I’ve been seeing adds all over the place for free spend tracking apps from banks, supposedly to help you control your spending and they’ve been driving me nuts, because they are a complete waste of time!
My name is Max Phelps and I’m a mortgage broker with Golden Eggs Home loans, here to give you a better solution using less time and helping you build for the long term
I’m going to use an anology here. Imagine that this colander represents any bank account that you have with card access, or a credit card account. The water represents your income pouring into that account each pay cycle.
Tracking your spending is a bit like trying to figure out which hole in the colander the water is pouring out from. Now let’s say you decide that you’re spending too much on lunches, so you plug that hole by bringing your lunch to work. Then what, the water keeps pouring through at almost the same rate as before, but maybe a little more from one of the other holes. Plugging them all is impossible, unless you happen to be one of the 10% of the population who spends no money at all, regardless of income! This video is not for you, please turn off now!
What if you put some of your income into savings before you started pouring it into the leaking account? – you’ve probably heard the saying “pay yourself first”.
That’ll definitely help, but what happens when your annual holiday, or xmas, or car rego comes due, or there’s simply not enough money left at the end of the month or fortnight? That’s when you’ll dip into your savings and top up your account.
The problem with credit cards and bank accounts with debit cards attached is that there’s no feedback on whether should buy something right now, or not. Or whether it’ll be ok next week, or month, but not now. In fact in my experience:
people Spend the money they can access.
Using a credit card simply gives you access to money you haven’t even earned yet.
What if I told you that you could have complete control of your finances without ever worrying about what you or your partner spends their money on? What if I said that it’s possible to get instant feedback on whether to say yes, or no to a purchase, without spending any time studying your spending habits?
You see I spent over 10 years doing what most people do – using credit and debit cards to pay for stuff, sweeping my credit card bill in full every month and never hitting my savings goals for fun stuff, or important stuff like buying assets to set me up for the long term. I thought the answer was more income, working harder, getting a promotion, we even hosted foreign students, but no matter what we tried, the more we earned the more we spent and the more we argued about money.
Luckily we made a change, quite by accident at first, but it worked for us. Then when I got into finance, spending the last 9 years of being a mortgage broker, seeing hundreds of peoples detailed savings spending pattern, I realized that the people who manage their finances the way I do now have better weddings, holidays and more savings and property than people who manage their finances how I used to.
The answer is strikingly simple – it’s Actually very difficult manage your finances with less than 5 bank accounts spread across 2 different banks, yet super simple once you make this change. Don’t scream at the screen, more accounts makes your life simpler, not more complicated.
The first thing to recognize is that you need 2 types of transaction accounts – 1 for fixed bills, like electric, car rego, rates, phone bill, insurance, or even the gym. And 1 for the Every day stuff that you do week in week out. The reason is simple – your weekly spending pattern should be fairly predictable, based on your habits, but your bills are predictable yearly and not at all weekly, fortnightly or monthly. So stop doing them together, otherwise how will you know if going for dinner tonight will actually leave you short on your annual car rego due in 2 months time?
The 2nd set of accounts you need are savings, but these need to be split into different buckets – long term savings, for your future so that one day you won’t have to work for a living, holiday savings to go to amazing places or make great family memories and then the other fun stuff we like to do – buying gifts, gadgets, clothes, special occasion things.
The reason for separation is simple – imagine you had $5k in a holiday account and $25k in your house deposit account, how much will you spend on your holiday? You’re far more likely to take a $5k holiday, than if you just had 1 big savings account with $30k in it. People who put all their savings in 1 place end up doing one of 2 things – blowing it all on the holiday, or never spending anything and going years without taking a break.
Having separate accounts is the first step. Controlling the flow of funds is what makes it all work and sets everything on autopilot – regular allowances paid into the right accounts at the right time, but let’s start out with where your income goes in.
Pouring your pay into the account with your debit card and trying to quickly scoop out enough to cover bills and different savings is too hard and too easy to mess up.
Turning it around the other way, to put your pay through the bills account is like putting down the water jug. This allows you to escape the pay cycle nightmare.
Getting paid monthly sucks – it works for a lot of the bills, but there’s always too many weeks in the month.
Getting paid weekly sucks – great for weekly spending, but quarterly, or worse, annual bills are terrifying.
Fortnightly pay is the worst of both worlds – pay week is great, the other week isn’t and the awkward lumpy, quarterly and annual bills are still horrible.
But putting your pay into the bills account and setting up an automatic WEEKLY allowance, now means you always have money for the things you do every week –groceries, lunches, coffees, petrol, regular entertainment. It’s like taking some of your pay each week and putting it through the old system and it doesn’t matter what you spend the money on, just that when it’s gone, you might need to wait a couple of days for some more.
This is what budgeting actually is – having a budget for something and sticking to it. The difference being, you now know how much you’ve got and you’ll quickly learn if you keep blowing it all in the first 2 days that you need to re-prioritise the money to make it last. But it’s probably better to have the money land just before the grocery shopping is due and then spending the leftover on Saturday night, than having a big weekend and trying to grocery shop using the leftovers!
But fun money is best managed on a monthly cycle – you get a decent chunk of money at the same time every month, but because it’s monthly, it triggers your brain to quickly figure out where to prioritize it – For us it’s all about birthdays and events, like weddings, or planned weekends or something. If it’s a light month for those, then spend it on clothes, gadgets, or some other treat.
Holidays can now be planned for, so you simply work out what you want to spend and when and put enough in your holiday account each fortnight or month to hit the target.
Long term savings is actually the part I care most about – it’s the deposit for your house, or paying it off, or the deposit for an investment and should be fixed at 15-20% of your income. 10% as an absolute minimum if you’re struggling to make ends meet, because you can always get by on 90% of what you earn.
Now lets get back to the banks and the reason why none of them will ever give you this advice. You see we’ve all got these mobile phones with internet banking apps, so putting all these accounts in one bank just makes it way too easy to cheat and nick money from one account if you’re a bit short. So what we want is to put your day to day account and fun accounts – the 2 spending accounts into Bank A and then everything else with any bank except Bank A.
Setting up a system like this takes you about an hour, once and then it’s done. Sure you can review things every so often and dial up or dial down the amount going to each account, but once it’s all automated, you’ll find it way easier to stick to it than not.
If you’ve already got all your direct debits set up on your regular bank account and it’s one of those accounts that you have to put a minimum of $2k/month into it to avoid fees, then why not convert this into the Bills account, but cut up, or hide the debit card. Most importantly, stop carrying it with you everywhere you go – it’ll keep your wallet lighter and avoid the risk of accidentally spending the money for the annual car insurance bill due next month.
You can set up new accounts, with banks like ING, NAB, Citibank, ME bank for your weekly spending and monthly fun. Most of these you can open up online after hours. For couples, I’d recommend having a weekly allowance each, just so you each have a bit of freedom, but just be clear about who pays for what when you go out together and who has the grocery budget.
Once the accounts are set up, you just need to decide how much needs to go into each account, but it’s not an exact science. Work out the bills properly and add 5-10% on top to allow for increases and stuff you might have missed. Work out the Long term savings properly based on your income and savings goals. Then just guess the weekly and monthly amounts and be prepared to adapt after having a go for the first 2-3 months.
Then set up the automatic transfers from your bills account to the others and get on with it.
If you’ve got questions, please post them on our Facebook page, or web page and we will get back to you. And if you like this video, please like, share and tag your friends and subscribe to our youtube channel. And once you’ve become brilliant at saving and got a deposit together, get in touch and we will help and guide you to becoming great brilliant at property buying and investing too.
I’m Max Phelps from Golden Eggs Home Loans, where we’ll help you grow your golden eggs!