3 Steps to Instructing your Money Like a Boss
When it comes to saving, a lot of us feel we can’t save because we feel can’t afford to save. We have so many bills flying our way from all directions and we feel like we are just trying to stay afloat. I completely understand, and well done for not giving up and continuing the good fight against debt. For you finding a way to increase your income through a pay rise or a new business venture might be the best way forward.
This post is for you who thinks that you can’t afford to save when in fact you don’t really know where your money goes on weekly or monthly basis. You remember vaguely getting paid … you think… But you don’t understand how come your account is empty 3 weeks before your next pay day. Saving is just a pipe dream to you, the most important thing now is to call the cops! Because your bank account has most definitely, without a shadow of a doubt, obviously been hacked and robbed!! Obviously!
I am not sharing anything new, you already know this deep down but sometime we need to hear something several times for it to sink in.
The TAP method is my 3 step plan to mastering your money with ease. In fact, it takes all of 5 minutes to do.
Track it:
Find out where your money has been going so you have an idea what you are spending money on. Bill's tend to stay the same every month. This idea is for you if you do not know what you spend on or how much your bills are.
37% Rule
Ten years ago, just before I got my first post-university accommodation, my brother gave me a tip which I work with, and it saved my finances. That tip is what I call the 37% Rule. Based on this rule all your fixed bills including rent should be under 37% of your net income for you to live within your means.
My first grad job paid me £1,500 per month, so when I was looking for accommodation, I looked for a place that was lovely yet under £576 per month including bills. After months of searching, I found the perfect place. It was a house share, about 10 minutes walk from the closest underground station. It was such a beautiful house with a massive kitchen (this was a big deal for me because I like baking) and I fell for the house instantly. I had a short interview with my would-be housemates; we were all professional working 9 to 5 jobs at the time. It had a huge driveway that could fit multiple cars so I always had a place to park and there were two baths and two showers, so that eliminated the morning rush. My rent plus bill came to £411 per month! It was a steal! I rented the place an lived there happily for three years. It was the perfect place for my single self.
Not true anymore
Fast forward two kids, and ten years later, that rule isn’t working so well for us anymore. When we become a single income family our bills to income ratio rose. So we cut back a lot, but our fixed expenses are not close to 37% though we are working towards it.
Get into this habit while you are young
Habits are best formed when the only person you have to convince or take into consideration is yourself. Saving to invest is the easiest way to build wealth and the earlier you start, the more prosperous you will be.
Here is my Free expense tracker I set up and used to monitor my finances. You can use it as you start to design your unique action plan for your financial life
2. Automate payment of bills:
Set up a direct debit for all your essential bills. This will make sure you don't forget especially when life happens. Missing payments can adversely affect your credit score. A poor credit score will reduce the speed to financial freedom. This is because a poor credit score will lead to higher interest rate been offered to you if you need to apply for any loan (credit cards, mortgage, car loans, any loan really).
3. Pay yourself always (PYA):
Imagine this, a sweet party is being thrown in your honour, and it makes you feel pretty special.
But when you arrive, the host tells you that because you go there, late everyone ate all the food (even though you are the guest of honour) and all that is left are scraps and leftovers. They couldn’t even be bothered to save you a plate! How special will you feel? Maybe you might even feel disrespected and unappreciated? Well, that's how i would feel too.
Now imagine you are actually starving? You would probably eat the scraps of leftover food, but you won’t be happy.
Stop Giving Yourself Leftovers!
Now imagine the Host is your present self and your guest of honour is “your future self”.
Every time you don’t pay yourself; you are dishonouring your future self. You are robbing from the future you could have.
We are offering our future selves scraps every time we get a paycheck and we spend it all without paying ourselves.
The secret to wealth - ‘A part of all you Earn is yours to keep - G. Clasons, Richest Man in Babylon'
What do I mean by PYAWell, every month as we earn there are so many other bills which we have to pay. It’s all part of adulting.
For my household, the main bills are the mortgage, phone & broadband bill, electric and gas, and council tax. If you are self-employed, you have to put aside extra money for tax also.
Then I have my subscriptions and extracurricular activities for the kids. By the time the month is over, I have nothing left. If you work to spend all of your salary on bills and activities, then you are paying the government, small business & large corporations. All your hard earned cash without paying the most important person, the person who made the salary possible a penny. It seems unfair that you earned all that money and you don’t get to keep a penny.How to pay yourself always automatically
Set up a fixed standing order to transfer your set personal saving amount from the account your salary is paid into and move it to your saving account on payday. You can set this up once and forget all about it. Review on your next pay rise. Paying yourself automatically removes the temptation to spend more than you should, and ensures you are saving towards your goals.