Alright, so finances and growing savings and investments is continually on the goals list for each year. Now that it's a new year it's time to review and set up this year's tracker.
Again, I'm no finance expert and just someone who wants to do right for my own personal finances. I'm always trying to find better ways to manage my funds so that I'm not living pay check to pay check and can handle any unexpected expenses as well as plan for the future. And maybe, just maybe I can reach that idea of financial independence. For now, here are some techniques that I've learnt along the way and use to manage my finances, that you could find helpful.
Account set up like Barefoot
Everyone would generally have a bank account for everyday transactions where your income goes in, which is then linked to a debit card for the money to go out. You may also have an internet high interest savings, if you’re trying to save up for something like a holiday or a house deposit. But, have you thought about setting up different saving goals or having a pot of money for when life happens and you have an emergency that you haven’t accounted for?
We all need money to get by but what do you do once you get your pay check each month? How should you structure your finances and manage your cashflow to ensure you’re looking after daily expenses and have enough funds to cover any shortfalls that should arise, as well as setting yourself up for success for the future?
Browsing through reddits’s ausfinance subreddit lead me to discovering ‘The Barefoot Investor’. He has written a very in depth, practical book on how to manage your finances right from getting out of debt, to what to do about insurance and superannuation, how to plan for the short term and long term and strategies on how to retire comfortably. What's great is that it's written for the Australian market and gets updated every year to keep it up to date in line with Australian tax laws.
The major take away I got from the book is how he splits income into buckets of money:
Source: Barefootinvestor.com
Blow - Expenses and general spending money
Mojo - Emergency fund/Safety net
Grow - Long term wealth and total security
He then later breaks down the blow bucket into 4 different accounts:
Daily Expenses - to cover bills and living expenses like groceries, transport cost etc.
Splurge - an account for discretionary spending - the fun money
A 'Smile' account - this would be your high interest savings account for bigger items to save up for like a holiday, new shoes, car, house deposit etc.
Fire Extinguisher - for fighting financial fires, unforeseen costs like car repairs or medical bills that you haven't accounted for but can screw you over if you're not prepared for it.
By setting up these different accounts, you are forced to separate your money and the nicknames remind you of their different purposes of what you’re allowed to use the funds for.
What's also important is that when you get paid, make sure you set up the routine of allocating your money between these accounts. Barefoot recommends the following splits:
Daily Expenses - 60%
Splurge - 10%
Smile - 10%
Fire Extinguisher - 20%
So long as you transfer the funds as soon as you get paid, you won't be as tempted to spend it since it's not in your transactional account.
We usually try to have $1,000 in our Fire Extinguisher account and if we use it, I'll continue to top it back up with a portion of each pay so that we have that we have contingency money if something unexpected comes up. Once it reaches $1,000 I use it for debt reduction (extra mortgage repayments or into the mojo account which doubles as our mortgage offset) or put it towards other investments like stocks or super contributions.
For more information I would recommend reading his book.
50/30/20 rule
If Barefoot's system seems overly complicated, another guide to managing your funds is the 50/30/20 rule. Similar to Barefoot, it’s just another way of allocating your money without necessarily having multiple accounts where:
50% of your money is for your needs like housing, groceries, bills etc
30% of your money is for your wants like shopping, eating out and entertainment
20% of your money is for debt reduction, savings for your emergency fund, retirement or investing
So even if you don't have distinctive pots of money in different accounts to pull from, this gives a rule of thumb on how you can look at budgeting your funds. This still comes back to making sure that you track your spending so you know if you're getting close to your allocation.
3 month emergency fund
“It’s believed that you should have enough money in your emergency fund to cover 3 to 9 months of your living expenses.”
Whilst, if we’re using Barefoot’s set up as an example, the fire extinguisher account will cover short term financial incidents that may be once off, the mojo account or your larger emergency fund will be your safety net when times get real tough, such as if you lose your job, go on maternity leave or have major medical conditions that may take you out of work over a period of time.
How much you should have put away is really up to you and what your expenses are. Calculate how much you daily living expenses are for a month (excluding your discretionary spending) and times by how many months you want to cover. And this is where tracking your spending initially helps! Obviously the more the better so you can start of small and slowly increase it.
Pocketbook
Where are you spending your money?
From writing it down on pen & paper when I was younger, to manually inputting transactions in a money app, tracking my income and expenses has become a whole lot easier since I discovered the Pocketbook app. What's great about it is that it's made for the Australian market and has integrations with all the major Australian banks so that it is able to automatically track your transactions and takes out the work of having to remember where you spent your money and manually documenting it.
“Once it syncs with your accounts and identifies a transaction, you can categorise it and will help you see the trends on where you are spending your money. ”
Source: getpocketbook.com
You can set the app to remember and automatically categorise transactions if it is a regular transaction.
Pro tip: Create a habit of setting some time to review your expenses regularly and categorise your transactions. Checking it often means it takes a very short time to keep it up to date and is a lot less tedious than going through huge bulks at a time. The accuracy of the reports is only as good as what you put into it.
The app has other features including:
Set budgets based on categories, e.g. you can set an amount that you can ‘safely spend’ and it will show you a bar graph of how close you are getting to that amount against how long you have until the new month or budget cycle. Within the Safely Spend amount you can specify how much you want to budget for specific categories. E.g I only want to spend $300 on eating out each month (and then it tells me I’m always overspending in that category :P)
See upcoming bills if you set a transaction as a regular expense, e.g. loan repayments, rent, bills etc so you can know when money is going to be deducted from your account
What I found most useful about the app is that if you’re like me and have a few different accounts with different banks, adding them all to the app means it can give you an overview of all your accounts regardless of which bank it’s in. That way you’re not reviewing them in silos.
Note: I started writing this article up before I switched credits cards to one not with a major bank and not supported by the app. With the plan of using that for most of our expenses to gain better frequent flyer points, I'm back to manually adding in my transactions (which sucks!). We'll see if I can keep it up or if I live to regret the switch. With that being said, you can see the list of banks it does support here.
Spreadsheets
You're not a true PM if you don't put everything in spreadsheets. In terms of personal finances, I have two:
Net worth tracker
Monthly expenses tracker
Net Worth tracker
The Net Worth tracker is something I fill out on the 1st of every month to see how much money I own across all my different assets, versus how much money I owe in terms of loans etc. Basically assets vs liabilities. These can include things like:
Liabilities
Home loans
Credit card loans
Car loans
Personal loans
HELP Debt
Assets
Cash bank accounts
Stock investments
Property investments
Superannuation accounts
Cryptocurrency
I track the balance of all my accounts every month so I can see how I'm doing and how my investments are performing over the course of the year. Is my net worth growing or am I losing money and overspending?
“Total assets - Total liabilities = Net worth”
I only started doing this religiously at the beginning of each month last year and found plotting it on a graph and seeing how our finances flowed visually month to month was really interesting to see. It told us what months were big money losses (which often involved paying for holidays or becoming unemployed), and which were months of growth (finishing up a job and getting a nice payout or good saving months). You can see how the things happening in your life directly affects the numbers in your bank account.
Last year was a bit of a rollercoaster with finances with 2 overseas trips and job changes, but we got back in the end. Last year I also hadn’t included property and super but it’s an improvement I’m making this year.
Monthly Expenses tracker
The monthly expenses tracker is exactly that, tracking where we spend our money as well as how much income we have earned. Though yes Pocketbook claims you can skip the spreadsheets, the reports don't always show me everything I want to see. In this case I generally take the expense data from Pocketbook to fill out my spreadsheet, then create my own formulas for the information I want to see. My spreadsheet is split into 4 tabs:
Income: List down income sources as well as a guide on how much I should be allocating into each account based on income.
Daily Expenses: Expenses for the month based on needs, such as loan repayments, utilities and insurance bills, groceries and transport costs
Splurge: Expenses based on wants, like shopping, entertainment, holidays and all other miscellaneous spending.
Savings: I get the total income - total expenses to see how much I've saved. I also calculate my saving rate so I can see the percentage of income I manage to save month to month.
“All this tracking may seem very tedious but by doing this gives me the personal satisfaction that I understand exactly what my financial situation is. ”
This is not to say that you have to become a zealous nut and penny pinch every single dollar to ensure your balance line goes up, but,
“having a complete understanding of your finances can help you make conscious decisions on what you do with your money.”
Are you spending too much on food? Maybe you need to cut back next month so you have enough to pay the bills. Had a good savings month? Maybe you can afford to buy that new pair of shoes or better yet, you've got spare money to invest and make it work for you.
I know this was a lot to get through, but it’s become something I’ve become really passionate and focused on as I’ve become an independent adult. Many of these strategies I wished I had learnt earlier in life so I share them with you and maybe it could help you get some ideas on how to manage your finances if you have no clue on where to start and want to be a little bit more smarter with your money. Please do let me know if you find this article useful and if you like to see more of this type of content.
