Your life is going to be so much easier if you can master the art of managing cash flow and budgeting. You will be so much more successful in achieving your personal lifestyle and financial goals, and it’s a lot easier than you think.
Let’s talk about cash flow and budgeting. No one has really taught how to manage our cash flow budgeting. It’s not taught at home and more often than not is not taught in school or university. But when you know how to do this you’ll actually really enjoy your banking ritual, and you’ll feel so comfortable and so secure financially. Knowing that you’re on top and in control of your cash flow and budgeting.
First of all, I want you to have all your bank accounts with one bank. No more savings accounts floating around in cyberspace. Because if you can’t see it you’ll forget about it. And I know so many people who’ve opened up those savings accounts and put $20, $40. After a certain period of time, they’ve completely forgotten about it and don’t even know how to log in and get that money. I want you to be able to log on to your internet banking whether it be through your app or your desktop. And see your entire cash flow situation right then and there. This is about making it easy and efficient so that you actually do it.
Everyday Savings Account
The first account that I want you to have is an everyday savings account. With a linked ATM debit card. This account is where you allocate money every time you get paid. To pay for your daily, weekly, monthly, fortnightly expenses. This is where you set up all your direct debits to come from. So the gym memberships, mobile phones. This is also where you spend to get your coffees and lunches. And your weekend spending money. You never use credit cards you always just use your everyday savings account.
Lifestyle and Emergency Account
The next account is your lifestyle and emergency account. Now before I explain this account. I want to explain why most of us get in trouble with money, or cash flow and also end up in debt. More often than not our budgets are not the same month-to-month. We might have a really quiet month where we don’t have as many living expenses. And we might have some money left over. And it creates a false sense of security. Because we see that money that’s leftover we think, “Oh wow I’ve got a bit more money in the account that I normally would have. I’m gonna go buy myself something new.” And we go and spend that money.
However, the next month or the following month we get hit with a bill that we completely forgot about was coming up. And we don’t have enough money in our account so we spent it the month before. So we reach for a credit card and get ourselves back into debt or even worse we get ourselves deeper into debt.
Now, this is why I recommend you have a life and emergency savings account. This is like your float account. This is where you stockpile your finances and your cash flow. In preparation for all those ad-hock or irregular bills.
So, for example, our quarterly bills like electricity bills. Or biannual bills, or our annual bills. This is where we will always see at least a couple of thousand dollars in this account. So that when bills come our way. We are not rattled financially and we can get back on with living our lives. And building up these accounts again.
Now within this life and emergency account is your “SOS money”. So this is the money that keeps you out of trouble. If anything should happen out of the blue an emergency. Again your financial cage is not rattled. Now the question that’s probably burning on your lips is, “How much money should I have as an emergency savings amount?” Well, there is no one-size-fits-all. Everyone is different it depends on what stresses you out financially. And what your financial responsibilities are.
For someone who is young say living at home. Got a really good cash flow. They may only want and need to say five thousand dollars in emergency money. It’s enough to get them through for a couple of months of living expenses and not having to borrow money from people.
However, I say a young family on one income. With say three young children may need a lot more than that. It may be closer to say $15,000. However, you need to ask yourself, what number or what amount of money in my savings account. Would help me sleep well at night. Now once you know what that number is. I want you to nickname this account with that number in there. So in this example, we would have our life and $5,000 emergency savings account. As the nickname, so we can see that every time we log on to our internet banking. Now there is a reason or a method to my madness. It is to stop creating a false sense of security.
If we had to say $6,000 in our life account. And one day we decided I’m gonna go and upgrade my laptop. I’m gonna go and spend you know five or say fifteen hundred dollars upgrading my laptop. We’re going to spend that money but actually, we don’t really have that money to blow. Because of that six and a half thousand dollar account balance, five thousand dollars is allocated for emergency money. So we cannot be blowing this money unnecessarily. It is for emergency use only.
I want to make sure you’re aware budgeting and cash flow is not about being mean, or depriving yourself financially or being the fun police. It’s about balance and it’s about giving ourselves spending boundaries that simply all it is. And with boundaries, it makes us accountable. So for the example of when you want to upgrade say a laptop or buy a new dress, or a new handbag. That is perfectly fine, we just allocate that to each separate account.
Now, this would be our lifestyle account and I want you to nickname that account in alignment with your goal. For example a new handbag account, or a new laptop account or. In my case, it’s my holiday savings account.
Saving To Invest
Now the fourth and final account is actually your financial goal account. This is where I want you to put money in on a regular basis towards a long-term financial goal, that’s important to you. So whether that be saving up for the deposit on your first home, or whether it be saving up for an investment portfolio, or even if you’re not quite sure what that goal might be.
I want you to still open up this account so you create intention and purpose and direction for your cash flow. Now for me personally this is my savings to invest account. I put money into this account on a regular basis and let it sit there until I know where I want to invest that money, and for what financial goal. It is really easy to set these accounts up. And these three should be internet-based accounts. With the same account, this means as these accounts build-up you’re actually earning some interest on these savings accounts.
Now the next step is to work out our banking rituals. So we know exactly how much money to allocate to each of these four accounts. So that we’re always on top of our cash flow I would feel great about our finances.
All right so how do we allocate our money? Say for example I get paid $2,000 after-tax per month by my employer. And my employer pays my pay into my everyday account. From using the sugar budget app or using the complimentary budget template. I know that my living expenses for the month, are around about $1,200 per month. If I’ve got that much money in my account I should be able to survive financially. I then look at all my upcoming bills that are coming in. I might even check my diary to see what’s due. And I now know that going forward I need to start allocating, approximately $500 per month into this account. Not only to pay for these upcoming bills. But also to slowly start building up my $5,000 emergency account.
I then look at my lifestyle goal, which is, for example, to buy say a new handbag. And it’s gonna cost me $2,000 I’d like to buy it and say ten months’ time. I know that if I want to achieve that goal in time I need to start putting $200 a month away into this savings account.
I also want to start doing the thousand dollar project and buying some shares. So I don’t know what shares I want to buy yet. But I’m gonna start saving anyway in the preparation of that. So I’m going to start putting say $100 per month into my savings to invest account.
This is the banking ritual I will follow every time I get paid. It is allocating the right amount of money for what is important to me. However, if I decide I really want to focus on building up this put emergency money sooner. Or I know that I’ve got some big bills coming in my way sooner rather than later. And I know that they’re $500 per month it’s going to cut me short. I can do something else. I’m giving you a quick get out of jail card for free. You can temporarily forgo or simply cut down on these of two accounts for the time being to quickly stockpile this is a priority. So, for example, you might want to hold off on doing this and maybe, either reduce it to zero or $50 here. And say $100 here, which then allows me to put a little bit more into my life and emergency account. Like this, so you actually have my permission to occasionally tweak your banking ritual. As long as you’re putting money to each of these savings accounts and achieving your financial goal.
So the moment you have more than $5000 in emergency money and a healthy float in your life account for these quarterly, bi-annual annual bills. You can start beefing up these accounts if that’s what’s important to you. But the point is you stick this banking ritual month after month after month. So you don’t even think about it you just simply do it. Now, this is something that I personally do every month. It gives me so much security and comfort knowing that I’m on top of my cash flow and I never need to rely on a credit card to get me out of trouble.