YOUR MONEY AND YOU — WHO MANAGES WHO?

I’m no money management expert, but here are some hints, for those who are starting out (with everything to learn), those who’ve learned that what they’ve been doing isn’t working and they’ve dug themselves a (debt) hole, and those in between.

Starting out:

Give money a home — that is, a purpose. You see, if you don’t give money a home, it will up and leave you. Or, as Robert Kiyosaki puts it:

Don’t just park it in a bank account (or your purse/wallet) and assume all is fine. In other words, develop a plan (with or without help). Your plan should cover:

1. All of your current living needs,
2. Your medium term (savings) goals, and
3. Your long-term investment goals.

Current Living Needs

For your current living needs, allow sufficient to cover necessary costs, but always remember that the more that you spend here, the less you have available for your medium and long-term goals. A highly-recommended way of managing these funds is money jars, but you can use separate bank accounts (and automatic payments) to achieve something similar. Using this, you may have:

• A jar for food,
• A jar for clothing,
• A jar for accommodation costs,
• A jar for transport costs (including e.g. car maintenance)
• and so on.

You will note that each of these is a fairly consistent spend, which is difficult to avoid.

In each of these, you would put a set amount each pay period, based on your budget. Then, you would only spend the cash in that particular jar on the items for which it was budgeted. If life happens and you have to ‘borrow’ from one of the other jars, you then must replace that money in the next pay period(s).

By spending cash, rather than waving a piece of plastic in front of a machine you will be far less likely to overspend. Why? Because you will be reluctant to go through the hassle of somehow replenishing that jar!

Medium Term Goals

Your medium term goals above will include:

• Savings for things on which you want to spend money, such as furniture, a new laptop, or a car, and
• Savings for other items, such as holidays

You will note that these are irregular spends, which can potentially be (at least) postponed, if not canceled.

As these are funds which would accumulate they are better in a savings account, rather than a jar. In this case, the best account is one which earns the best interest you can find, while still enabling fairly easy (if not immediate) access.

Long-term Goals

Finally, your long-term goals will cover:

• Savings for a family home,
• Savings for larger items — e.g. a boat or a beach house,
• Savings for investment (including superannuation/pension).

Remember when buying that family home, that your borrowings could become a burden in the future, so:

1. Save as much as possible & borrow as little as possible, and
2. Borrow wisely.
3. Save as much as possible & borrow as little as possible

How do you save enough? I guess this quote, from Warren Buffett, explains it:

These long-term savings should also be, at least initially, in savings accounts earning the best interest you can find. While you will be putting something aside into these accounts each pay period, you will want the accounts to be the sort you can’t access easily. As the funds build up you may want to take most of an account and put it on term deposit, in order to earn more interest. (Other investment options may also be useful here too.) Aim, ultimately, for a well-balanced portfolio — whereby the spread of the investments minimizes exposure to the risks associated with any particular industry/investment type.

Remember always that the higher the interest/earnings, the higher the risk that is likely associated with the investment.

1. Borrow wisely

Try and get the best (= lowest) interest rate you can, and keep borrowings to the shortest period possible. Anything over 15 years means the bank is making more of a killing than it needs. And watch, if coming off a period of having a fixed rate, that the bank doesn’t take it back out to 15 years, even though you’ve already had x number of years of your original 15 years. They can be cunning like that.

In other words, your focus should be one reducing debt, before anything else, as the proverb says:

“Out of debt, out of danger.”

Finally, given you are starting out — and likely therefore fairly young, you can, in fact, invest in a slightly riskier (or, at least, less consistent performance) investment than a middle-aged person might because you have time on your side.

As with all plans, you will need to ‘stick to your guns’ — there will be constant challenges to ‘spend now, save later’. I.e. you will face a constant trade-off between spending now, versus saving for later. (This could be living well now, versus living well later…)

As Dave Ramsey says:
“Ask yourself if what you’re buying is a want of a need. There’s a big difference.”

Will Smith, too, offers some wisdom:

“Too many people spend money they haven’t earned, on things they don’t want, to impress people they don’t like.”

The good thing about jars is that you can see what’s in them — you can see money building up. However, bank accounts allow this too. In other words, they enable you to keep a constant eye on how things are going and to keep yourself accountable.

Getting out of the hole

Recognizing there is a problem, is perhaps the best thing you could do. And the sooner you do it the better!

The next step is to go through the process above. However, built into your plan will be clearing those debts. These will need to be prioritized in order of the interest rate being paid. (It makes sense to pay them off in this order, as it’s these debts that are growing the fastest.)

These priorities may need to be amended if there’s some pressing urgency on the part of one that simply must be met regardless. The best method after that to clear these debts is the snowball method. Under this, you:

• continue to pay each debt at the rate you are currently, but
• put any and every spare dollar against the highest interest debt.
• once that debt is paid off, you put the amounts you were paying off that debt against the next highest interest debt, and so on until they are all cleared.

It’s quite possible you might be able to make an arrangement with your creditors to achieve this. Be assured, though, that they will listen (and probably be amenable to your proposal) — they’d far rather have someone taking charge of their finances and sorting things out on their books, than someone who is in denial.

Obviously, if there’s a way you can increase your income, grab it with both hands (without spending the extra money!) If need be, get help, including training in how to manage your money.

Depending on how deep the hole, you may have to consider selling your home, or other assets. If you need to, then do. It’s far better to be starting again with (next to) nothing — but, now, knowing how to manage your finances — than up to your eyeballs in debt. Although it might all seem really hard, never minimize the importance of a good credit record so pay everyone off, and have them update credit registries accordingly if need be.

For all of the above, there are many great resources available, including the writings and programs of Dave Ramsey, Robert Kiyosaki, and Sylvia Bowden.

I’ll leave the final word to Warren Buffett: