Recently we looked at this list of 15 things put together by John Rampton which may be holding you back from financial freedom. The list is :
- Living Above Your Means
- Lack Of Determination
- Neglecting your Health
- Purchasing a Home
- Relying on One Source Of Income
- Wasting Valuable Time
- Not Acting on Your Ideas
- Not Reading
- Fear and Negativity
- Not Setting Goals
- Avoiding Routine
- Not Collecting Assets
- Spending Time with Toxic People
- Failing to Follow to Allocate your finances (70/30 rule)
- Not Having A Mentor
Today we are going to look at the first - Living Above Your Means.
90% of 'poor people do not save' which then leads to more 'unexpected bills', over spending, long term difficulties and worry. From my days of dealing with the 'control of lending' set in the bank (control actually meant recovery) it was plain to see, that those without a plan or awareness buried their heads in the sand, didn't open letters (usually offering assistance) and spiralled out of control.
On the flip side, those with a budgeting account, a structure for their finances and awareness suddenly seemed to leave my care, their finances were more healthy.
There are many ways to organise the financial budget, the difficulty is, that none of us start from scratch on day one - our financial spending has evolved over years, budgets have been shaped, and we live to them.
Splitting the funds into separate pots as identified in these posts by my colleague Clive Thompson How to take control of your spending and myself Bring the fun back to your finance (and relationship)are a couple of great ways to give some form, but of course, we need to get there first.
The 50/20/30 method (and it's variants) is a great place to start, and also a great place to work towards. Of course, everyone's financial plan and priorities are different, and you should come to your own splits dependent on how your life plan looks, but a good starting tape is @
50% of your NET income (that's after tax) on fixed costs (regular bills and payments) - all the direct debits and regular bills which help the house run.
20% on your financial goals which you will have worked through (savings, pensions etc)
30% on flexible spending - such as food, fun, and financial back up (this is the pot from where the 'me money' comes from.
Of course, to budget properly, everything needs to be thought of - a trip to the dentist, the car costs, Christmas (how many people forget about paying for that each year then spend December worrying about the cost and not enjoying the experience).
As a little exercise, take some time today to work through how your net incomes are spent, you may be surprised how close you are to the model, and on the other hand, it may be just the wake up call which you need to start moving you towards financial freedom.
use the 50/20/30 guideline - 50% on fixed costs (monthly direct debits, bills etc, 20% on financial goals - savings & pensions for example, and 30% on flexible spending - shopping, entertainment, hobbies and fun.