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A Simple Money Management System

The definition of financial wellbeing is a feeling of certainty and empowerment around your money, both now and for the future. Setting up an effective yet simple money management system is certainly one way of helping to achieve that and gaining valuable peace of mind at the same time.

Can you image a beautifully organised walk-in wardrobe? With a place for all your clothes, shoes, bags and more. For me something like the Great Gatsby, comes to mind, with all his shirts and suits perfectly tidy and organised.

Now imagine the opposite, all your belongings just thrown into a pile or dumped into an inflatable paddling pool. Every morning you rummage through trying to find a matching sock, or a top which is not too obviously un-ironed. If this feels a little extreme just picture a typical teenager’s room to get the idea.

Its safe to assume that most of us would prefer door number 1, the organised, systematic and tidy system for the ease, comfort and certainty it brings.

After this detour into home makeovers, you may be asking what has this got to do with personal finance? Allow me to explain…

A Simple Money Management System - image of a tidy dressing room / wardrobe

In many cases our bank accounts and financial lives are more like the paddling pool than the tidy, well-ordered system.

Money comes in and flows out but we are not entirely sure how much or to where. There are direct debits and standing orders, credit cards, PayPal, Apple Pay and who knows what else. All in the big paddling pool and we hope that the important bills are paid and there’s a little money left at the end of the month.

Surely there is a better, less stressful way?

The first step is to know your numbers. This was explained in a previous post, so if you haven’t read that one yet you might like to catch up when you can.

But assuming you have a pretty good understanding of how much you earn and how much you spend, here is a 3 step plan for an effective yet simple money management system.

  1. Additional Bank Accounts

Opening an additional bank account can be easily achieved by either contacting your existing provider or perhaps opening a new one with one of the online banks such as Revolut or Starling. (If you are listening outside the UK – firstly hello and secondly there will be equivalent banks local to you). I suggest having 2 current accounts plus a savings account.

2. Pay Yourself First

Rather than waiting until the end of the month and hoping there is a little money left to move to savings, after all the bills and everyone else has been paid, make yourself a priority.

I am going to suggest you set up an automated transfer for two amounts. The first is for savings, the second for Walking Around Money. Let’s concentrate on savings first. Take a proportion of your income and move it to a new or existing savings account.

How much, well that depends on your circumstances. In some ways the habit is more important than the actual amount. Because you are showing yourself and the universe that you are now taking control of your finances and honouring your financial future by paying yourself first.

As a rule of thumb aim for 10% of your monthly income, more if you can but less is ok if that is what your current circumstances will allow.

The second transfer is for your Walking Around Money, or WAM. This is discretionary income which is not already allocated for bills, food or credit card repayments for example.

Again, knowing your numbers is crucial here because by understanding how much you need to cover your monthly costs, you will also know how much you have left to spend as you please.

You can transfer your WAM either monthly or weekly to your newly minted second bank account. Then only use this account for your day to day spending, secure in the knowledge that it will be topped up again at the end of the week.

3. Using Your Primary Bank Account

Your original bank account is used to receive your monthly salary and from it you pay all your bills and regular expenses. You feel secure knowing that all your expenses are covered and automated. Then you can leave that account to happily run along in the background, with just the occasional check to make sure you have included everything and there is always a small positive balance.

Meanwhile you have a growing savings account thanks to your regular contributions and a weekly allowance which you are free to spend as you like.

So there you are an effective yet simple money management system that you can have up and running in less than an hour but will save you time, effort and worry for years to come.

If you liked this post you will enjoy listening to the fearless finance podcast. I look forward to having you join the growing tribe improving their financial wellness together.

The 7 Pillars of Financial Wellbeing – Awareness

Awareness – Understanding where you are now, where you want to be and creating a plan to get there

If you were asked how much money is in your bank account right now, how accurate could you be? Within £100? Within £10?

If that was challenging, you are not alone. When I ask that question to a group, the majority has no idea.

Yet most of us know how much we earn and will soon notice if an expected sum on payday is different by even a small amount.

So what’s going on? It would follow that the gap in our understanding is in how much we spend.

if you would prefer to listen to this post it is available on The Fearless Finance podcast

The 7 Pillars of Financial Wellbeing - know your numbers. The importance of awareness - looking in a mirror image

I remember travelling one time and allocated myself a budget in the local currency in cash. Everything I spent, physically came from my wallet and I could easily see at a glance how much was left. Setting aside money for a coffee at the airport and a taxi to get there, I was pretty confident and certain how much I could spend throughout the week.

And it feels good to be certain.

Contrast that with how most people manage their money day to day. It arrives electronically and leaves electronically and if we only glance at a balance once or twice a month, we really have no idea how much is available.

Rather than certainty, we are in the realms of assumption and denial.

Know Your Numbers

A great starting point in financial planning and regaining control of your money is to know your numbers.

Make a list of your regular outgoings, housing costs, food, transport, subscriptions etc. Next add on other spending, which is less predictable such as nights out, or clothes maybe.

If you total the list, you now have a pretty good indication of how much you spend each month and where it goes.

If you enjoy being even more granular you can use tracking apps or a spreadsheet to dig deeper or automate the process.

To some this may seem like a bit of a pain, but the process can be liberating in several ways.

If you were thinking about changing jobs or starting a business, now you know how much you need to earn as a minimum.

By comparing with your current income, you can see how much of a surplus or deficit you have each month. If a deficit you can take action to reduce or re-evaluate your spending. A surplus can be directed towards saving, investment or paying off debt.

A good practice is to pay yourself first by taking some of your surplus at the start of every month, rather than waiting to see what’s left at the end.

A third benefit is becoming more conscious where you are spending your money. If petrol is costing you X hundred pounds a month, how much could you save by taking public transport? If home heating bills are spiralling, maybe it’s time to nudge down the thermostat? Small savings add up and its better for your wellbeing to be in control rather than in denial.

Setting Goals and Plans for The Future

One of the most popular categories for New Year’s resolutions is around money. Many people set well intentioned ones such as to get out of debt or increasing their income.

One of the keys to effective goal setting is to understand your why. Having a compelling reason for doing something will help you find the way to achieve it.

Some things are more under your control than others. For example, getting out of debt is achievable by identifying spare money and targeting debts in a systematic way. Stop spending money on credit cards and look to switch to lower rates of interest will also accelerate your success.

Doubling your income is more of a challenge especially if you earn a salary. Mostly because there are more factors beyond your control. However, if you ask powerful questions you can expect to receive powerful answers.

For instance, asking ‘why am I always broke’ is not a powerful question. But asking ‘what would need to happen for me to double my income’ could be.

That might lead to some ideas such as asking your boss what you would need to do to qualify for a promotion or raise. Taking additional training or qualifications. Working extra hours or starting a side project. Perhaps even switching careers all together.

A definition of financial wellbeing includes feeling comfortable and empowered around money both now and for the future. Therefore, a better understanding of where you are now and where you want to be is a great first step in improving yours.

If you would like my free guide – The 7 Secrets to Financial Wellbeing – please click here