Do you have a system in place for your finances?

Enhanced Transcribe:

Hey folks, it’s Dr Ro here. I want to tackle the subject of money, I’m not a financial adviser I’m not here to give you financial advice. 

If you want more detail I want to talk about money management go have a read of the turning point book, which I wrote 2011 chapter 12 has a whole section on money, money management and how to manage what’s coming in and how you manage it going out and where you are allocating those funds to. 

I talk about if you’ve got a lot of money coming in, not a lot but also if you’ve got a lot of debt as well and how to deal with that as a lot of people don’t do that very well. The most important thing here is to consider the following, you have to look at your immediate current financial situation and your future financial situation. 

A lot of people don’t do this. 

What happens for a lot of people is that they are earning the money it comes in and it goes out and often there is not enough balance there on having some residual. 

When people came up to me at an event they said what do you mean by residual? 

I said how much money have you got coming in versus how much is going out, is there any left over at the end of the month? They’d say not really and then how are you forecasting that? 

There are three things you need to be mindful of, the first one is management of your money. That’s about looking at your finances now it’s like a snapshot of where you’re at. How are you managing literally every penny, every cent every dollar, euro that comes into your account? 

Where’s it going, meaning how much are you allocating, for example, to your basic living costs? 

How much are you allocating to the education of your children? 

How much are you allocating to charity? 

How much are you allocating to debt management or investments and there is a very specific formulaic approach you can use. Based on the certain amount coming in you can portion a percentage into these different areas. There may be several bank accounts et cetera. Bear in mind what’s happening at the moment. Covid, recession is biting very rapidly, we were due a recession about a year and half ago. 10 years later from 2008, 2009 it didn’t hit us. 

It’s been delayed due to quantitative easing and a whole bunch of other things, that is my personal view. But has now been brought to its knees rapidly through Covid and wait till we see the end of the furlough schemes and the end of October when things start to get kind of scary and people realise just how vulnerable they are in terms of their current financial situation. This is really important to understand what your money’s doing and where it’s going. 

One of the challenges I think a lot of people have is simply that although they’ve got all the right intentions to look after their money they don’t have a system to do it. I think that’s the distinction here, that is the first thing how are you managing your money? 

Start to look at it, start to break it down and compartmentalise it and know what’s happening with those funds. 

Next one is income and expenses. 

Now this is slightly different. I want you to start an exercise and look at exactly what’s coming in and think about what’s going out. The best way to do this over the next month, two months actually make a list of what’s being spent, but then put into compartments or bank accounts or groupings. 

Simplest way to do this is to think of the areas where the money is being spent. There will be household groceries, utility bills, social spending, you might have educational spending, you’ve got to categorise that because over a two, three-month period you’ll see where it’s going out and can you tighten up on that. 

Your objective is to increase what’s coming in and reduce what’s going out to create a surplus which is a residual income, if you don’t do this what you’re going to find is you’re always just staying enough. The last one is forecasting. 

Forecasting is different to the other two, the other two are a snapshot of what’s going on now, whereas we are now talking about looking into the future. I’m talking about what’s going to happen in a month, two months, six months, 12 months. If you can forecast out 24 months it is worth doing and you should be doing this on the basis that you want to anticipate any positive or negative situations. You might get a bonus coming in great, you might have a sale of a house coming in great. 

On a personal level, you might have a boiler that you know is playing up if you don’t look at instant cash flow right now, your income expenses and your future forecasting and they don’t tie together. You’ll find yourself in a financial crisis at some point. 

Meaning that boiler you think is playing up what happens if it does play up and it’s a two, three, four grand hit. What happens if that coincides with your tyres and all of a sudden that happens at the same time as the boiler? 

You’ve got maybe five or six grand worth of a boiler and a grand worth of tyres and other stuff is building up, debt may need to be paid back. You’ve got to think ahead. Can you spread that? 

Can you reduce those outgoings to spread them whilst maintaining the income, the surplus is the residual to pay that down it’s very specific approach and it does need to be done properly. I’m not perfect. 

We work at it, I’m fortunate to have a team around me and I have a couple of people I work with who help with that. But at the end of the day it is your responsibility so you need to be able to maintain this level of understanding and the problem is if you don’t know what’s going on in your finances how can you plan? 

How can you start thinking about the future? 

How can you start to work on a strategy for becoming financially independent and all these things, if you don’t even know what your finances are right now. Management is how you manage what’s coming in and what’s going out and over a monthly basis how is your money allocated? 

What percentage goes where? 

Management is the bigger picture, income, expenses is just what comes in and goes out on a personal level where you are spending and forecasting into the future. 

Why is it important? 

Covid is going to kick the hell out of people’s finances in the next two, three, four months, so having some understanding of it now allows you to prepare for the storm. Changes in interest rates, reduce staff, minimise lending, buy yourself time to extend borrowing if you have to stretch it out to give you a chance to ride out the next storm.

I shall see you on my next live.

Disclaimer: This video or written publication does not offer investment or financial advice and nothing in them should be construed as investment or financial advice. Our publications provide information and education only. The information contained in our publications is not, and should not be seen as a recommendation to use any particular investment strategy. Always seek financial advice from an independent financial adviser around your own personal financial situation.

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