excel spread sheets for our budget because you can set up formulas to do the calculations for you. Let me give you an example. Our car registration is about $800 per year I think it’s a bit more than that but let’s go with $800. So I divide $800 by 26 because of 26 fortnights in the year to get $30.76, lets round it up to $31. So I know to have enough money to pay my car rego I need to put away $31 a fortnight.
So getting back to why we have two expense accounts
Using our budget information. We calculate the total of all our annual expenses and work out the fortnightly amount by dividing it by 26 and then we simply round it up and make sure we put that amount in our annual expense account. For all our other weekly and monthly expenses we do the same by adding it all up and working out the fortnightly amount we need to put away and put it in the second expense account. We do this because you might be surprised how much you actually have to put away per fortnight to cover your yearly expenses. It can be more than you think. Which is why so many of us can get caught out. My self included. The reason we separated out our yearly expenses is sometime we would get carried away with some big grocery shops or think we had more than we did and would come up short when it came to our yearly accounts. By separating it out we have more control to make sure the money is there for the annual expenses and if our weekly expense account starts to dry up we quickly know we have to tone it down.
Now to the Buffer account or what Melissa Browne in her book refers to as an ‘Oh F*ck’ account, I love that, to cover any unexpected emergency expenses or shortfalls. How much you have in a buffer account is up to you. I would say a minimum should be three months living expenses but you could aim for six or twelve months worth. If you work in your own business or contract I would go with the latter. Well even if you have an ongoing position it’s up to you what you feel comfortable with. Having a buffer account gives me more confidence investing and in general peace of mind because I know if something happens unexpectedly we have the money to cover it.
Your Savings account is for long term investing. You might use it to accumulate funds to invest in shares or use for a deposit on your home or investment property or other investment vehicles like bonds. This account is so important to your financial future but if you are drowning in debt you might channel these funds into debt elimination first.
Holiday account is pretty self-explanatory. You might call the account something else like car deposit but whatever you call it this account is to save for the big short term fun expenses like a holiday or new car.
Spending account- this is your personal account to spend on whatever you want.
As a couple and family unit we toyed with the idea of having all our income paid into the one account but we agreed we like having our own accounts so we have kept it that way. We each have an amount to spend fortnightly on whatever we want and that way we can save up for our own things or buy each other a present or in my case another investment or mindset book without having to consult the other about it. And just as a side note worth mentioning here. I can’t even imagine my partner doing the dodgy on me if we separated, well for starters I organise all the money so I can’t see that happening and I’m not trying to be all doom and gloom but separations do happen and people can do some crazy sh!t when they break up so in light of that I just think it’s a good idea to have your own money and accounts and also be on top of how the money is managed even if you’re not the primary one who takes care of the finances.
And lastly the Special savings accounts are just for anything that you specifically want to save for that doesn’t fit into any of the above categories. For example I have a savings account for each of my girls. I save a small amount each fortnight so that when they are older I already have money put aside to help them with a major expense. But hopefully they will learn from me to be amazing money managers and in that case I will just have some extra savings. A bonus either way.
This might seem like a lot of accounts to you but I don’t like to monitor every dollar we spend. The thought of that seems really tedious and painful to me. I like to be able to just spend what is in the account without thinking about each expense. By separating our expenses into two accounts like I explained and having separate savings accounts means we can use our personal accounts for the fun splurges and know we can rely on our expense accounts to cover all our essential expenses. As I outlined in the last episode on budgets I work out our spending once a year only, distribute the funds accordingly and then I always have enough to cover our expenses and stay out of debt.
The final step in setting up your accounts is to automate it. I highly recommend setting up direct debits for your savings and buffer account. Some employers have the facility to distribute your income to different accounts directly or you can simply set up direct debits to come out the day after you get paid. It’s much easier to stick with a savings plan if the money is deposited straight away as then you just get use to not having it in the first place.
I also have majority of my bills set up on direct debits. This is a personal preference to save time. When you have bills set to direct debit they email you the bill to notify when the payment will come out. I still always check the bills but then I forget about it and know it will be covered.
Thanks for hanging out with me this week. The purpose of Money Mindful is to share information about money and how to manage it by giving you real examples and getting money talk out in the open. It never ceases to astound me or worry me when I talk to my colleagues and friends about money and it quickly becomes apparent that they do or don’t do particular things with their money simply because they are just unaware of what is possible. They lack financial literacy and rob themselves of having more money because they don’t know how to manage it. So I hope sharing what I do has given you some insight into what is possible. Well done for taking the time to educate yourself about money. Have a great week. Until next time bye bye.