As I’ve said before, managing money and building wealth isn’t rocket science; it’s pocket science. If you don’t spend the time and energy to look after your money, your finances can run a little ‘wild’. What you need to stay on course is a solid money plan.
The best systems out there are the ones that are designed to be simple to put together, straightforward to use, and easy to monitor. You want to make sure that your money plan is effective yet simple to give yourself the best chance of sticking to it!
1. Give every dollar a purpose
Logic says that if someone has $4,000 coming in each month and $3,000 going out then they must have $1,000 left sitting in their account. Yet, as most of us know, that’s usually not the case. The truth is that if you don’t give your money a purpose then it will find one of its own. If you don’t tell your $1,000 that’s its purpose is saving then it will drift away and become shoes, beer, a great deal at the mall or something else you didn’t plan for and probably don’t need!
When you create your money plan, every dollar must have a purpose. Start by deciding how much you need for expenses related to food, housing and transportation. Then add in everything else: cable, internet, haircuts, eating out etc. Calculate how much you should have left over and give every one of those dollars the purpose of “savings”.
Ideally, you want to be saving 10-20% of your take home pay. Some of this will be for long-term savings goals like retirement; others will be for short term goals like vacations, Christmas or property taxes; and some will be set aside for emergencies. For some people this is do-able right away. For others, it takes time to get there. However, at the end of the day, what’s most important is that you’re saving something. Even $25/month will get you into the savings habit, and once you’ve developed that habit, it will grow. What’s important is to get started.
As a starting point, a good strategy to help you spend more consciously is to set up a savings account that’s attached to your chequing account but not to your debit card. This makes it easy to move money between accounts but not so easy to spend on impulse.
Your goal for the savings account is to spend as little of your savings as possible so that it grows a bit every single payday. Realistically, there will always be expenses you haven’t accounted for, When expenses come up that you hadn’t planned for, you can transfer the money from your savings back to your chequing account to pay for them.
Some people might argue that if the money you put into your savings account is likely to get spent then you should just leave it in your chequing account. This is logical. However, the way we handle money tends to be more emotional than logical. By moving the money into a separate account and keeping the chequing balance low, it forces us to think about our spending and to make a conscious decision to spend by transferring the money between accounts. Often, the fact that you’re taking money out of the savings account to spend is enough to make you think twice about whether or not the purchase is necessary.
3. Pay yourself first
This is the keystone of financial success. Paying yourself first means that you set aside all the money you intended for savings before you paid anything else.
This means that you’re minimizing the risk that your savings dollars will drift away before you have chance to tuck them away. It’s a strategy that our government has down to a fine art… that’s why they take their tax money before we take our money home, rather than waiting until the end of the year and running the risk that we’ve spent it on something else!
Use these tips:
- Set up pre-authorized payments from your bank account to go directly into a savings account every payday.
- Take a certain amount of cash and stash it in an envelope somewhere safe.
- Take advantage of a group RRSP or TFSA plan at work and having a certain amount taken directly off every paycheque.
However you set up your savings, the most important thing is that it’s as automated as possible and it happens at the same time you get paid and not days later.
4. Track your spending
This is a cornerstone of financial health and one of the key habits of wealthy people. However, many people have no idea what they’re actually spending their money on.
When I sit down with people to create a money plan, one of the first things I do is ask them to make a list of all the things they spend money on each month. Often, they ‘guesstimate’ the amounts they spend. When I ask them to check the numbers against last month’s statements, they’re surprised to discover they’re spending far more than they thought, especially on gas and groceries.
Tracking your spending gives you a clear idea of how much money is flowing in and out, and where it is going. It also helps you spend less on “stuff” you don’t need, reduces impulse spending and helps you save more.
It used to be a time consuming process but, with all the recent advances in technology and the fact that we make most of our purchases with a card rather than with cash, it’s incredibly easy to track our spending.
Some people track their spending using an online tool like mint.com or an app that can pull information from their accounts. Some prefer to create a spreadsheet while others like to put everything down on paper. It doesn’t matter which method you use as long as it’s simple enough that you will use it consistently.
5. Create a money management system
I don’t like the word “budget”. It summons up feelings of restriction and boredom, which isn’t helpful when I’m trying to motivate myself to create one! Instead I prefer “money management system”. It works exactly the same but the name summons up feelings of control, organization and simplicity, which is motivating.
The system I use is a template I created for myself using Excel. Check out moneyproblems.ca free excel budgeting template.
These five steps to creating a money plan are intended to be a simple and practical guide to taking control of your money so you can achieve your financial goals. Managing money isn’t rocket science. It comes down to understanding how much you have coming in and going out, giving every dollar a purpose, and setting aside as much as you can for savings. If you automate your systems and pay yourself first, you should be able to get yourself on track for whatever financial goals you’ve set yourself.