Advice - How to plan your income
I will let you into a secret. Money is designed to make you fail. Very clever people realised many moons ago that people don’t like to deal with their money and personal finances.
The banks realised that if they sold you a really attractive 0% credit card, the chances are that you are not going to pay off the balance and get charged a fairly high rate of interest when the “teaser rate” ends. Teaser rates are by nature meant to tease you in and then a game begins. They are basically backing themselves that they will beat you, mainly due to people’s inertia or lack of control over money.
It is the same if you are saving. They want their sales numbers and they want to make money from you therefore there is often a trade off between a better rate for the first year and then “zero or zilch” after this year. This is a nightmare for those of us that are busy running businesses and families.
But let’s not get too downbeat. There are ways to beat the system, it just takes a little thought and planning and the right mindset. Some of these principles have been taught for years but they don’t get talked about enough. The experiences from my work with clients is that you need to build a foundation that you simply don’t touch particularly as we become more successful more complexities show up.
Really this is focused at business owners like the rest of my blog and I am going to make this really easy to follow because anyone can do this no matter how much wealth or debt they have. The same principles always apply.
Too much money comes in and then goes out without any real thought or planning. If you ever have that feeling at the middle of the month that you are not sure where your money has gone, you need to start taking control now. This fairly simple system will help you do that and it involves minimal work to set it up and minimal work to maintain.
It is all about the Three Buckets of Fixed, Savings and You:
Sorry about my dodgy writing but the idea should be fairly clear. I have allocated the income to three amounts with the majority of it (50%) going to my fixed expenditure, 20% going towards my savings and 30% going towards “you” which I like to call the cool stuff.
The numbers can be bigger or smaller but the principles and percentages are fairly spot on I think. I am afraid if you have higher fixed costs then the first thing to do is to look at how you cut this or reduce the “You” part. This is a simple trade off. The other way to improve the situation is to earn more and that might mean taking more money out of your business. The funny thing is that allocating capital and income is a fairly fundamental thing for a business but business owners forget to do it for the own family finances.
Below are some examples of the three buckets.
Food for household
Bills (Sky, water, gas etc..)
Cars and vehicles
Debt (credit cards and loans repayment)
Cash Savings - usually 3 months at least of monthly income
Pensions - Can be from company or personally.
Other investments once the above exhausted
Holidays - important!
New Trainers :) if that is your thing
All the Cool stuff basically
Now here is the trick. Listen really carefully to this point as your success with this will depend on it; Once you have worked out your optimal allocation for each bucket you need to set it up so that you can’t screw it up. This means actually setting up a separate account and transferring money into the “YOU” account and also making sure that your direct debits for savings leave your current account as soon as your income comes in so that you can’t touch them or alter them. The whole point in this system is that it can’t be tampered with. Every 6 months or so, maybe sit down and review it but the more you touch it, the more you will screw it up.
So here are some of the tools to help you started. I am writing this blog in December so that you can get all your excess out of the way ready to start this in January 2017. It is all about the planning at the start and then you just set and forget. It shouldn’t take longer than a couple of hours at the most. When you get good at this stuff you can actually start playing around with the allocations and see what that looks like in the future but that is a blog for another time.
Here are some tools to get you started
I use Monzo for my “You” account - Monzo Card
Information on Savings - Free Money Resources