That is a pretty scary headline for a lot of people, particularly if your money controls you rather than you controlling your money. Last week I shared with you some simple, basic, but essential tips on how to prepare yourself to be able to borrow to invest in property. This week, I offer you a magical money management system that will put you on track to the wealth you want – its easy and you can start right now.
If you would like to learn about this simple system, then please read on. This is the single most important thing you can do in the pursuit of your financial goals. And the really cool thing about this system is that a whole lot of guilt free spending fun is built in to the program!
The idea is to break down your after tax income in to percentages and allocate those towards your spending and saving patterns. First step – work out your after tax monthly income. Let’s say its $50,000 per annum, or say $4,200 per month.
We need to break that down in to sections of your finances. We start with your Long Term Savings – this is your investment fund, never to be touched – ever – except to invest. Allocate 10% to that – so you are paying yourself first. Then you need to allow for your necessary expenses – these include rent/mortgage, food, fuel, insurances, rates & taxes – allow 50-60%. If you look at your current net income, and your necessary expenses are more than 60% of your after tax income – you have two choices – increase your income or cut your expenses, otherwise you have no chance to save to invest and your only choice will be to work to 70 years or more and exist on a pension pittance. So in this example, if you are paying more than $500 per week in rent or your mortgage, you need a cheaper house in which to live. Or a better paying job, or a second job.
Then you have Short term savings – you need to put money aside to replace a car or take a holiday. If you don’t do it regularly, your only choice to enjoy a new car or go overseas will be to borrow to do so at interest rates of 12 to 21%. That does not make much financial sense. Allow 5-10% here.
Most of us have credit card or cards – let’s dump these as they have interest rates over around 20%. Use them each month for convenience but pay them off each month. If you have existing debt, let’s kill it. Take 5-10% of your income and attack one card, paying everything you can from your 5-10% debt killer account, off that one card until you have paid it off. Then cut it up. Proceed to the next card paying off everything from that one debt killer account on the second card, until it too is paid out. Repeat until you are credit card debt free. Then you can apply that 5-10% to making larger long term savings in your investment account.
Everyone should put aside 5-10% of their income to invest in to education – it could be your children’s or it could be your own. Every year I do a new course and read new books, seeking to increase my knowledge, learn new skills and gain more confidence.
Lastly, it is beholden on each of us who are financially blessed compared to many others in the world to put aside 5-10% of our incomes to give to those who need it more than we do. Choose a charity or cause that fits with your beliefs. Giving also tells your mind that you have enough money to give some of it away to others less fortunate than you and that more is on the way. If you can’t afford 5-10%, start with 1 or 2% and build it up as you can. You will make a big difference in the world and to your own feelings about money.
Lastly, the fun bit. Ever walked past the shoe shop or that new restaurant you wanted to try, gazed longingly through the window and then clunked back to reality, remembering there was nothing in your bank account and your credit cards were maxed? What if you had money in a separate Fun Fund – that you just had to spend each month – on whatever you wanted? Like that idea? I bet you do. All you need to do is allocate 5-10% of your net income to your Fun Fund, in exactly the same way as you do your long term saving account. This is your fun reward for all of your fiscal discipline and a great reminder for your mind that you can be firm with your finances and have fun at the same time.
So to summarise:
- 10% – Long Term Savings for Investment
- 50-60% – Necessary Living
- 5-10% – Short Term Savings
- 5-10% – Debt Killer
- 5-10% – Giving
- 5-10% – Fun Fund
Work out the ratio that totals up to 100%, that best suits you and adjust it each twelve months as your financial situation improves.
The best way to run this management system is to have a separate online bank account for each of your money accounts. You do need to find a bank though that will offer you this without all those annoying and expensive account fees, which can be $10-$20 per month – per account! If you leave all your money in one account, without separating it, I guarantee you will not be successful managing your Money system – it is just too easy to take money out of savings or out of debt killer to pay for that ticket to the concert you just had to have when your Fun Fund ran low.
I guarantee you this will work – but you just need to start – and then be disciplined. Think about the lifestyle you want – taking charge of your finances is the first step on the journey.
Now you have money to invest. And you can have fun doing it!