A Good Money Management System Is Like Getting Your Plumbing Right
If the tap you have leaks but your normal usage hasn’t changed, you’ll use more water overall, with the excess literally going down the drain.
It’s the same for your finances, and by simply avoiding the waste, you can improve and potentially dramatically improve your overall saving capacity. Ensuring that you and your family are secure, just by creating a strategy around your money. All while having little or no impact on your lifestyle.
In this five part blog series, we look at the main ways money leaks from your savings, teach you how it can be fixed and then saved for your benefit. These are:
- Reduce your spending with a budget and save
- Legally reducing the tax that you pay
- Managing Debt Costs – By getting the structuring right
- Spending money that makes money
- Protecting your ability to earn income, with insurance
Reducing Your Spending with a Budget and Save – By Thinking Like a Business Owner
How can I budget my money better? Such a common question that can help create better clarity and accountability for where your money is going. It also gives you the best opportunity to identify problems and prioritise what is important, and yet few people have one. Especially not one that is fluid and measurable.
Therefore, it always begins with a budget. This will allow you to understand where your money is going and the opportunities that exist to improve things. To fix the leaking tap as it were.
The Yield Financial Planning budget is structured like a business cash flow; if you think about it, a household budget is like a small business. You need to make the books balance, and the way a business does this is by recording what it earns and spends on a monthly and annual basis, then balances how they are tracking against their bank account.
In this way, a budget should really be a monthly account of your income and expenses, not just an annualised figure, as most basic budgets are designed. In fact, you could get a whole lot more granular than this if you wanted to and look at it as regularly as daily, but we believe that like a business, monthly provides sufficient accountability and control.
One benefit of breaking your budget down to monthly, is that it reflects the fact that expenses are not incurred evenly throughout the year.
Therefore, you should expect that some months will be stronger saving months than others and some months you will likely even go backwards in your bank account.
Importantly though, as long as you have budgeted well and are monitoring it, you will not be disheartened to see your bank account fluctuating month to month. In fact, you will be completely assured that your budget is on track, because you can measure your progress against your bank account.
With this in mind, the starting point for you is to review and record your previous years actual expenses. This forms your budget foundation.
From here, a business will forecast the upcoming years income, and then budget for the things it prioritises are important in the coming year and this should be no different for you.
As a next step, we suggest that once you have laid out what you spend, break it up into what you ‘need’ and what you ‘want’.
The things you ‘need’ you have identified you cannot do without, and the things you ‘want’ are discretionary and by understanding what they are it allows you to prioritise them, to get your desired saving outcome that you want, budgeted for and achievable.
Once your expenses are broken down this way, you can also review them to see if you are getting the best price.
For the items you have identified you need, start with the most expensive and work your way down. Can you get the same or equivalent for less?
This is a strategy that you should be implementing annually, as there are normally thousands of dollars you can save, without compromising on getting the items you’ve identified you need.
Utilities are an obvious one you can budget and save with. Compare your energy prices for example and if you can get the same for less, then switch. This saving then moves over to your want column and can either be prioritised for things that you want that year or can go directly into your savings for the future.
The next step is to try and look at the expenses you’ve identified that you need through a different lens. Is there something that you can accept as an equivalent, that may not be the same, but cheaper. In our house, an example of this was Fox Footy. We had Foxtel, primarily because we wanted the AFL, but it was expensive. We now have Kayo for AFL and stream two different TV channels. It is costing us less and we actually prefer the content we are getting as well.
Once you are done with your needs, then move on to your wants. Look at it through the same lens initially. Can you get the same or equivalent for less?
You’ve now reached the point where you can quantify what amount you want or need to save to achieve your desired outcomes in life. Ultimately we are all working towards achieving a point in life where we can transition the need to work for money, to a point that we can rely on the wealth we’ve created to provide the income we need for lifestyle and this comes from our savings.
Therefore, once you’ve got your budget to the point that you are comfortable there is no leakage due to paying too much, you can then review your budget to determine what your saving target is. This will then help you determine how much you are prepared to spend on your ‘wants’ in the upcoming year.
Year to year it will vary what these wants might look like. It could be a new couch or bed. A holiday or a new car. Effective budgeting, where you really balance out all of what is important to you in life, means you should be making good measured decisions on what really matters to you, rather than being impulsive and just having to pay the price later.
It is not to say that you shouldn’t have what you want, quite the opposite actually. It is saying that if you have thought about it, you will be buying the things that really give you value and help you live your best life.
Yield Financial Planning Is Here To Help
If you’d like to speak to us about how we can help you fix your leaky taps, budget and save and set up a financial plan for success, feel free to tee up a complimentary initial conversation.