Putting your money to work and automating your financial plan

When it comes to devising a financial plan, I start with the assumption that every dollar needs a job.

Money without a job is a bit like trying to hold water in your hands, it will leak away a lot faster than you think.

So how do you set up a financial plan that gives your money a job? In this article, I break down how we set up a plan for a client that automates their day to day spending whilst making sure they are investing for the future.

How much does your life cost to live?

The first step in any financial plan is to work out how much money your life costs to live on an annual basis.

Whilst many people will budget on a fortnightly or monthly basis, we believe the best approach is to start with an annual budget.

Why? Because there are a lot of expenses which happen throughout the year that aren’t consistent. The most obvious of these are Christmas expenses or holiday expenses which don’t happen every month but can be large one-off expenses.

By starting with an annual budget, you can then divide it by 52 (for a weekly budget), 26 (for a fortnightly budget), or 12 (for a monthly budget).

How much can you save?

Once you’ve worked out how much you spend in a year, you can work out how much you can save.

This is a simple calculation of your post tax annual income MINUS the annual living expenses.

If this number is a negative i.e. you are spending more than you are earning, you need to go back to the drawing board.

If it’s a positive, you need to consider if this is enough of a positive to make sense. If it isn’t, again go back to your spending and see what can be reduced.

As a general rule, you want to be long-term saving at least 10-20% of your post-tax income.

As a practical example, let’s say you and your partner both make $130k plus super (i.e. $260k combined).

After tax, this works out to about $195k.

If your spending rate is $170k, you are saving $25k or 12.8% of your income.

The Main Bills Hub

Now that you’ve worked out your spending and savings rate, the trick is to set up automations so that this happens automatically.

We usually suggest starting with what we call the Main Bills Hub.

The Main Bills Hub is like the central train station of your finances. All the money arrives here first, then departs on the right tracks towards bills, savings and goals.

You both direct your pay to go into this account.

In addition, I usually suggest keeping approximately $10k-$30k in this account at any one time.

The goal of this money isn’t to grow, but instead acts as a float allowing you to set up automatic direct debits without being worried about not having enough money in the account at any one time.

If you only have one offset account, this can be a great account to use for this.

You can then set up any direct debits for bills to come from this account. This may include your phone bill, streaming services etc.

Fun Spending Accounts

The first regular recurring payment you should set up is to your fun spending accounts.

Work out how much money you can each receive each week or fortnight and set up a recurring payment into these accounts.

This is the money you can spend without checking in on whether it aligns with your budget.

If you don’t spend a lot, this money may increase each fortnight but don’t transfer it back to your Main Bills Hub. Just keep it there for future fun expenses.

Holiday Account

The next automatic recurring payment to set up is to a holiday account.

Work out how much you intend to spend on holidays each year and set up a recurring payment to this account to fund that.

For example, if you spend $10k a year on holidays, just set up a fortnightly payment of $385 to this account.

When you go on holiday, you can simply use the money from this account.

Speciality Accounts

You may have other accounts you want to set up for different expenses. This may be a kids saving account or a clothes account.

Whatever is a priority to you, set up an account and fund it each week/fortnight/month.

The only caveat to this is don’t set up too many accounts. If you find your finances overwhelming, it can be hard to stick to it.

Additional Home Loan Repayments

Now that you’ve set up accounts for all of your living expenses, the next step is to think about where to direct your savings money.

For a lot of our clients, a big part of their plan is additional repayments onto their home loan to reduce their loan term.

In addition to the minimum repayment the bank takes from your account, set up a recurring payment of the extra money you want to go onto the loan.

Even if it’s coming from the offset account, an additional payment onto the loan will feel like paying a bill and will mean that you get the house paid off earlier.

The key here is once the money hits the loan, it can’t be redrawn.

The only caveat to this strategy is if you are intending to turn your home into an investment property, you may want to get advice prior to doing this to ensure your tax structure makes sense.

Whilst having money in an offset account has the same financial effect as paying money on the loan, the psychological benefit of paying the additional bill will ensure you pay off the loan sooner.

Investment

Finally, the last step is to set up a recurring regular payment to your investment. This might be into an investment portfolio or something else like an investment property that you need to top up after the rent is received.

Again the key here is to automate this so that it happens every week/fortnight or month without you having to take any further steps.

Invest first, live on the rest

One really good philosophy is the idea of investing first, and then aiming to live on the rest.

The beauty of the above plan is once money is on the home loan and in your investment, if you just focus on living on what you have left, your plan will succeed.

If you try to do this the other way around where you spend money and see what’s left at the end of the month for debt or investment, you probably won’t get ahead.

If you’re looking for help in devising your financial plan, then please drop us an enquiry on our contact us page. We work with clients all over Australia and would love to hear from you.