It’s being the driver of your wealth instead of the passenger!
Most people don’t realise that to build wealth you need to be the one directing where your money’s going, rather than it directing you.
You generally don’t get taught how to manage your money and so there tends to be an expectation of ‘I should know where my money’s going’, in reality that’s not the case.
A simple way to do this is by using a cashflow planner (click HERE for a FREE template). A cashflow planner helps you to get transparency over your spending, what you’re spending your money on and if there’s any leakages (you know those recurring payments that come out for subscriptions you don’t use or thought you’d cancelled).
It also allows you to annualise your spending so you’ll know how much to put away each pay and have funds available when bill comes in (see below on how to calculate this out).
When working with clients, the cashflow planner forms one of the core foundations because without knowing what you need personally, how do you know what you need to be earning in your business?
It doesn’t matter whether you earn very little or earn a lot, without clarity you can both end up in a position of living pay to pay, and I’ve seen this more often than not.
When we look at savings, behavioural issues and the habits we’ve formed can hold us back. So undertaking this key step is going to give you insight into your behaviour and the habits that have been formed, from here you can jump into the drivers seat and decide what direction you want to take.
where to get started
- Identify what income you’re receiving e.g. salary, business income, investment income, social services support). If your income is variable, estimate using your past year’s earnings.
- Pull together any receipts you might have e.g. rates notices, utility bills, insurance invoices. If you’re mainly paperless, you can access your debit or credit card transactions history online through your bank. From here you can download and start categorising your purchases. If you’re lucky, your bank might already offer this feature!
- Start with any regular expenses you have e.g. rent, mortgage, utilities (gas, electricity, water), phone, internet, tv streaming services (Netflix, Foxtel, Disney+, Amazon Prime etc.) In some cases, these will be consistent and can be entered directly into your cashflow planner. For others, pull together 2-3 of your most recent bills and add all of these bills together, diving by the number you have e.g. you have 3 electricity bills billed monthly of $250 + $350 + $200 = $800/3 = $267 and this is the amount you’ll enter into your planner. Just remember to check the time period on your bills so you can reflect this correctly.
- Next Identify what other adhoc expenses you need to cover e.g. Insurances for home, investments, health and vehicles, roadside assistance membership, ambulance etc.
Your cashflow planner is a work in progress and will evolve over time so don’t think it has to be 100% accurate. What you’re trying to do is gain an overview of money coming in and money going out. It could take up to 12 months to obtain an accurate overview, that allows time to capture any annual expenses you may have forgotten about.
needs versus wants
If you’ve found that you’re spending more than you earn or wanting to save more, consider identifying those items that are needs (these are the essentials like rent, mortgage, food and utilities (gas, water and electricity), wants (things you can cut back on/get a better deal on or live without) and those that need to be cancelled as you no longer need or didn’t realise you were still paying.
earn more income
Can you earn more income? Whilst cutting costs is one way to bring your planner into alignment the other is earning more income. When you get clear on your personal cashflow planner, this starts to drive what you need to be achieving in business and other areas of your finances. Your business starts to take on a new focus – what does it need to be earning to cover all business expenses e.g. Salaries (this includes what you need to be paid to cover your personal expenses), Tax, Super, GST, PAYG) plus profit.
other things to keep in mind
- Accuracy check. Where possible, try and keep a track of your expenses each week for the next 2-3 months to see if you have missed any unknown bills. This will help you get a clearer picture of how accurate your planner is. Also work out what platform works best for you – budget app, excel document or writing your expenditure down in a notebook.
- Diarise to review your budget. The more often you review this, the less time you need to allocate. At the beginning you might like to do this weekly, then adjust to fortnight or even monthly. Just remember, checking in helps you to see how your progressing? Take engaging a personal training vs training by yourself. It’s the personal trainer that’s going to extend you and help you achieve your goal and you’re doing just that by regularly checking in with your finances.
- Try mimicking your expense allocation to your income frequency. If you get paid monthly, calculate out what you need to save, allocate to bills and spend for the month and then try to keep to that amount.
Common time period conversions:
- Yearly to weekly, divide by 52
- Yearly to fortnightly, divide by 26
- Yearly to monthly, divide by 12
- Set up direct debits/make regular payments. If you find you get caught out with utility bills, set up a regular payment program i.e. you can force pay an amount each pay cycle or set up a separate bank account that is only for utility bills and can’t be touched for other reasons. Some providers will actually average out your expenses for the year and then you can pay this amount each pay.
- Consider setting up separate bank accounts and naming them. This way you’ll know that the money in your spending/splurge account can be spent freely until it runs out, your bills/everyday account will have funds available to pay for your upcoming expenses you’ve accounted for and your savings account will have money to put towards future goals. You can also consider establishing accounts for separate goals to i.e. holiday, new car, investments etc.
- Establish a buffer. There’s always times you’re going to be caught short due to an unforeseen expense i.e. medical, car repair, hot water system breakdown! Having a buffer gives you peace of mind that you have the money there to cover these expenses without putting you into debt or having to rely on your credit card.
- Take time to review your regular bills. Have you come off contract? Are there better offers out there? Are you paying for things you don’t need? i.e. check if you’re outside of contract and still pay for product fees such as your mobile phone. In Victoria if you compare energy providers you may be eligible for a $250 rebate. Click HERE for eligibility and when this offer closes.
- Is it better for me to pay monthly or annually? When reviewing your bills, check what the difference is in paying upfront i.e. annually, vs quarterly, monthly, weekly. Often you’ll find there’s a discount for paying in advance. Whilst you might not be able to do that immediately, it will give you something to aim for if there are considerable savings.
Working with a financial coach can help you to gain clarity around your cashflow. If you would like to explore this further, please book in for a free 15 minute chat.