Want to know THE most important thing you can do to be financially successful?
Spend- less-than-you-earn.
Most of the time, many of us spend without thinking, then wonder where it’s all gone. So, I want to share with you my successful formula for budgeting, spending and saving.
Download the past six months of your transaction history from your online bank statements. Most banks have the function to save the data into a spreadsheet. Once you have this data, filter each entry and group each item into a category: groceries, home, vehicle, kids/ pets, utilities, insurance, entertainment, debts etc.
Then examine how much you spend in each category, express it as a percentage ie. 35% on groceries. Having this information will help you make better decisions about your future spending.
Ask yourself ‘If I keep spending money in this category, where am I not going to be able to spend money, and can I live with the long-term consequences of continuing this for the next 2, 5-10 years?’
Download an online ‘Values List’ and circle all the ones that resonate with you, then go back and reduce your list to just 5 values. Take your time, it’s worth getting right.
For example, mine are – connection, health, financial stability, achievement and variety.
Now you know the things that are most important to you. Give yourself permission to spend some of your money on these areas. This is where you’ll get the most enjoyment spending money.
Where are you spending money that doesn’t bring you joy? for me its phone, electricity, internet, insurance and bank fees. Whatever they are for you, these are the areas to focus on.
Go and negotiate better rates from these providers and free up some extra cash (that won’t affect your lifestyle).
You may find from Step 1, you spend money on takeaway, but it isn’t something you value. This is where you cut or reduce spending and allocate it to savings or something aligned with your values.
Ask yourself:
Can I get this cheaper elsewhere, or borrow it?
Do I need to buy it now, can I wait 6 months?
Why am I buying this? What will it give me?
Is there somewhere else I can direct this money, that will make me happier in the long-term?
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Here’s how I recommend setting up your money – I follow this myself. It’s based on Elizabeth Warren’s ‘50/20/30’ model.
Simplify your spending into three categories:
50% Needs - are the necessary costs for you to live. Think mortgage/rent, groceries, insurance and utilities. They don’t include Netflix or eating out.
20% Investments - this is the most important category. Savings, financial goals and your retirement. This is where you can also allocate additional mortgage repayments as it results in increasing your financial position.
30% Wants –the non-essential items. TV subscriptions, Spotify, handbags, eating out, gym membership. It also includes spending on luxury essential items, so say for instance you rent a home which is more than basic, the difference between a minimum rent and the higher rent you pay, should be allocated to your ‘Want’ bucket.
Set up three bank accounts and direct your regular income 3 ways using 50%, 20% and 30% of your net income. Only spend money on each category with the money you have left in each account.
You may want to take this a step further and create a couple of extra bank accounts to further narrow down any of your large expenditures or savings goals so these funds are further segregated ie. holiday account; storage account (for those lumpy annual ‘needs’ payments like car registration, new tyres or services) or an entertainment splurge account.
Once you get started, for the first few month’s you want to check-into make sure it is working for you. You might need to review some areas where you are spending ie if 20% to Investments is too much for you at the moment, you might need to reduce it to 10%-15% and top up your Needs account.
The goal of a spending plan/budget isn’t to limit you, but to expand your awareness of the daily money patterns that have been pulling you further away from your financial goals.
When you examine your spending you become conscious about where it is going and most importantly you can now actively decide where it goes in the future.
By allocating a regular monthly allowance or % to your investments or financial goals, you'll start to see progress in the right direction. It also gives you permission to allocate money to your 'wants' or 'guilt-free' spending, then you get enjoy your money, without feeling like you're not also taking care of your financial future.
Warmest,
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