Personal Financial Management

Number one in the Big Three

We all have a budget, some are just more structured than others.  I prefer to call it personal financial management.

If you can manage your personal finances well, you are more likely to achieve your financial and lifestyle goals. Think about the last time you got a pay rise, or the income you were on when you first started working. Are you much better off now than before, even though you are earning more?

Perhaps you are, but often people tell me that life seemed  easier and simpler at a time when they had less money. Now, there’s nothing wrong with earning more, but it is not necessarily the key to building your wealth or having a better lifestyle.

Do you know someone who earns less or the same as you but seems to be doing so much better financially? Or maybe the opposite, perhaps you know someone who earns a lot, but never seems to have any money.

We have become conditioned to thinking that more money will makes us better off.  More often than not, more money simply leads to spending more – a more expensive, but not necessarily a better lifestyle. It can also lead to more worries.

In addition, we don’t  have the ability to suddenly earn more money, certainly not without changing jobs or taking some risks. However, what we all have absolute control over, is the amount that we spend.  Take control of what you spend, control what is going out and you might just find a lot more money right there under your nose.

If you know where your money is going you are in a very powerful position.  You suddenly have the power to know how and when you can invest, with confidence.  You can make your big purchases, plan for holidays and even just the day to day with total faith that you know where you are headed and there are no surprises around the corner.

You can also navigate your way through some tricky financial times, saving for a house, starting a family or a career change if you just know what you need, when and where you need it.

So, how do you do it?

There are plenty of useful tips and helpful information on budgeting out there on the internet.  There are also a large number of organizations and programs that can help you know where your money is going.  You can literally pay thousands of dollars just to find out where your money is going.

Whilst these programs can be very effective, in the end all they are doing is helping track where your money is going and perhaps assisting with a bit of goal setting.

You can save a lot of money by just getting back to basics. This is one area where you don’t need to start with the end in mind. Don’t set a savings goal, yet.  The goal, initially, is to know where your money is going.

Follow these basic steps to get started:

  • Buy a pen and a notebook, keep the notebook somewhere handy at home – or use this sheet
  • Rule up three columns in the notebook – date, description and cost
  • At the end of each day, write everything down. Every dollar spent, regardless of how small, with a basic description, just enough for you to be able to categorize it later.
  • Do this for a month
  • At the end of the month go back through and categorize where your money went. It should fall into a number of categories but two main categories, discretionary and non discretionary.
  • Discretionary are the things you can reduce, if you wanted or had too.  For example entertainment, day to day living and eating out etc.  Non discretionary are essential things like  mortgage, utilities, loan payments and school fees etc. You may find this sheet useful, it is also a helpful annual budgeting sheet.

Okay, now sit down, with a cup of tea (or a stiff drink) and review your work for the month. Let me warn you, this is can be a catalyst for a disagreement with other people in your household.

At this point two things usually happen:

  • You will see where your money goes and be happy with it. That in itself is a great relief and a weight off your shoulders.  Or
  • You will see several areas where you can either save or reallocate money.

Now what?

Repeat the recording process for another month.  You will have an idea of where you can save and you may start making some small decisions about the use of your money, and the effect of your choices.

At the end of the second month you will be in a position where you know where your money goes on a day to day basis. It is important to realise that there are probably some big annual bills that have not come in the last two months such as insurances, rates, car repairs and registration.

You will definitely start to see areas where you can save, if you want to. In addition, you may see areas where you can reallocate your money.

For example, when I first did this I found I was spending hundreds per month on takeaway food.  I managed to reduce and save part of that but also reallocate more money towards going out for dinner.  Now, going out for dinner more often wasn’t a saving but I felt I was getting more value for my money doing that.

The next step is to do it again for another month.  This time try setting a few small goals and targets for what you expect to spend in a month on certain things, and try to achieve those targets.

Also, during the third month start to think about the big bills you have, the quarterly, bi-annual and annual ones. These will also be important for the next step.

By the end of three months you should have a really good handle on exactly where your money is going, because you have real numbers, not just guesses you made whilst preparing a budget. Importantly, you will have an idea of what you can afford to save, invest, reduce debt or allocate towards other financial goals.

To see what you can achieve next, it might be time to have a chat with us.