Working out your Plan continued:
So now that we’ve set our current & future financial priorities, reviewed our current structure and confirmed a structure going forward, it’s time to address a system which we’ll use to manage our money on an ongoing basis and help us achieve our future financial priorities…
This part is the working part of the overall plan – the day to day part – the real guts of it – the part most resembling a budget…
For many people, this part can be the most scary prospect of the overall financial plan…
…There are many reasons for this – possibly because of the perceived work involved… possibly because they’ve operated a budget in the past and been unsuccessful at it…
…usually the scariest part for me is knowing and accepting the reality of our financial health – because as a family on one very inconsistent income – it’s unfortunately not always a pretty picture!
However, this is such a crucial part of the plan towards achieving your financial priorities. It not only helps us manage our money on a day to day basis and helps us avoid living paycheck to paycheck, but also it helps us achieve those future financial priorities/goals/dreams that we’ve set and move forward in life. – And we definitely want to achieve those right?! Therefore any fear needs to be overcome (Easy to say – but believe me that I know it’s not always easy to do…)
So if you are following along with this and have been put off by budgeting in the past, I encourage you to take a breath, let it go, and now try and look at your financial system with a new perspective…. really the key here is that we’re not just looking at a budget, but we’re looking at our financial plan as a whole and setting up everything to work in harmony with each other. If we keep the focus on achieving our financial priorities – that focus will help overcome any hesitation or fear.
I’m not going to deny that establishing a good working system does take some work and commitment – especially when first starting up. But it shouldn’t be so much work that it puts us off. It can be made simple and tailored to your own situation… so lets look at some options…
** it must be easy to use
** everything must be written down
** it must show your income – to the cent…
** it must show your expenses – to the cent… (remember the financial priorities side of your goals sheet – these all need to be listed in your expenses)
** it must clearly help you facilitate your structure
** it must show you where you are in achieving your plan at any given point… (that’s the hard one that most “budgets” lack – but is really important to the ongoing review process, which I’ll go into in a couple of days…)
There are some really fantastic money management tools and programmes out there to help you establish a system. If you currently use one successfully, then awesome! I have tried a couple in the past, but at the moment I don’t use a specified budgeting program. It’s not that I think that my current system is perfect of anything – but moreso other reasons… Reason a) I’m too lazy to learn a new programme. Reason b) I’m a bit skeptical at times to trust a new complex programme to work since I’m too lazy to learn to use it properly. Reason c) I’m a stinge – and I can’t get my head around paying for something (that I’m too lazy to use) when all it’s probably going to tell me is not to spend so much money on luxuries I can’t afford. Pfft…
This is a representation of what it looks – although obviously the figures are bogus and there’s a lot missing….
On page 1 all of our financial priorities (off the original goals sheet from part 1) are recorded to the cent and grouped together by like, to make processing the information a little easier. – All our bills come in at different frequencies, so to make life easier we’ve broken these down per month and per week – because we get paid weekly. If we got paid fortnightly we would probably do it fortnightly… Then at the bottom we’ve simply worked out the surplus/shortfall by taking the total income – total expenses. Easy.
Make sure you remember to include expenses that don’t come along often but still need accounting for e.g. new tyres, servicing your car, replacement of big items such as your fridge etc…
So how does this work with our structure?
As explained yesterday we operate a separate bills account to our day to day spending account. Also a separate savings account. Therefore we want our system to distinguish between the money needing to go into each account. This can be done easily by adding other columns – for example a day to day column…
The expenses we want to pay into the day to day account get duplicated across into this column. We then set the total day to day transfer amount up as a weekly automatic payment from our bills account (which all the income and all the other expenses go out of). It’s essentially like paying yourself an income. The beauty of this structure is that you can always spend every penny in that account and know that all your bills will be paid and you are working towards your financial goals. Easy.
The same would be true of the savings amounts if you are putting those into multiple different accounts.
Many people have a budget like the one above already, but this second page is a bit more unusual… as I mentioned above – the best systems show you quite easily where you are in achieving your financial goals. This is one of the ways I do that using a spreadsheet. It’s pretty simplistic and it looks like a lot of hard work – but actually, after I initially set it up for the year (which takes a couple of hours at the most) it’s very easy to maintain. I like it because it works with my plan page above, and my structure, and it tells me exactly how much money I should have in my bills account on any given day. So I know the moment that I open it whether we are on track financially or not… I’m sure there are other ways to achieve this as well, this is just what works for us… here goes…
The formula for this is easy – = opening bank balance cell + top income column cell – top expense column cell = . Then that formula is copied down the column (does that make sense?). So in other words you are formulating a running total, which should accurately correspond with your running bank account balance.
It is work to set up initially – but with the exception of a few less regular bills I mostly find that the bills can be copied and pasted to the next month. Most of the work involved after generating the initial list is just going through and changing the dates for things, and sometimes changing the amounts for things like power with seasonal fluctuations. After that is done though, because this only tracks the main bills, not every expense we spend (with this structure that spending is all done out of a separate account and therefore only occurs as a single expense in this spreadsheet) it is easy to maintain going forward.
So in summary these 2 pages combined track:
** income to the cent
** expenditure to the cent
** work with our structure to distinguish our money into spending groups
** show us at a glance whether we are overspending or have a surplus
** show us at a glance whether we are on track in achieving our financial plan, when compared to our daily bank balance
Two extra benefits are: we have a very inconsistent income – therefore we live a very feast or famine lifestyle. Because this page shows me the whole calendar year at a glance, it helps us plan ahead in the feast times, to prepare for the famine times when our income isn’t enough to cover our fixed expenses… otherwise I’d be inclined to see money in my account and go and spend it without thinking of the long term ramifications.
Similarly the last benefit is that we can use it to see the long term effects of changing our spending habits and play with different scenarios… for example if we decided that we wanted get pay TV or another loan, by putting that in our bill tracker it would show us the long term effects of our savings. Also if we wanted to see the effect that reducing our pocket money would have, then we could play with that as well…
As I said above there are lots of different systems available to track your spending and achieve this part of your plan. This is just my approach and it works well for us. Just like every part of the process, the best system for you will depend on a number of factors and be different for every person. In saying this I believe the fundamentals of a successful system are pretty much the same. So if you make sure that your system includes all the fundamentals listed above as a minimum, then you should be onto a winner system for you.
Back tomorrow to cover the Risk Management Step.