Better budgeting

For many people the word “budget” conjures feelings of restriction. (Just like the word “diet”.) However a good budget should be the exact opposite. It should facilitate you having enough money for the things that really matter so you need not feel restricted. In this article I reveal a better budgeting technique using the model “Pay Yourself First (in practice)”

Cue Skyhooks tune…

Budget…is not a…dirty word! Budget…is not a…dirty word!

Once on live TV I was challenged to come up with a better word for a budget. The interviewer felt the word was too creepy.

The reality, as you can probably guess is that it has nothing to do with the word but the meaning we associate with it.

In fact the origin of the word “budget” is in the leather case or wallet that bureaucrats used to carry their financial plans.

Of course the problem is that for many people budget conjures feelings of restriction. (Just like the word “diet”.)

A good budget should be the exact opposite. It should facilitate you having enough money for the things that really matter so you need not feel restricted.

You achieve this this by following the wealth principle I call “saving for the significant and minimising the insignificant.”

Pay Yourself First (in practice)

It’s likely you’ve heard of the principle to pay yourself first.

Back when I was a graduate engineer I thought this principle meant to put a certain percentage of my income away for wealth creation. Then I wondered “what next? How do I manage the remainder?”

Now that I’ve had the benefit of working with lots of people on their cash flow I’ve created this model to help you create an effective budget that sets aside money for the significant things in your life plan.

(Download a PDF version of the model here)

Top-down or bottom-up?

To follow the principle of pay yourself first ideally you work from the top as you allocate your income into pots of savings.

However, if you find that you never have any savings and in fact spend more than you earn the top-down approach won’t feel possible – because it’s not yet. To extricate your butt from the spending fire first you need to get control. You do that by starting at categories 5 and 6 and working upwards as you increase your control.

In short if you are in stages 1 or 2 in the Six Stages of Wealth Creation you would start at the bottom and work upwards to improve your cash flow management. Everyone else can take the planning approach and go top-down.

Your pots of money

1. Financial Independence

The first pot you allocate is how much you need to regularly invest so you accumulate enough net wealth to “retire” – or make work optional – when and how you want it.

In addition you include the additional regular loan repayment s you need to make to ensure you are free of personal (non-investment) debt by your financial independence target date.

2. Pre-retirement Essentials

The second allocation is to all the big things you want and need to do, buy or experience between now and the point you achieve financial independence.

For example: car upgrades, major home maintenance, family holidays, replacing major household items, parental leave. (The list goes on.)

In my experience many people find these items either blow their savings or are funded by debt. Why borrow and pay interest on predictable expenses when instead you could be earning interest? Earning interest in advance actually reduces the true cost of the items and the amount you need to save.

3. Irregular Expenses

In this pot I include all expenses you pay at least every year but less frequently than monthly.

For example: clothing, utilities, insurance, gifts, parties, subscriptions.

Again from my experience it is often the irregular expenses that end up blowing the savings of otherwise consistent savers. The problem for them is that whilst they are saving, usually by automated pay deductions, they are not saving enough. Month-to-month they may have savings but not year-to-year.

Often when clients actually separate their irregular from their regular expenses they are shocked by how high a proportion are irregular expenses. That observation alone is an insight into why they may be spending too much.

The expenses may be out of sight but they should not be out of budget.

4. Existing regular commitments

This category is the allocation for repaying all of your existing debts as per the current minimum required repayment.

For many people this is the first line item they put in when working out their budget.

The reason loan repayments is item 4 is that when you take a planning approach you first allocate items 1 through 3 to work out how much you can afford to borrow.

The way many people actually work out how much to borrow is a combination of:

  • What the lender says they will lend them
  • Their income less the regular spending that comes to their mind (i.e. untracked)

5. Regular Essentials & Comforts

All the regular items you spend at least every month.

When you take the planning approach you get to this point and discover how much you can afford to spend on comforts. And some things you thought were essentials get re-categorised.

It’s at this point many people start prioritising between lifestyle now and future significant goals.

  • Which is more important to me?
  • If I don’t save up for that future goal, but still want it how will I create the money to afford it? (e.g. I’ll only be able to afford X if I get a promotion – so I’d better start investing in professional development.)

6. Impulses and Indulgences

The final category is a little allocation for spontaneity.

How much to allocate to each pot

If everyone were identical in situation and value-system then we could define a nice neat package of percentages to allocate to each pot.

But we’re not.

To create a budget that is meaningful and motivating to you it needs to relate to your goals for your money.

That’s not as hard as it may sound. You already know what you want – it’s in your head, you probably think about it regularly. Just get it out of your head and onto paper and then put a number and time frame next to it.

Automatic wealth creation

Once implemented good budgeting should also be as automatic as possible. That’s the next step of smart cash flow management.

If you’re interested in how to put this all into place talk to me about Cash Flow Coaching.

B.S. from GE Money

I just heard on the radio the latest advert for the GE Money Personal Loan. It claims to give you more money to enjoy the things that matter. A lovely marketing tug on your emotions but total B.S.!

I just heard on the radio the latest advert for the GE Money Personal Loan. It claims to give you more money to enjoy the things that matter.

A lovely marketing tug on your emotions but total B.S.!

After you’ve blown the loan amount you’ll have lots of interest to repay – at a rate not much lower than credit cards. So a personal loan such as this will actually give you LESS money to enjoy the things that matter (for a long time).

Save for the significant. Minimise the insignificant.

If you really want to ensure you have enough money for those things that really matter to you follow this process:

  1. Identify those things that matter most
  2. Work out how much money you need for them, and when you’ll need it.
  3. Establish automated saving and cash flow management plans to ensure that money is there when those things that matter occur.
  4. Enjoy life with the peace of mind you’ll have the money to enjoy what really matters most.
  5. If there is any money left over you can spend it on insignificant things suchs as impulses and indulgences.

If you need a personal loan (or credit card) to fund experiences and items that matter to you take it as screaming alarm bells that your cash flow control is on fire. Run away from the lenders and towards a financial counsellor or decent financial planner.

Learn more about my cash flow coaching here.

Take The Financial Pressure Down

Today is Stress Down Day, to raise funds for Lifeline. As part of their promotion of Stress Down Day Lifeline conducted a Newspoll to discover what was stressing Australians.

The Newspoll found that two thirds of Australians are stressed about money, second only to being stressed about work. Does that include you?

Financially Stressed CoupleThe Lifeline poll reminded me of research published last year by Relationships Australia, which found that financial stress was the second largest contributor to relationship breakdown, affecting 35 percent of relationships.

This may be a stretch, but if we can work together to reduce our financial stress we may be able to lower the divorce rate and bring more joy into everyone’s lives.

Causes of financial stress

I started writing a list of what has caused financial stress among people I’ve met. Most of the causes fell into two broad categories:

  1. Not enough money (to do, buy or retain)
  2. Doing it for the money

In this article I’ll share some tips for reducing your stress caused by “not enough money”. Later, I’ll write about “doing it for the money”, but if you’re keen to learn how to earn money doing what you love then please call me now.

Stress about not enough money

Our stress seems to rise when we don’t have enough money for something that is really important to us. For example:

  • To join our close friends on a big interstate or overseas holiday (maybe to celebrate a milestone birthday)
  • To buy a bigger house when our family has well and truly outgrown the current shoebox
  • To keep our car and house when we lose our job and fall behind in the mortgage repayments

Our stress doesn’t appear to rise when we decide we can’t afford the $2 chocolate bar or $15 movie ticket. I believe that is because those things aren’t really that important to most of us.

Financially related decisions can also stress us, and I believe they fall into this broad category. Our stress level is affected by the materiality of the loss or by the consequence of a wrong decision. If we get the decision wrong it may mean we won’t be able to upgrade our shoebox house when we want to, so then we stress about the decision.

Save for the Significant. Minimise the Insignificant

To reduce your financial stress plan to have enough money for those things that are most important to you. This is a personal thing and is based on your values.

Once you have plans to be able to afford the most important things in your life you can spend the rest of your money on whatever you want, guilt free.

You need to move your thinking from “next pay” to “next year” and then onto “next decade”.

I believe it is through spending too much on daily insignificant things that we end up not having enough for the significant things. This is often because the significant experiences and achievements are lumpy and irregular, so they can sneak up on us.

Bring far away important things into focus

”binoculars”Here’s an exercise that you can do.

Get a blank piece of paper and place it in landscape orientation. Across the middle from left to right draw a thick line. The left represents now; the right represents your passing, say at age 100.

Divide this line representing the remainder of your life into bite size chunks. The length of each chunk is not fixed, just make it meaningful to you. You may like symmetry and therefore make each chunk an even five years. Or each chunk could be of different length representing different life stages you have in mind.

Next fill the rest of the page with all of those achievements and experiences that are really important for you in each of those meaningful chunks of life. For example:

  • Career transitions you’d like to make
  • Places you’d like to see in the world
  • Experiences you’d like to have with your family
  • Time out of the workforce to study, reflect or travel
  • Contributions you’d like to make to your community and world

For inspiration on what is really important reflect on your personal values.

Now implement plans

Implement a clear plan to manage your money so that you achieve and experience what is really important to you. Then you can happily spend the remainder on whatever insignificant pleasures you want, guilt free.

This is how you can achieve what I call financial fulfilment. And this exercise is part of the process that I call Fulfilment Financial Planning. To learn more call me on 1300 669 101. I take clients from all around Australia and would love to hear from you.

How to survive the recession

On the ABC’s 7:30 Report on Wednesday night, Economist Associate Professor Steven Keen gave the following prediction for Australia this year:

“Best case scenario is a recession more severe than 1990 and lasting one and a half times as long.

Worst case is something up to the level of the Great Depression which was 20 per cent unemployment and lasting up to a decade.”
(Read the full interview here)

Earlier that morning my esteemed colleague Bill Milburn had enlightened me as to the technical difference between a recession and a depression:

A recession is when your mates lose their jobs.
A depression is when you lose your job.

Following are some tips to help you place yourself in a stronger position should we enter a recession.

Repay Debt Faster

If a recession hits you are probably going to need to pull in your belts just to continue to meet the minimum debt repayments.Get a head start and build a substantial buffer by boosting your repayments now.

It is when you fall behind in repayments that the banks will start to repossess your car, boat and house. If you are ahead in your repayments that will give you a buffer if your income stops temporarily.


If you recently locked in a fixed interest rate on your loans and that now seems high in the current environment consider refinancing to a lower rate and a more flexible package. Check the break fees before doing so and include them in your cost/benefit analysis.You will have more options if you refinance now while you appear to have a more secure income and before your property value has plummeted. Don’t wait until both you and the lenders get even more nervous.

If you do achieve a lower interest rate keep your repayments at the same (or even higher) dollar level to help you build a substantial buffer.

Secure Your Income

Twenty per cent unemployment sounds really bad. But remember that means eighty per cent are employed. So make sure you are one of the people who keep their job.Ask yourself what you can do to ensure you continue to be of massive value to your employer. How do you ensure that you only lose your job if your employer goes broke? What can you do to help your employer not go broke?

  • Can you be more personally productive by improving personal systems and eliminating personal waste?
  • Can you increase your expertise by completing additional, relevant and valuable professional development?
  • Can you help your employer win new (unexpected) business and retain existing business?
  • If your industry looks to be hit hard (e.g. retail) can you up-skill now and be prepared to change to a more robust industry?

Ensure you are very employable to both your current and other employers, so that if you do lose your job you don’t lose your income.

Superant – financial literacy for littlies

A new educational website has been launched, called SuperAnt. Anything to do with money and finance can make many people’s eyes glaze over. This is perhaps even more so with younger people who have not yet had the life experience to realise the value of money in facilitating life experiences.

If you prefer to learn in fun, interactive ways (as many of us do) then check out the SuperAnt website, developed for TasPlan. It has lots of budgeting tips that will be useful for your teenage children too.

You are never too young, or old to learn how to make your money work harder for you. 

Calculate the real value of spending

I’ve written previously about Australian websites that help you save money, one of which is Simple Savings. This week’s savings tip from a member of Simple Savings, Lee-Anne Stevenson is excellent in it simplicity and effectiveness. Lee-Anne shares her story:

I curb my spending by calculating how long I have to work to earn enough money to pay for each purchase! My husband loves KFC but I am no longer an easy push over. I would have to work three hours for our family to enjoy one meal that is gone in just 30 minutes!

Instead of looking at the dollar value of an item, I look at the ‘work value’ of an item – this is what it will really cost me. To do this, work out your net hourly rate (after tax and minus expenses such as babysitting). When you are tempted to buy something, divide the purchase price by your hourly rate to see how long you will have to work. It can be a real turn off – especially when buying takeaway food!

If you have not done so already, check out Simple Savings and consider subscribing to their free newsletter so you get tips like this every week.

Be healthy & wealthy in 2008

Four blokes walk into a bar…

One Friday evening in December I met three mates at The Como Hotel for a drink to celebrate the spirit of the festive season. Around us there were many other jovial groups obviously enjoying the season, which is often characterised by eating (and drinking) to excess.

Pretty soon we too were discussing ordering some bar snacks when one of the mates confessed that only a few days earlier his wife had put him on the Sacred Heart Diet. You may have heard of the diet under a different name, but in essence it is one of the strict meal plans that prescribes what food you eat and slowly introduces a new food or two each day.

In confessing, my mate – let’s call him No-More-Fun-Man – was actually looking for a reprieve. You see, one of the other mates happens to be a very experienced and respected dietitian – let’s call him The Health Saviour.

Fortunately, No-More-Fun-Man got his reprieve when The Saviour declared that all of these fashionable, prescriptive weight loss diets are rubbish. Sustainably losing and then maintaining weight is as simple as eat less & exercise more. Control your calories so that energy out equals energy into your body. The rest is just finesse around the edges.

This simple truth equally applies to creating wealth

Just like diets, there are an abundance of wealth creation books, seminars and websites professing to teach you the secrets of creating great wealth fast. But most, if not all of it is just finesse around the edges.

The core of wealth creation is to ensure money out is less than money in – spend less than you earn.

Before worrying about all the fancy finesse of advanced wealth creation strategies, focus on consistently and sustainably controlling your cash flow.

Tracking your cash flow

Interestingly, in the last two years I can recall only two clients who came to me with a clear idea of how much and where they spend their money. When I recommend to the other clients that they track their spending for at least one month their body language betrays their reluctance.

It seems that controlling our cash flow and controlling our calories are concepts that make us very uncomfortable.

Those four blokes are still at the bar…

And that brings me back to those four blokes sitting in The Como Hotel.

As it turns out my third mate present at the pub was also on a diet. He is participating in a CSIRO research project. As part of the research all he has to do is control his calories and include one specific food in his diet each day (the subject of the research). The recommended tool for helping participants track their calories is and he spoke highly of the tool.

The mention of CalorieKing caught my attention as another close friend has lost over 20kgs in the past 6 months by simply eating less and exercising more. The tool she has used to track her calorie control and inform her eating decisions has been CalorieKing.

So over the Christmas holidays I signed up on CalorieKing to see how it can help me get back to within my health weight range (as judged by the body mass index). And what a fascinating experience it has been.

The right first step

There are so many similarities between the quest to maintain a healthy weight and the quest to maintain healthy finances.

We seem to accept that a first step to losing weight is to start tracking what we eat. Every diet I have ever seen starts with identifying or specifying what and how much you eat. We may be reluctant to do so, but the act of tracking what we eat actually serves a second purpose of informing our future decisions

The same principle applies to creating wealth. Fortunately identifying what you spend is much simpler than tracking your calories. The key measure you need to track – dollars – is openly disclosed at each purchase.

The even better news is that with both calories and money you’re not required to minutely track them every day for the rest of your life. But it is a very useful place to start. Especially if you are not happy with your current situation and want to accelerate the transition to a more comfortable, sustainable lifestyle.

Stories to help you

Through my health journey I am noticing many similarities to wealth creation. These similarities may be very helpful to you on your wealth journey, so I will be sharing my observations with you right here on my blog. Subscribe to be advised when I share new insights and tips.

If you are already very good with health then you already have the capacity to also be very good with wealth. The insights from my journey may help you apply the skills to your wealth creation.

If you don’t feel that you are already good at either health or wealth, don’t despair. I bet you are good at lots of other things. So you too already have the capacity to be very good with wealth creation. As you read future blog posts my story will spark your mind at how what you are already good at can be applied to wealth. (When it does so please write to me and share your story – or leave a comment.)

Are you starting 2008 in peak financial fitness?

Your financial fitness is how well you manage your money on a daily basis. Just like physical fitness helps your health, so does financial fitness help your financial health and weath.

Discover your financial fitness by completing our brand new Financial Fitness quiz now. (It’s free and takes about 70 seconds).

Cheap laptops equal smart salary-packaging

“A phenomenon in recent years has been the way the price of electronic goods just seems to be getting lower. This is attributable to a combination of ceaseless technological advances; Asia’s cheap manufacturing costs; and the strong Australian dollar.

Just blink and the prices of laptop computers, digital cameras, DVD recorders and flat-screen TVs seem to drop another hundred dollars or so.

But there is another factor that is pushing the cost of some electronics way down: the increasing use of smart salary-packaging techniques by employees from senior executives down through the employee hierarchy.

Employees these days would need rocks in their head – or an employer with an extremely inflexible remuneration policy – not to buy their next laptop computer through their salary packages. The tax savings are breathtaking.”

Wow, this issue of “Smart Investing” by Robin Bowerman of Vanguard Investments (Australia) has several good articles. The above is an excerpt from a good article on salary packaging a laptop computer. Read the full article here.

If you need a new computer then perhaps it is worth asking your employer about their salary sacrifice options. For the way most people use their home computers a modern laptop has plenty of computing power and is compact. “Be a Smart Spender” is one of the behaviours of Money Masters that I talk about in my seminars.

3 tips to manage your mortgage stress

Have recent rises in interest rates left you feeling the strain of meeting mortgage repayments? Or perhaps are you concerned that if interest rates go much higher you will be under financial stress? If so, this interview is perfect for you.

This morning I interviewed expert Mortgage Professional, Damian Day of Ardent Finance to uncover some of the loan options that may be available to you if you are concerned about your repayments.

You will learn about:

  • The value of refinancing to consolidate debts at a lower rate
  • Where and how to shop around for a lower interest rate
  • How fixed interest rates can be used to provide cash flow security
  • The important traps of refinancing and fixing rates that could cost you much more than you gain in lower interest

The interview goes for 20mins 20 secs and could save you thousands of dollars in loan interest. I encourage you to make a cup of your favourite beverage and listen now.

For expert assistance on creating your debt structure contact Damian Day by telephone on 1300 793 813 or e-mail dday AT damianday DOT com

‘Tis the season to be…broke??

Wow, the Christmas decorations are up and about in the shopping centres and even through Perth city centre. Christmas is a terrific fun time, but historically it also is a time where we not only eat and party to excess but we seem to spend to excess. Eating to excess leaves us feeling terrible and spending to excess can leave us with a big financial hangover that can last for weeks, not just one day.

With a bit of forethought it does not have to be that way. In this interview on Wake Up Perth I reveal fun and quick ways to avoid the New Year Debt Hangover.

If you have know of other great ways to cut the costs of Christmas whilst boosting the fun please leave your suggestions as a comment below.

Ho Ho Ho Merry Christmas!

Maintain the fun and cut your costs

Sometimes once we get a clearer picture of our current position, in particular our cashflow, we can get a bit of a shock and wonder how we can reign in our spending. If so, you may be interested in a wonderful resource that a client told me about.

I was complimenting Kylie on her wonderful ability to have lots of fun and control her spending within what she had defined as their budget. She then revealed one of her “secrets” – a website called Simple Savings.

Budgeting doesn’t have to equate to sacrifice, even though that is what your money mindset may lead you to believe. Often there are ways to keep your current lifestyle but shave dollars off the cost by just being in the know.

Simple Savings has a terrific free newsletter that highlights at least one tip per week.

If you want to search the archive of tips Simple Savings also has a members vault jam packed with great insights from other members about how they have become smarter consumers. I have been impressed by the ideas and I’m sure you will be too. (There is a $47 joining fee for the members vault.)

Do you know of any other resources?

Do you use other resources to help you become a master of your money? Maybe other sites with tips for smart spending? If so, please let me know by leaving a comment below as I’d love to share them.

Credit is the drug I’m thinking of

One in two Australians (51%) agree they would be lost without a credit card, according to research published in the Citibank Payment Evolution Report (June 2007). In fact one in five (21%) strongly agree.

Credit is the drug, got a hook on me.

(Apologies to the ’70s band Roxy Music.)

That wouldn’t be such a problem if credit cards were used wisely, but they’re not. The research also shows that one in nine Australians (12%) only repay the minimum required amount on their credit card. Minimums vary but generally if you only repay the minimum it will take you between 20 – 30 years to repay the balance.

Less than one in two Australians (44%) actually repay the full balance every month. Everyone else incurs interest usually at a staggeringly high rate around 17% per annum.

If you can’t maintain the discipline to repay your credit card in full every month then don’t use one. Fortunately there are now convenient alternatives that provide the payment flexibility without the high interest rate – they are called debit cards.

With a debit card you can only access the existing balance in your account, therefore you can avoid spending more than you can afford to each month. Plus they use the payment systems of Visa or MasterCard giving you the same payment flexibility as you are accustomed to with a credit card.

Visit InfoChoice to find a list of some financial institutions offering debit cards and get control over your addiction.

I could give up drinking coffee, if I wanted to

Today the Australian Government’s Financial Literacy Foundation released the findings of research into the financial literacy of Australians. The results are a real eye opener. I was very surprised to read that most Australians are confident in their ability to manage their money and create wealth. I was not surprised to read that for most people this self-confidence does not translate into action. (View the research report.)

Controlling your cash flow is fundamental to creating wealth. You need to save money by spending less than you earn. Creating and sticking to a budget is one tool to assist you in understanding your capacity to save, and in helping you to consistently save.

According to the research 88% of Australians are confident in their ability to save, and an even higher 90% say they have the ability and understanding to budget day to day finances.

This ability has not translated to action with only 62% of Australians saving regularly and an even lower 48% using a budget to control spending. It seems that almost half of Australians (43%) spend first then save the leftovers, if there are any.

It appears that it is not knowledge that is holding people back from great wealth, but action is the true obstacle.

If you are struggling with motivation to consistently save then one way to start is with small, easy steps to an achievable goal. The experience then helps you build motivation for greater saving and snowballs from there.

Here is a suggestion to help you:

  • Set up a high interest savings account that is separate to your daily transaction account
  • Arrange for an automatic transfer of at least 3% of your gross income into that account each pay period. (If you already do this then increase it by 3%)
  • Do that for one full year without touching the money.
  • Spend the year learning as much as you can about how to utilise the savings at the end of the year to build your net assets. (If you have not done so already then a great start is to subscribe for my free educational newsletter.)