Maintaining a lifestyle is important. Scrimping and saving isn’t something that most people can do over the long term.. just like a diet. If you eat lettuce for a week to lose a few kilos, then there is a fair chance that at the end of the week at the first sight of ___________ (insert food weakness here) you will gorge and undo a week’s worth of hard work.
Budgeting is the same. Going without for too long will mean the likely hood of blowing any savings at the next stock take sale is well and truly on the cards. [inlinetweet prefix=”#budgeting” tweeter=”@TheAssetLab” suffix=”#financialfreedom”]Budgeting is such a dirty filthy naughty word.[/inlinetweet] I prefer to have a ‘Spending Plan’ so let’s agree not use the B-word from now on.
The fact of the matter is that just like sticking to a healthy eating plan, sticking to your spending plan is hard work and it is something that I find difficult to do because that is a part of my ‘money-personality’. What I have found though, is that with the right tools it can be easier to keep your financial goals on track without feeling like you’re missing out or living like a church mouse.
The worst thing that has happened to my personal bottom-line is the rapid advancement of e-commerce. I’m impatient and love it when some new shiny thing arrives in the post. It is just soooo easy to have what I want delivered the very next day without having to actually see the money leave my possession. The resulting financial phenomenon is called ‘holy-shit-where-did-my-money-go-itis’. As a financial adviser, I thought that it might be a good idea if I delved into my expertise to find a solution.
The philosophy of my firm is that we help people enjoy the more memorable moments in their lives, and we speak to our clients about their idea of ‘Financial Freedom’ which is a concept that gives priority to the things that are important in life, and that money is simply an enabler of our lifestyle. That’s where the ‘Spending Plan’ comes to life. One of the underlying principles of the advice that we give in my firm is that it is the small decisions that people make every day that have the greatest impact on their financial freedom, rather than the big long term investment decisions. So that means that getting a Spending Plan together is one of the most important things that we can help our clients with, and has an almost immediate positive impact on how in control people feel.
Here are some of the tools that we use with our clients to help put their ‘Spending Plan’ in place:
The Guessing Game
Some new clients joined our firm recently and they were in that all too familiar predicament of getting to the end of the month with nothing left in their bank account to show for it. These guys were typical of the clients that we can easily help, they had a young family, a new house that they were trying to pay off and trying to juggle work and family requirements. Going from two good incomes to one good income and a couple of extra mouths to feed is not easy.
The constant bills and empty bank account along with the pressures of becoming a parent (no sleep, no social life, no sex) culminated in a whole lot of arguing about money, when what they really wanted to do was to enjoy quality time with each other and their children. There was a lot of he-spent-she-spent arguments that weren’t based on any facts other than the fact that no money was in the account, so we played the ‘Guessing Game’ which is now one of the first activities that I ask people in our MoneyMentor Bootcamp Program to undertake.
I gave them a short list of common household expenses and asked them to individual guess how much they think they spent on each, without referring to any bank statements… just the first number that popped into their minds. There will be differences and these are the best place to start the conversation about where money is going. The fact is that over 70% of working Australians live paycheck to paycheck and I think it is because they don’t know where their money is going so they can’t fix the problem.
With my new clients however, it became apparent that the grocery bill was going to be the first place for us to start work. Aside from the difference in what they each thought they were spending, neither of them were anywhere near what they were actually spending. They guessed $150 per week and $300 per week but when we started using our cash-flow software, the number was more like $500 per week. There was a few other areas that needed attention, but this was the low-hanging fruit. By sorting this out with them, they were able to find a saving of about $100 per week by focusing on being efficient in their grocery spend.
The 50-20-30 Rule
My financial kryptonite is clothes… (and photography equipment) So… how do I work out how much I can spend on clothes? We actually get asked this question quite a lot. To make sure that your spending plan is sustainable, you need to cater to your lifestyle. If you’re a foodie, then a plan than means it’s 2-Minute Noodles all week is not going to work. You have to enjoy life…otherwise what is the point of having money?
We can control our income, but that is a discussion for another day. Today we are talking about our expenses. We categorise our expenses into three groups: Living, Later and Lifestyle. (Watch my YouTube video on this subject https://www.youtube.com/watch?v=YnmCe7JfXGE)
Living is all of the things that are necessary for life… rent/mortgage, fuel, electricity etc. About 50% of your income should go here. Later, is your savings. For me, that includes capital repayments on a mortgage, savings, extra superannuation contributions. Most people run with mortgage payments. Allocate about 20% to the Later things.
That leaves you with 30% for your Lifestyle… the discretionary spending on clothes, eating out holidays, whatever it is that makes your life enjoyable.
If you stick to these ratios, you’ll be ok. But don’t be worried if you’re outside of them, just use it as an indication of where your money is going. For example, I have clients who’s Living costs are at about 70% of their income…. That’s because they made a decision to live in a suburb that was perhaps a bit beyond their means… for now. For these guys, that’s a part of their lifestyle decision so they know that when they can’t go on a long holiday, or drive the same sort of car that their friends do, it’s because of their decision to live in a place they love. They know where their money is going and it was an active decision.
Similarly, I have clients who spend 40% of their income on their lifestyle and they know that it means it will be longer before they have a deposit for their first home. The key here is that they know where their money is going, and have made an active decision with the consequences in mind.
Ahhhhh FinTech… the unholy alliance between your money and your computer…. well most budgeting tools can be found on your phone actually. There are so many great pieces of software that can make it so easy to bring this all together (I think ours is the best but I’m a bit biased). Most applications will feed directly from your bank, and auto-allocate your transactions so that you can get a live update of your progress towards your financial goals, but more importantly, how you are tracking for the month against your spending plan. This is where you begin to know where your money is going, so you can make deliberate and conscious decisions with your money.
So What Now?
Our team have some very strong beliefs when It comes to managing your cash flow:
- Know where your money is going
- Make conscious decisions about how you spend it,
- and finally, use tech to help you.
I am certain that If you start a spending plan then track and reconcile your expenses, that you will make faster progress towards your goals. If you’re interested in a one-month free trial of our AssetLab Wealth Portal software, just ask by e-mail and I can set you up.