Key to good financial management…
In my first blog post I mentioned that the first edition of the Barefoot Investor was key influence providing me ability to establish a foundation for good financial management. While I took away many things from that book all those years ago, the key thing that stuck with me was budgeting and basically breaking down your key expenses into manageable weekly amounts. In the most recent edition of the book Scott has simplified it a little bit and has focused on ‘three buckets’ (discussed at his blog) whereby your income is divided into three buckets, a blow bucket (daily expenses), a mojo bucket (safety money) and a grow bucket (savings). For those starting out I would definitely recommend this approach.
I, like Scott, believe budgeting (which can be undertaken at varying degrees) is essential to good financial management. For me, without budgeting you are unable to determine your cash flow, its pain-points and opportunities.
How often do i do budgeting…
To be honest, not often, I might refer back to the family budget once a quarter, but in truth its really an ad-hoc thing based on changes to our personal circumstances, examples have included:
- when we moved in together
- when we received pay rises
- when were planning for a baby/holiday/a wedding etc
- after we had a baby/babies
- after our eldest started pre-school (dropping days from child care) and we suddenly had extra cash (…child care is ridiculously expensive)
When my now wife and I first moved in together, I decided to setup a budget which combined our income and our expenses. To do so I setup a simple Excel spreadsheet which identified the weekly amounts for:
- Mobile phones
- Spending/splurge money
- Car/s (yearly rego, insurance, rego, tyres)
Its important to be conservative (i.e. overs) rather than optimistic when identifying these values. But by doing so you can then work out how much weekly income you have left over after all the essential costs are covered. We then proceeded to identify future holidays or big purchases (such as a new car) and after setting generous enough weekly splurge amounts, the rest was put into savings accounts (e.g. $50 a week to holiday fund, $100 to car fund). We continued to review and update the budget as our personal circumstances changed.
Note: Having a budget setup will be key to make the most out of the savings and money making techniques I will discuss in future blog posts.
People approach budgets differently…
As I noted above people approach budgets in different ways. For many, breaking down the weekly income for the number of different expenditure items as I do, would be considered excessive, and the three bucket approach may be more than sufficient. Its really just a personal choice.
Personally, I have about 9 UBank savings accounts setup covering holidays to kids extracurricular (tennis, soccer, etc). These accounts are setup to withdraw from my bank account every pay day. Again I am not suggesting this approach for everyone but this reflects the approach I am comfortable with.
Note: Interest rates are fairly low across the board, but if you would like to compare the Canstar site compares over 450 savings accounts.
Sometimes when your personal circumstances change you will experience pain-points or opportunities. While we generally try to avoid or plan for pain-points sometimes this is not possible. For example, there may be a legislative change that impacts on the benefits or subsidies you may receive (such as changes to the paid maternity leave programme, which is currently under consideration by the Government).
The reality with money is, if we receive more, we have no trouble finding ways to spend it. But the same can’t be said for when we receive less (pain-point) or our expenses inevitably rise, such as when you have an extra mouth to feed (pain-point). It is at this time that it is critical to review your budget and identify where you can make changes so that you can continue to live within your means and not resort to credit/high-interest debt.
Note: If you currently have high-interest debt, its important to structure your budget in a way that you can put as much money towards this debt. If you have multiple loans, and are unable to consolidate these loans, you must target the highest interest rate loans first.
Ultimately when undertaking this process you must identify what purchases make you the happiest. For me, I love food and like to eat out or get take away lunches a few times a week so I budget for that. I ensure my weekly splurge money is at a level that can manage this. Having said this, I don’t have foxtel, I used to, but I don’t anymore. Truthfully I only had it for the sports, but as a Telstra mobile customer I get the NRL Live subscription for free. While this is of course not high definition, it is sufficient to my needs, and again a choice I have actively made.
The reality is no matter how much you are earning unless you are mega-rich, you have a weekly/fortnightly flow of money and after the essentials are covered, you have to decide where the rest goes. Again, and this is something I will stress to my kids as they get older, you have to identify what purchases make you the happiest and budget accordingly.
As I mentioned earlier, as our incomes increase we never seem to struggle to identify ways to spend that money. But when you do have changes to your personal circumstances that does present an opportunity (pay rise, reduced/no child care fees etc) it is important to update the budget and again identify what purchases make you the happiest. This will ensure you continue to spend/save your money on things that really matter. This could be setting an investment fund for your kids (I will discuss this in a future blog) or increasing savings to a holiday fund or whatever.
If you are to take anything away from this blog post, please let it be this….
Setting up a budget is the only way to ensure you can live within your means and not resort to high-interest debt, put your money towards things that make you the happiest, and effectively manage the inevitable pain-points and opportunities that life provides.