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.

You may also enjoy these related articles:

1. Budgeting tip: Medical costs
2. Budgeting tip: They don’t make things like they used to
3. Take The Financial Pressure Down

This week is National Identity Fraud Awareness Week (NIDFAW), so I encourage you to consider how you may be placing yourself at risk of identity fraud. Then act to prevent it.

NIDFAW spokesperson Peter Campbell noted that “potentially, all it could take is a combination of a few carelessly discarded pieces of information such as name, date of birth and bank account details for the fraudsters to have the information they need to attempt to commit identity fraud.”

How my sister was defrauded

• Offender contacted her bank and changed her phone banking password.
• Offender ordered a Visa Debit card linked to her savings account.
• Offender stole the Visa Debit card and PIN from her letter box.
• Offender withdrew the max $1,000 from ATM using Visa debit card.
• Offender used phone banking to make a cash advance from her credit card to her savings account.
• The next day the offender withdrew another $1,000 using the Visa Debit card.
• That same day my sister detected the fraud and contacted her bank about the missing $2,000. The card was cancelled.

It could easily happen to you

Often we are very conscious of online identity fraud but paper based fraud is still the most common way for an identity to be stolen.

And 75% of Australians put themselves at risk of paper based identity fraud by throwing away highly sensitive information.

Lock away your mail

Needless to say Julia now has a lock on her letter box, as do we. I recommend that you do too.

In fact, some years ago after mail was stolen from the letter box at our old house we decided to get a post office box. If there is a post office convenient to you then a post office box can be a low cost way to help protect your sensitive mail.

A post office box also helps keep your home safe when you are away on holidays by preventing mail accumulating.

Store safely

Physically

For legal reasons it is a good idea to retain copies of your tax returns and related financial statements for around seven years. These documents contain precisely the sensitive information that could enable your identity to be stolen.

To help protect your identity store these records in a lockable filing cabinet. And of course keep the cabinet locked with the key hidden away.

I know that we have so many locks these days that it can be considered inconvenient to lock things and hide the keys. So I was excited recently to find a very affordable small lockable key cabinet at my local hardware store. Yes it is more of a barrier than truly secure, but it is convenient and thieves do first need to find it. Plus it helps keep my young children out of places I don’t want them.

Electronically

Today many of our statements and records may be received electronically and stored on our computers. This is convenient and low cost. But if your computer is stolen or simply accessed while you aren’t around you could be giving up sensitive information.

Protect yourself by:

• Password protecting your computer.
• Storing these sensitive records in an encrypted folder on your computer.
• Automatically locking your smartphone when not in use.
• Securely erasing disk drives before discarding of old computers and USB drives. (Ask a geeky friend or relative to point you in the right direction.)
• Create passwords/PINS that are not easily associated with you and your details such as date of birth, phone number and age.
• Only allow trusted close friends to EFT money directly into your bank account.

Encryption is easier than you may think. Most modern computer operating systems (e.g. Microsoft Windows) have an inbuilt encryption facility that enables you to selectively encrypt folders.

Many of us now have smartphones and use the apps to store documents and access websites that contain sensitive personal information. For convenience often these apps automatically remember your logins and passwords. So ensure that you lock your smartphone when it is not in use.

Update on 2nd April 2011: New research has shown that “over half of secondhand mobile phones retain important personal data of the original owner”. So ensure you  format the phone’s memory and destroy your SIM card before discarding it.

Share birthday wishes privately not publically on Facebook, Twitter and other social media. Even just saying “happy birthday Matt” on Facebook gives away the day and month of my birth. Adding the personalisation of my age is a nice touch, especially on a milestone birthday, but it gives away my entire date of birth.

Shred before discarding

Documents containing the following sensitive information should be shredded before being placed in the rubbish bin:

• Account details (of anything where money can change hands)
• Dates of birth
• Tax file, Centrelink and Medicare numbers

Personally I like to shred statements and letters referencing any account details for anything. This includes all bank, investment, superannuation and insurance products, plus utility bills.

Protect your identity and the environment

If like me you like to recycle paper then I recommend you buy a compost bin. I discovered recently that putting shredded paper into our composter helps to keep it balanced and healthy. Plus composting saves us money.

Other tips from NIDFAW

The partners in National Identity Fraud Awareness Week suggested these additional tips:

• Check your account statements regularly and look for any unusual or unauthorised activity.
• Subscribe to an ID theft protection/monitoring service such as Secure Identity that allows you to proactively monitor your credit file for fraudulent activity and be able to react swiftly should you become a target for ID theft.
• Contact your credit card company and banking institution before departing for travel, or your travel may prompt a block on your account.

For more information on how to protect yourself from identity fraud, and how to cope if you are a victim of ID fraud, visit the official campaign website www.stopIDtheft.com.au or www.crimestoppers.com.au for more information.

Got your own story or extra tips?

Have you been the victim of identity theft or know someone who has? If so, please share your extra tips for how to prevent what happened to you. You can do so in the comments below. (Share it anonymously if you prefer to protect your identity.)

Article sources include:
* National Identity Fraud Awareness Week (NIDFAW) media release.
* Fellowes (2010), Newspoll Survey, Australia – ID Fraud Awareness, conducted on a national online study with a sample of 1211 people aged 18-64 years.

You may also enjoy these related articles:

1. National Identity Fraud Awareness Week
2. Is this a scam?
3. The Three Fatal Financial Behaviours

Create your own wealth creation plan

This course will provide you with a detailed overview of the key things you need to know to make smart financial choices that are right for you. As well as discovering what you need to know you’ll also learn how to take action straight away.

As a result of completing the activities during this course you will:

1. Create a wealth creation plan to achieve your lifestyle goals
2. Identify how to plug any gaps in your financial foundations
3. Understand mainstream investment, superannuation and insurance structures
4. Understand the appropriate next steps you need to take in wisely managing your money

It will be hands on with activities for you to complete each week as you construct your personal financial plan.

I am presenting this seven week course  as part of the regular Adult Community Education courses offered by the Challenger Institute of Technology (formerly called Challenger TAFE). It will be held at their Heathcote campus in Applecross, Perth.

Learn more about the course and how to enrol here.

You may also enjoy these related articles:

1. Find Ten for Wealth
2. The cost of retirement
3. Financial Planning Week 2011 – Free resources

If so, then this e-book is brimming with ideas to help you kick start the new decade.

My article, “How To Have Enough Money For What You Want” is on page 17.

Most things in life require money to support them. My article shares a process to help you have enough money for those things in life that are most important to you. So if you are reviewing 2009 and setting new goals for 2010 my article is on the money about the money to support you achieving those goals.

You can browse the entire book below or download a copy to your computer.

You may also enjoy these related articles:

1. The Three Fatal Financial Behaviours
2. Defining TRUE financial planning
3. The dilemma of realistic financial goals

Almost all respondants said that they think about these things daily or a few times a week. That is a lot of time and energy consumed on money matters instead of spent doing the things you really love. Better to resolve the issues and spend more time with family and friends, or pursuing your hobbies.

Most issues fell into these three broad categories: Planning, Saving and Investing. For example:

“How will I have enough money for…”

“How can I save more money for…”

“Where is the right place to invest my savings?”

For an insight into the process to resolve these issues watch the recording of the webinar below.

The recording is 45 minutes. A small time investment when you consider the time cost of repetitively thinking about financial issues without resolution.

For assistance to make more clear, confident financial decisions call me.

Download video as an MP4 file (126MB)

You may also enjoy these related articles:

1. The Three Fatal Financial Behaviours
2. Take The Financial Pressure Down
3. Defining TRUE financial planning

You give up flexibility for certainty plus you often pay more.

 The initial attraction to fix rates is often primal – we hate to miss an opportunity to save money. With more rate rises forecast that’s precisely what people think they’ll be doing if they fix rates.

Most get it wrong

The reality is somewhat different for most. Research has shown that over half of people who fix their rates end up worse off financially. They pay more interest and repayments than if they’d left their loans variable.

For a personal illustration of that just ask anyone who fixed their rates two years ago when there was still talk of rates going higher. That crystal ball was clearly broken.

The Rate You’ll Be Paying

One belief is that you can fix your rate at the current variable rate, so as soon as rates go up you’re in front. That is not the case. Fixed rates are set taking into consideration the lender’s forecast of rates during the fixed period.

The following table summarises rates as at 7th November 2009 from the four biggest lenders:

Source: Cannex

Ponder This: If you fix your rates now how high do variable rates need to go before you break even overall?

For and Against

Why Fix

• You can’t keep food on the table if your repayments go much higher
• Your mindset is that certainty is a very high priority. (Any control freaks reading this article?)

Downside Trade-offs:

• You immediately pay a higher interest rate and higher repayments, which impacts your cash flow
• You are very restricted on the amount of additional repayments you can make, meaning you can’t ahead as quickly as you may like.
• There can be a break fee if you need to refinance during the fixed term (usually when your fixed rate is higher than the variable rate, like now.)

Things To Consider

What are your life plans over the next three or five years?

Your financial decisions today impact on the options you will have available to you tomorrow, next year and five years from now. If you’re not well informed some decisions you make can shut out important life choices you would like to make in coming years.

For example, let’s say you plan to upgrade your home in the next few years. If you have a fixed rate you may be liable for a large break cost. At the time the cost may be so high that you can’t afford it and end up not being able to move as desired.

Maybe you don’t plan to for certain, but maybe it’s an above fifty percent possibility. If so, wouldn’t you like to keep the option flexibly open to you?

Before fixing your rates write down all the things you think you may like to do in the coming years. Project out as far ahead as the period for which you are planning to fix your rates.

Pay rises

Right now you may not have the cash flow to make high additional repayments but keep in mind the pay rises and bonuses you may receive over the next two to three years. Wouldn’t you love to be able to use them to nail your mortgage?

Cash flow control

Remember that if your cash flow is hyper-sensitive to increased repayments then fixing rates will immediately increase your pressure. Instead, over the next few months redirect that same amount into getting some cash flow coaching. You’ll discover ways to save money that’ll actually decrease your sensitivity to rate rises.

Call or e-mail me now to enquire about my Cash Flow Coaching program.

Still Unsure?

On thing you can do is hedge your bets by splitting your loan into a variable and a fixed portion. It doesn’t need to be an even split.

If you’d like some assistance in making the decision then book a meeting with me. I’m confident you’ll have a clear decision in under an hour.

Please Share This

If you found this article to be useful please forward it to your friends who have mortgages.

You may also enjoy these related articles:

1. Is now the time to fix interest rates?
2. 3 tips to manage your mortgage stress
3. Six tips for choosing the best home loan

Your current financial situation is the cumulative effect of all the financial and lifestyle choices you have made to date. Over time your possible lifestyle outcomes diverge greatly and not necessarily towards the outcome you most want (represented by the star on the diagram to the right).

The purpose of comprehensively planning your financial situation is to maximise the probability that you will meet or exceed your desired lifestyle.

Implicit in this is to minimise the impact of negative outcomes from your choices and from external events.

Why we don’t meet our financial goals

I believe there are three main categories of reasons we don’t meet our financial (and therefore lifestyle) goals:

• Knowledge – we don’t find out the right things for us to do right now
• Behaviour – we don’t do the things we already know we should be doing
• Time – we take action too late (delay)

In this article let’s look at three financial behaviours that can prove fatal to the achievement of your goals and what you can do to overcome them.

There are other destructive behaviours. I have chosen these three because they eat away at your foundation and are counter-productive to your other efforts. Long term readers may notice they link to the three Cs of Money Mastery.

The Three Fatal Behaviours

1. No idea what you spend

The common impact of this behaviour is that you end up spending way too much money on insignificant things and don’t have enough for really important things. The longer term impact is that you will not be diverting enough savings to longer term wealth creation meaning you may never be able to retire on your terms.

A symptom of this behaviour is thinking “wow, where did all my money go?” Another symptom is having an ad-hoc important event creep up on you, like a wedding or milestone birthday and you not being able to afford to fully participate. A variant of that symptom is that whenever that happens you whack it on your credit card and spend months trying to repay it.

What to do

You know what to do to solve this one just like I know what to do to get fitter. If you exhibit this behaviour hire a personal trainer for your money to support you in getting financially fit.

Call me about cash flow coaching and read my last article for additional suggestions.

2. Haphazard investment decisions

We make haphazard investment decisions when we don’t really know what is the best option for us but we can’t be bothered spending the time and energy on the research. So we tend to do what others are doing and take emotional comfort in being part of the crowd. (For most people this will be sub-conscious.)

The impacts of this behaviour are many and include:

• Mediocre returns – you may make money but probably nowhere near enough for the ‘risk’ you took, and also not as much as the rest of the market. So you miss your lifestyle target (the star).
• Stress – you are not confident about the investment so you are stressed about what could or is going wrong. You saved time doing the research but traded it for emotional stress – what’s the point?

What to do

The solution here includes:

• starting early (like right now) so time is on your side
• starting simple with only what you currently understand
• Taking incremental steps forward in your knowledge so you can increment forward in complexity of investments
• Hiring a mentor to educate you and thereby increase your confidence and capability. (A good financial planner will not only advise but also educate you.)

3. Blind optimism

This behaviour is all about the impact of negative outcomes from your choices and from external events.

Optimism – you think it’ll never happen to you. You underestimate both the likelihood and the consequences of something going askew.

Blind – You don’t even bother to investigate, consider and evaluate what could go wrong and its impact.

What to do

“Sometimes maybe curiosity can kill the cat-astrophe before it actually happens. Ask questions, seek answers, find possibilities.” Wise words from one of my mentors, Glenn Capelli.

Next erect your safety nets so if you fall off the tight rope of life you bounce rather than splat.

Do It

You probably know this stuff already – I write about it all the time. But if you are not doing the positive things you are robbing yourself of riches. One day the party is going to end and you will wake up with a rude hangover (that could last decades).

Party responsibly and you can enjoy both today and tomorrow.

Just like health, if you need support and accountability to implement new financial behaviours hire a personal trainer and even buddy up.

To have enough money to live the life you’d love stop researching new trends (K), start doing the foundation actions (B) and do it now (T).

Yours in prosperity

Matt Hern CFP
Financial Educator and Adviser

You may also enjoy these related articles:

1. Take The Financial Pressure Down
2. Solving The Financial Decisions On Your Mind
3. The source of financial stress

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

The 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

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.

You may also enjoy these related articles:

1. The source of financial stress
2. The Three Fatal Financial Behaviours
3. The dilemma of realistic financial goals

Or maybe have you been holding out on your regular investment plan because you haven’t felt comfortable?

If you made that decision based on an emotional trigger such as “feeling tired of losing money” then you face the real predicament of getting back in too late and missing out on big gains which often come in the early days of an economic recovery.

Watch the video below for some insights into how to decide when to start investing again.

You may also enjoy these related articles:

1. Misleading marketing finally acknowledged
2. Investing between the flags
3. Over 10 years they’ve never lost

The Find Thirty campaign encourages us to complete 30 minutes of physical activity each day as an investment in our physical health.

Imagine the possibilities if we also found thirty minutes for wealth?

Imagine how financial literate you could become and how you could use that to create enough money to afford to do and have what you really want.

The twist – DO, not THINK

The interesting twist is that the Find Thirty campaign is not reading or thinking about exercise – it is doing exercise.

For all the hours I may have spent watching “The Biggest Loser” I haven’t lost a kilo of weight, beefed up my muscles or increased my aerobic capacity.

Find thirty to DO wealth creation

The great news is I think that if you spent 182 hours per year implementing wealth creation strategies you could become very wealthy indeed.

That means that making money is possibly easier and quicker than getting healthy. You beauty!

Even if you split it 50:50 and spent 91 hours per year learning and 91 hours implementing you could become a serious money master. How that would change your life!

Learning is important, but not enough

Please don’t misinterpret me. Your financial literacy is essential to how effectively you manage your money. Your knowledge helps you do the right things, in the right way and at the right time.

That’s why it is often said you don’t need money to make money. You just need knowledge. So definitely keep learning.

Financial literacy (and financial health) also shield you against fear and stress at times like we are experiencing in the economy right now.

Find Ten will just about do it

The great news is that unlike physical health, financial health doesn’t require everyday attention (for most). You can concentrate it in a couple of sessions, so long as you just do it.

I think that you’d be in good shape if you could average ten minutes per day on proactively building your financial health.

Sadly, many people spend less than that over a whole year!

An average of ten minutes could look like this

You could average ten minutes per day if you did this:

• Up to one hour per week ensuring cash flow is on track and within budget. (The better you are the less time is required for this step.)
• One hour per year benchmarking the performance of each of your investment assets (including superannuation)
• Three hours every three years ensuring your personal insurance policies are still adequate
• Four hours per year reviewing and evolving your long term strategy with your financial planner

In fact the more you outsource to a trusted financial professional as your partner the less time you personally need to spend to stay financially healthy.

Let’s just do it

For some people maybe it is time to spend less time learning and more time doing.

The benefits are:

• More money for what you really want to do and have
• Less financial stress (which often leads to relationship stress)
• Happy days

I understand the predicament – there is so much wealth creation information out there that it is easy to become overwhelmed. For fear of doing the wrong thing you do nothing. The problem is that delay is the greatest cost in wealth creation.

The great news is that I have spent the last nine years working out what strategies have the highest impact for the lowest effort. So, for help in taking action with the right strategies for you call me directly on 1300 669 101.

You may also enjoy these related articles:

1. Announcing: DIY Wealth Creation Course
2. An updated wealth creation rule of thumb
3. The annual cost of retirement