In our experience, people hear the word ‘budget’ and immediately cringe. Not because they don’t think it’s important but because thinking about what you can’t spend can be exhausting, uninspiring, and for some, debilitating. We prefer the idea of a ‘Money Plan’.
A Money Plan is exactly what you would assume, it is a realistic plan for your money. It is a way to look at your financial situation and make the very most of it, focusing more on what you can do rather than what you cannot. The truth is, when it comes to achieving your financial goals (or any goals for that matter), it’s not always easy and it definitely doesn’t happen overnight. You’ve probably heard it said, “you don’t eat the fruit the same day you plant the seed,” and that couldn’t be more correct (and, we’ll admit at times, disappointing).
We can discuss the theory and importance of Money Plans until the cows come home and well, we have (click here for that), but what we really want is to get a little more practical. We believe these 7 steps are exactly how you can build and maintain your Money Plan.
1. Work out your reliable monthly income
This is exactly how it sounds. Sit down and work out what you reliably earn each month. Consider your wages, bonuses, interest, investment incomes, centrelink – whatever it is you KNOW you have coming into your account each month and when that happens.
The important thing to remember when Money Planning is to write it down somewhere for you to work from. Having those numbers and dates physically written out (be it in a notebook, on a calendar, whatever you choose) is paramount to making this a Money Plan rather than a Money Concept.
2. Write a list of monthly expenses
Once we know what we earn, put that page aside and forget about it for a moment.
Open a new document (or use a copy of our Money Plan Worksheet here) and write a list of your monthly expenses exactly as they are now. Once you have a list, determine which of these are non-negotiable expenses (things like transport, food, utilities, housing etc).
Pull out your original sheet detailing your reliable income and begin allocating funds. These non-negotiables are our first priority when putting our plan in place.
3. Allocate a portion of your income to a ‘pinch fund’
Let’s talk about ‘pinch’ funds. This is where you go when you find yourself in a financial pinch like your car breaking down, or an unexpected vet bill. By allocating a portion of your income for small, unexpected contingencies that arise, you are able to break your dependency on using money you don’t have. This is vital!
We usually suggest putting between $1,000-$2,000 away for this. For some, this is not an issue and for others, it is a lot of money. If you don’t have $1,000 lying around, that’s okay. Start with what you do have and work towards it – sell things, cut out unnecessary expenses, make this a priority – because the unexpected does happen and it’s usually not cheap.
Aim to keep your pinch fund separate from your other accounts – be it in cash at home or in a separate account where it’s not so tempting to dip into unless you really are in a pinch. Then, each time the unexpected does happen and you do spend some of your pinch fund, remember to top it back up.
The goal of your pinch fund is so that you never have to rely on credit cards, personal loans or Afterpay which are termites to lifetime wealth.
4. Work out the priorities when it comes to remaining expenses
Earlier we talked about your non-negotiable expenses and now it’s time to work out what to do with the remaining items on your list from Step 2. Here, we are talking about netflix, holiday funds, that nice pair of shoes we couldn’t justify saying is a non-negotiable expense – that sort of thing.
In this step, we recommend ordering these in terms of priority and allocating your remaining income accordingly until 100% of your income is accounted for (or you have provided for all your expenses).
If you discover there’s not enough income to cover your expenses (that does happen!) there are two options:
OPTION A: Increase your income – extra job, extra hours, extra pay, sell some things; or OPTION B: Decrease expenses – downsize, negotiate, declutter.
Tip: Think about it, strategise all you like but know that these really are the only two options.
5. Write a list of all of your debts and think about your reserves
If you do have funds remaining after paying all your expenses, these should be allocated to rapidly paying off all consumer debt. (Note: Consumer debt is things like your credit card, personal loan, Afterpay instalments – not your mortgage).
Write a list of all of your debts from smallest to biggest and begin paying them off in that order. Once consumer debt has been paid off, any remaining funds should be allocated to reserves.
Unlike a pinch fund that is designed for smaller contingencies, reserves are for some of those bigger unexpected turns life can take such as, unexpected illness that prevents you from working, or, I don’t know, a global pandemic!
Reserves are like self-insurance against life’s curve balls and are designed to give you protection against any bigger disasters which may arise. We recommend that, where possible, you aim to have 3-6 months of expenses set aside. Don’t freak out! Nobody has this ready overnight and it can be a slow process to build towards this level of reserve but it does offer a sense of security in challenging circumstances.
6. Develop a system to track your expenses and monitor your plan
Once you have a money plan, you need to maintain it.
The best thing you can do is to develop a system to track your expenses and monitor how you are going. Make it simple and manageable for yourself – it doesn’t need to be fancy or stressful, just something that works for you.
You might be recording every dollar you earn or spend in an accounting program, creating different bank accounts for different expenses, or putting cash in different envelopes or jars for specific things.
The important point is that it needs to work for your life and your personality (and your partner’s too if you have one) because you’re going to need to stick with it.
7. Review it often and change as necessary
We like to break down Step 7 into 5 quick tips:
Remember, you don’t need to do this alone – in fact, we don’t think you should. The most successful Money Planners have an accountability partner, helping them to stay motivated and on track. This is someone you’re being honest with, sharing in the journey with, and working alongside to help one another achieve your lifetime wealth goals.
And if we can ever help or you have questions about setting up your Money Plan, do not hesitate to get in touch via email hello@legacyroad.com.au
Happy Money Planning!
