Improving Your Financial Health – Step 2

As promised, here’s the next instalment in my guide to achieving Financial Health.  If you haven’t done so already, I highly recommend reading Improving Your Financial Health – Step 1 before you continue with this article.


Improving Your Financial Health – Step 2

In “Step 1” mentioned a number of phrases that encapsulate what “Financial Health” or “Freedom” meant to me, I have included them below.

Full awareness – (of my Financial Position)
The ability to be open and honest – (with my family)
To have choice – (where we spend our money)
Ability to handle “surprises”
Guilt Free Spending

In this post, we are looking at the 2nd phrase, The ability to be open and honest – (with my family).

Open & Honest

Just to be clear, I’m not talking about suddenly going from keeping a closed book on your finances to proudly standing on top of a podium in your busiest mall, announcing to the world your latest financial health check report.  That’s a little too open, even for me.   That said, I gave the subtext in the phrase “The ability to be open and honest” as “with my family“, which is true for me, but there is more to it than that.

We’ve already covered being honest with yourself , in the first article (link is at the top of this post), I talked about finding out the reality of your current financial health, as we covered, it’s not an easy step.

Who to be honest with ?

I think the simplest answer is ideally anyone who has influence over the spending of, or allocating of a budget category.  For example, in the “full awareness” step, if you are jointly responsible for the household budget (ie, flatmate, spouse or significant over) then it’s pretty much everything.  I wholeheartedly advocate a completely open financial book for you and your significant other.

If you share any kind of dwelling, and some of the bills/budget with your cohabitants, then it’s openness about all of those specific areas which you share or take joint responsibility for.

Kids is a little trickier, you need to choose the right time to introduce financial planning help, but once you do, again, learn to open up with them about any budget areas they can have an influence in.  Also to understand the full picture of your financial position, it can help them understand what they can do to help or get involved.

For example, when we brought together our families, we sat down with all of our teenage children in one of our family meetings (another useful topic in a parenting section we may start to include), we discussed ways in which as a family we can reduce our spend.  We were honest about our financial health situation and what issues we faced, from our perspective.  Then asked the kids what their perspective was, what issues they saw, and what goals they wanted.

We looked at categories such as Groceries, TV/Internet/Phone, Cell Phones, Electric/Water etc, anything that we all had use of or influence over.  We made decisions as a family, that EVERYONE could understand and get behind.  We reduced our cable TV monthly costs, monthly grocery budget, increased awareness regarding electricity usage (which had both a financial and importantly environmental impact).  Actually resulted in over $400 per month saving on our monthly outgoings.

Whats so important here, is that the conversations around these topics, were not only carried out with openness and honesty, they were also inclusive.

The bottom line

Being open to a financial analysis can reduce your financial stress.  The old adage, A problem shared is a problem halved, rings true here, but its much more than that.  Being open ensures your own honesty, it enables others to understand and get on board with any changes that are required to achieve our goals.  It ensures accountability, once you have shared your goals and commitments with someone else, you are much more likely to stick to it and make it happen.  Essentially you are putting your positive intent out there, here’s my current situation and here’s what I want to do differently.

Whatever your current financial situation, you can make a difference to your financial health and reduce stress.  It can start now, it’s all just choice.

 

Types of Budgeting: The Multi-Pot Approach

Forget Other complex Types of Budgeting and keep it simple

I mentioned on Facebook, that I would put together a post on my Multi-pot Budgeting approach, so here it is.

This approach is one of the cornerstones of the budgeting system I have put in place for myself, my family and others over the last 7-8 years.  It requires a some thought, some discipline and is how I ensure I have money for when non-monthly bills hit.

Some groundwork

Budgeting 1-0-1

Budgeting is pretty standard and straight forward right ?  It’s a well known approach.

  1. Know what you have (see my post on Improving Your Financial Health – Step 1)
  2. Know what you need
  3. Allocate a weekly/monthly amount for those category,
  4. Either save it until you need it, or spend it if its in the “living expenses” budget
  5. Stick to your budget!

piggy-bank-Types of budgetingI like to split budgeting into 2 different types.

The first budget type, is the standard monthly “living expenses”, stuff that you KNOW you will spend every month. Gas, Groceries, Utility Bills, Snacks, Drinks, Eating out etc.   This takes up a large chunk of most incomes.

The second budget type, my “budget pots” are the items you need to budget for on a 2 to 12 month or longer basis.  Categories that don’t come up each month.  Some will have known dates/intervals, others will occur randomly depending on other factors, but you know they will happen.  For example, car maintenance, household repairs/maintenance, education etc.

The latter, is the area that you can more easily implement the multi-pot approach.  It’s the budget type that I will focus on here for my examples.  It can be applied to “living expenses” but not as easily.

Lets get started….

We’ll use an example to take us through the key principles.  We’ll just use 3 budget categories for illustration…

  1. Car Maintenance
  2. Household Maintenance
  3. Birthdays/Gifts

I will also use easy numbers for the budget, so the actual values are unlikely to be realistic for your budgetary needs.

We’ll begin by looking at each category, how much we need for a year, and how much we need to put into the pots each month to achieve that goal.

Annual Budget
Multipot-1-Types of budgeting

For our purposes, lets say that we have an account that has a Zero balance to begin with.

On month 1, we deposit our monthly budget amount of $225.00, the same on month 2, 3 etc

That money builds up, and after month 3 we have a total in our account of $675 and it keeps going up (provided we don’t need to spend it).

Rolling Budget Totals
Multipot-2 copy-Types of budgeting
Nothing new about that, so what am going on about ?

My big focus on budgeting is reducing stress, for better health.  Having money allocated, knowing what its for is all part of reducing that stress, as is how to spend it and the mentality around doing that.

Time for some expense

Types of budgetingWhat happens when you need to spend money on one of the categories… back to our example.

We get to month 2 (we have $450 in our account), and we have a leak in the bathroom.  Plumbers are expensive, but it’s got to be fixed.

  • Plumber comes and goes, leak fixed but we had a $300 bill.
  • Good news, we have a household maintenance budget.
  • Bad news, the home maintenance budget pot only has $150 in it
  • Good new, overall we have $450 in the budget account, so at least we can pay the plumber

Now we have paid the plumber, lets take a look at our budget “sheet”…

Post Plumbing Payment Budget Sheet
Multipot-3 copy-Types of budgeting

In the table above, our household maintenance, shows as $150 over budget. Overall the total of our budget pots is still $150 to the positive.  For many people this image is where we feel we have failed, we are over budget, even in just one pot, often it makes us feel like giving up.  But not for me, not when you change your thinking.

If we look at the overall Annual Budget in the image below.

Annual Budget Sheet
Multipot-4 copy-Types of budgeting

The annual budget for Household spend showing $600 still available.  When we are looking at our budget “pots”, we need to consider what we have available in our account now, and, this is IMPORTANT, our annual budget.

There is the issue that if everything hits at once, you may not have enough in the budget pot to cover off the immediate bill, but once you have been running the system for around 6 months, it will start to really come into its own.

I want to fast forward 6 months, and add some expenses to the pot so you can see the overall effect.

Multipot-5 copy-Types of budgeting

 

In Summary

8 Months in and the budget pot is performing as planned (no surprise for an example right), we have paid the expenses that we have needed and have some left over.  We see a scary moment in month 4, where our budget pot was wiped out, and that can be stressful.  Although I have a secret weapon for that kind of situation, but that’s the subject of another blog post to come.

You can see that pots effectively “borrow” from the overall budget if they need to, as its unlikely that all your budget pots will have a major expense at the same time.  The more budget pots you have, and the larger the amount you save each month, the less the chance of you getting to the month 4 situation.

There are times, as is shown in month four, where we had a spend of $600 in one month, which wiped out the budget account.  Ultimately the overall budget WAS able to cope.  In his post about our programs (link to Joe’s post) and his take on them, as my son says his experience when starting up the budget pots was pretty difficult.  For the 1st 3 months, every time Joe put some money into his account, he would have something crop up that would wipe it out.  He does say that at least he could pay for the expenses he had.  Wa are 12 months in, and Joe has a VERY healthy budget account, that can now afford almost anything that could hit him.  He’s 18 and has an exceptional financial start.

Some notes on the example, its much more simplified that the full budget approach I have in place, but the principle is the same.
Just for reference, we now have built up to around 60 “budget pots”, this gives incredible flexibility, but starting with around 10-15 is a good beginning, you can add as you have more money available for allocating.

I can’t wait to hear your thoughts/comments on this approach, and would be happy to answer any questions you have on it and other areas, so please drop me a comment in the section below

Improving Your Financial Health – Step 1

Improving Your Financial Health – Step 1

Before I really start, I would like to introduce myself.  My name is Mark, I’m originally from the United Kingdom, but now living in Florida.  I’m husband, tomark profile pic for financial health my wonderful wife Margie and the father of 4 great kids, all teenagers, and yes I still say great!   I’m an engaged father, that has worked hard on taking a very different approach to the way our whole family budgets. The transformation has left me with the passion to share this approach with as many people as I am able. I find helping others gain a healthy control over their financial lives to be fulfilling and rewarding.


 Financial Health

“Financial Health” or “Financial Health Check” is a phrase that I’ve heard and read about many times, along with “financial freedom”. Both of which are usually associated with the balance of your bank account and having large amounts of money available, with which to purchase what we want and believe will give us a sense of being “free”.

I have a different view these days, and I’m really passionate about it. That’s whats made me want to tackle this as my first article in this series on our site.  I can’t emphasize enough how much of a “life changer” it has been. For Margie and I it was a total revelation, but to be able to influence the financial health of our 4 teenage children, (at the time of writing this, they range from 17-19 years old) gives us even more joy.  We started introducing them to our approach from the ages of about 14 upwards, ideally I think 10-12 would have been even better. Having our children be able to begin their financial life this way has given them the head start that I could only dream of.

upset over financial healthThe words budget or budgeting, what do they mean to you?  For me, it used to bring up feelings of restriction and fear.  Fear of not being able to afford to live how i wanted, and that restriction would have to be put in place and I would miss out on things I wanted to do.

My view has been transformed over the last 10 years.  The approach we now have as a family, and that has me so excited, has taught me something very different. There can be a different mindset to budgeting and financial analysis.  I no longer have fear of my finances, or confusion over what I can and cannot afford, or guilt over spending money on myself or my family.

What does financial health or freedom mean to me now?

Here’s some phrases that help to define my thoughts on the subject, each one will spawn a separate article in the near future, but provides a taste of what it means to me.

Full awareness – (of my Financial Position)
The ability to be open and honest – (with my family)
To have choice – (where we spend our money)
Ability to handle “surprises”
Guilt Free Spending

youth happy about financial healthCan you imagine, knowing what money you have; the purpose it has, not adding to your debt, having money for when things just hit you out of the blue?  If that sounds like something you would like, read on…


Step 1 – Full Awareness

This is the 1st key concept and although it’s a very simple one, it’s actually probably the hardest to achieve.  It requires an open mind and complete honesty, something that is very useful for when we get into the the subject surrounding the second phrase on my list above.

Many of us live our lives wanting to believe that we are in a place different from our reality. We crave distraction and diversion from our day to day lives.  This is no different when it comes to financial planning help, wanting to project the financial image we want, rather that the reality.

The first real step to financial health requires us to take a real, open and honest look at the truth about our monetary position or a financial health check.

dollar-is financial healthfinancial-crisis or financial health1. What money do I/we have coming in ?
2. Where is my/our money going ?

These are two questions we have all been faced with many times and are, on the surface, pretty simple.

Usually people have a fairly good idea of how much money is coming in, although depending on your income stream, it will need some level of exploration.

For now, we’ll let that one slide by, and tackle the second one, the one that is not so easy to answer….

Where does it all go ?

When most people budget or think of budgeting, they consider the “big ticket” items, mortgage/rent payments, car loan payments, utility bills, insurance payments etc. These are vital starting points to any budget and are the things that give us a base sense of security. If we can’t afford those, we all struggle with our sense of freedom.  Its the other section of our outgoings that I’m most concerned within this article.

What tends to happen, once the critical items are ticked off as having been accounted for in the budget, is that any money “left over” is considered disposable income.  Its the disposable income that’s the key, this is the thing people miss when talking about budgeting. I refer to this as “Stealth” spending.

What is “Stealth” Spending ?

coffee-beans for financial health Let’s “grab a coffee”. A significant proportion of us have membership/loyalty cards, membership cards that are auto refilled from our bank accounts, bypassing almost any conscious thought of the amount we are spending.  Even if you don’t have a membership card, the principle still stands. Many of us will spend on a regular basis, with the “its only a couple of bucks” mentality, or just through unconscious habit that damages our financial health.

The question is, how much will we spend at our favorite coffee house each week or month, and what does that mean for a whole year ?

Lets run the figures…

If a cup of coffee is around $4.00, and we go 3 times a week consistently throughout the year, that’s

achievement-is financial health$12 a week (doesn’t sound too bad)

$52 per month (still not that bad?)

$624 per year  (Ah!)

and that is just one spend category.   Imagine another 10 categories, all spending something similar.

Over $6,000 per year, and the truth is usually much much more than that.  Stacks up fast doesn’t it ?

This is “stealth spending”, I love the phrase. It represents all the things we spend money on, that we don’t think about when considering our outgoings. In many cases, its more that we don’t want to think about it, or to budget for it, as there is uncomfortable feeling of restriction when budget or financial analysis is mentioned.  In some cases we may not consider that a budget is required, or even be conscious that a spending category or habit exists.

Understanding un-mapped spending is the 1st key focus for our financial health program.  It does take work, similar to that first work out at the gym. Like working out, when you have a picture or goal you want to achieve, it can become more and more rewarding with every step.

fear of financial healthThe goal of understanding the balance of income & expense, in our program, is NOT to say you shouldn’t/can’t spend your money on what you want.  It is abolutely about giving you the power to CHOOSE where to spend your money, how you want your money to work for you, and to reduce the fear around budgeting.

Whether your are single, in a relationship or have a family, you can make a difference to your financial health and reduce stress.  It can start now, and really is all just choice.

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