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…
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.
- 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.
