Lesson 4:  Money Flow and Spending Plan

Understanding our Money Flow

Our money is a limited resource in that we only have what we have and it can be difficult to get more of it, so we must be intentional and aware of our spending habits and how best to allocate it to make sure we’re using it in a way that we want.

A simple process to gain clarity on this is to create a money flow diagram where we sketch out the flow of our money between our different bank accounts.

By creating a money flow diagram, we can apply two simple principles: Simplify and Automate to help us better manage the flow of cash in and out of our lives.

To simplify we need to reduce the number of accounts we have and the places we send our money. Fewer accounts will mean less account keeping fees. It will also make it simpler to manage and we’ll gain more clarity on what we have to spend and save. Ideally when it comes to managing money well we need just three accounts:

• Saving Account
• Bills Account
• Spending Account

When we automate our money flow it automatically goes where it needs to go and removes the need for us to manage it. Automation helps us to become better organized and also protects us from ourselves. By automating our finances, it becomes harder for us to sabotage our spending plan. Automation helps us to save, pay bills on time and to develop healthier money habits.

Creating a Mindful Spending Plan

If experience has taught us something, it’s that budgets don’t work.

It might sound like a strange statement coming from a financial planner but it’s the truth, why?

So what can we do instead?

We can create a mindful spending plan.

Where a budget is a list of planned income and expenses, a mindful spending plan is a tool that tracks and aligns our spending with our values. We start by identifying our goals and working out what our priorities are for using our money. With a mindful spending plan we decide exactly how we’re going to spend our money.

It’s not restrictive, it’s empowering.

It’s a less rigid method for managing our money, as there aren’t any guidelines or rules to tell us what we should and shouldn’t spend money on. Instead, we get to prioritize our spending and allocate our money to what is most important and what we value most in our lives.

Changing our Approach

Most of us receive money and allocate it bills then spending, then savings.

Others may opt for an approach of spending, then bills and then savings.

Both of these approaches often mean that saving is left to last.

When we leave saving to last generally there is nothing left over at the end of the week or month because it’s not a priority for us. We can always find something else to spend our money on so our savings take a back seat.

Ideally the approach we should be taking with our money is to allocate it as follows:
Savings then Bills and then Spending

This simple approach helps us to prioritize our saving.

Step 1. Arrange to have our income or salary paid into our bills account.

Step 2. Set up an automatic transfer to our savings account as soon as we get paid. It doesn’t matter if it’s $5 or $50, just start with something.

Step 3. Add up all the fixed bills. These are things like mortgage, rent, electricity, rates, registration, insurance, private medical cover, child care costs etc. This amount needs to stay in the bills account.  There should be no ATM access to this account. It’s for paying bills only.

Tip: Where possible we can arrange with our service providers and billers to have weekly repayments come out of our account instead of quarterly, monthly or fortnightly. Most providers are happy to arrange regular direct debits and by paying smaller amounts regularly it becomes easier to manage and we’re less likely to be hit with irregular and large bills that seem to pop up like rates and registration.

Step 4: Whatever is left over is our spending money and will include groceries, petrol, clothing, eating out and other entertainment. We can set up an automatic transfer to our spending account that will have ATM access to it to pay these expenses.

Note: Some people prefer to use their credit card with an interest free period, instead of having a separate spending account. In this case, all spending is done on the credit card and the balance owing is paid off before the interest free period expires.

The trick to creating a successful spending plan is to use the money you allocate to each area only for the assigned purpose. If another expense or things crops up that you want or need, then you have to re-allocate money from another area, or make a compromise.

Spending Leaks

We all have them, those little expenses we have that we can’t resist. Perhaps it’s our daily coffee or our breakfast on the run when we can’t be bothered to make it at home. Maybe it’s our gym membership that we never use or the Netflix login that we hardly watch. Little things can certainly add up over time.

Part of creating a mindful money practice is to bring more awareness to our spending habits. We don’t have to stop spending all together, it’s more a case of creating a point where we stop and think, before we act out of habit. It’s about creating priorities for our money.

There is a really great calculator by LearnVest, Turning this into that. It shows how your small spending habits could be replaced and turned into something else, something that we value more or that will bring us more joy and contentment in life.

Move on to Lesson 5