Personal Finance and Be Money smart! – Part VIII: Financial health check up

After a series of personal finance posts, it’s time to go through a health check on your personal finance! If you have a personal finance planner, then your planner should have gone through annual checks with you. If you don’t have a planner working with you, then it’s not hard to go through a check list with me! Let’s do it, then.

I bought a popular personal finance book before last Christmas: The Barefoot Investor for my summer reading over Christmas and New Year. Oh, for my readers living in the Northern Hemisphere, it may be hard to imagine to spend Christmas and New Year holidays on the beach, on BBQ, and surfing. Yes, it’s our summer time during Christmas here in Australia! ^_< Oh, this post is NOT a review of that book and I didn’t do this post for the publisher (I’m neutral and not sponsored!). ^_+

I always think that I’m doing (almost) everything right in personal finance and investments. I was wondering what the book could offer that I didn’t know, so I got the book. I finished reading the book in a few days over the holiday break. The conclusion is that I (almost) do everything right! Haha…. very nice! OK, let me go through a check list with you, and examine your financial health together.

1. Know where you are first: Before you manage your money, you should know where money comes from (this should be easy), and how it is spent by you (this is at times very unclear!). If you think you know how you spend money, then say so until you actually build a spreadsheet about your money spending behaviour. Most banks now offer you to download your bank statements, so it’s a good idea to download at least 12-month transaction data of your bank accounts and calculate how you spent your money in each category:

Category #1 Regular living expenses: those money you MUST spend to live, such as rents, mortgage repayments, utility bills, grocery shopping, kids expenses, education … etc.
Category #2 Entertainment: these are those fun stuff that you can CHOOSE to spend or not, such as movies, fashion, cafe, dining out, holidays … etc. If you can live without spending on an item, then it belongs here.
Category #3 Saving: this is roughly equal to your monthly income minus #1 and #2. Simple.

In general and as a good citizen (responsible for yourself and family future), say if you have $100 income per month, then (#1 + #2) < $70 (70% of your months income). This leaves you $20 (20% of your monthly income) for emergency and $10 for your future and retirement; they come from #3.

This Porsche is probably falling in Category #2 for me; I want one but I don’t need one.

2. Put your income into 3 buckets (accounts): One is for living expenses, the second is for emergency (your ‘Plan-B’ bucket) and the third is for long-term growth and investment. Basically, Bucket 1 contains #1 and #2. You then split your #3 into Bucket 2 and Bucket 3. In a previous post, I suggested that you should have your Plan-B bucket that you can live off it for at least 3 months when shit happens; ideally 6 or 12 months. So, depending on how much you have in #3, I’d suggest that you put 30% of #3 into Bucket 2 for emergency and the remaining 70% in Bucket 3 for long-term growth and investments.

Set up a bank account for each bucket, so in total you should have 3 bank accounts. If you bother yourself enough to budget your monthly spending, then set up ‘auto-transfer‘ on a monthly basis, so 70% goes to Bucket account 1, 10% goes to Bucket account 2 for emergency, and 20% goes to Bucket account 3 for investment. These monthly auto-transfer jobs can be done through online banking systems with most banks, so explore this. Be patient with Step 1 and 2 because it may be time-consuming, if you haven’t done it before. Once it’s done, then it’s a lot easier afterwards; almost auto-piloting. ^_^

Make sure you have a cover on a rainy day (Photo by Genaro Servu00edn on Pexels.com).

How to use these buckets properly?
Bucket 1 should have easy access to you. If you are concious about money, then you can use a credit card which is always paid off every month by Bucket 1 account by auto-debits. If you are not good at controlling yourself and sometimes struggle at the end of each month, then I’d suggest that you use a debit card (and no credit cards!) by Bucket 1 bank account, so you always know the balance and don’t go over the balance (well, you can’t anyway!). Any money left in Bucket 1 account should be transferred to Bucket 2 account every month (and congratulate yourself, good job!).

Bucket 2 account should NOT have easy access to you (yes, no easy access means better self-control!). So, leave Bucket 2 account as a bank account without card access because you only need it for emergency. Check the balance of your emergency bucket regularly . If it goes beyond your emergency fund target, say 6-months worth of Bucket 1, then transfer that extra money to Bucket 3! ^_^

Bucket 3 account should be linked to an investment account or is used to transfer your money to investments. You don’t need easy access to withdraw money from Bucket 3, so just leave it as a bank account without cards (so you won’t spend the money)! Bucket 1 and Bucket 2 are easy and you only need to monitor their situation regularly (try not to overspend!). Your future depends on Bucket 3, managing your debts, and ….. boosting your income!

Credit cards can be helpful but don’t fall into the debt trap (Photo by Pixabay on Pexels.com).

3. Manage your debts properly: check my previous posts about managing debts. In principle, don’t overspend, don’t spend your future money with credit cards or Afterpay/Zip, avoid credit card debts (ridiculously expensive, almost liky legalised robbery!), don’t take personal loans (just as expensive!) , and repay your loans as soon as you could! It’s a great idea to consolidate your loans into a single loan, if you have any. If you need such a service, then Google will find you a lot financial advisors who live by doing this for clients. Trust me, it’s worth it! I’ve seen clients turning around their lives by doing this.

4. Boosting your income by a side-hustle, or two: consider doing some extra work to earn more income or have a ‘side business’ that earns you some passive income. For example, if you are a school teacher, then you perhaps can provide private tutoring during school breaks or weekends. This can easily earn you some extra hundreds per month. Perhaps you can create some online learning courses on YouTube (free of charge to you!), and start earning some passive income from YouTube? The principle I told my client on boosting income is to capitalise on your skills and assets you’ve accumulated in your career; a lot easier than opening an Amazon store and sell some stuff without knowing that the cost of stocks can easily kill a business!

Get some extra income while working out as a trainer in a gym; not a bad idea, uh? ^_^ I have a friend who does exactly this.

5. Buy your home: if your Bucket 2 and Bucket 3 are done properly, then you should be able to save a deposit for home mortgage so you can buy your first home! Bucket 3 can be used for this purpose, too. Depending on the market, assuming that you want to buy a 2-bedroom apartment unit in Sydney for $500,000. Then 10% deposit is about $50,000. If you can manage to save $20,000 a year, then two years later, you can buy a unit! If the unit is not close to city, then it would be cheaper. This means you can buy your home earlier with your saving. Sorry, there is no short-cut for saving the deposit (unless you have rich parents who want to help, or you win a lottery)! The good thing about buying a property and have a home mortgage is that it forces you to save money, be money concious, and pay off your home.

6. Offset your home loan, if you can: most banks offer you to offset your home loan, if you put your savings in an ‘offset account’. In other words, put you saving in the offset account. If you have such a choice with your bank, then put Bucket 1 and Bucket 2 money into your offset accounts. While you save some money for emergency in Bucket 2, you also save yourself home loan interests. What’s good about it, you may ask? Well, home loan interest rate is always at least 1% higher than the best term-deposit rate offered by banks. So, by saving money in Bucket 2 in an offset account, every $ you put in will ‘earn’ you 2.5% interest (the current rate of a regular Australian home loan)! The current 1-year term deposit saving rate is about 0.75% only! No better saving plan than this on earth! So, you get to save loan interests (you make $), while you build up your Bucket 1 and 2. This is a great thing to do.

Saving money is a good habit to have.

7. Pay attention to your investments: if you don’t know much about all the fancy stuff about share markets or “hot” bit coins, then revert to my earlier post about passive investment options. Don’t invest on a single company, but invest on a bunch of good companies. Many investment funds offer you the option to change the investment strategy, so you could allocate $ in different ‘baskets’, so your eggs are not subject to the same risks. Cash has low return but you love it when the market crashes! Leave your investment money (Bucket 3) alone and let the market does the job for you. Smart investors let good companies make money for them, instead of making money by themselves. ^_< Got the point, yet?

If you can tick every item here on the check list, then your personal financial health is pretty good! Keep up and enjoy your life. You may not have million of dollars at the moment, but you know you will soon. Just be patient. There is not much good to become a millionaire at 30, although most people (if not everyone) want that. Hey Richard, this doesn’t sound right; why it is not good? Well, it is because even billionaires go to work! The only difference is that they work for fun and passion; they don’t work to live and they can quit any time! Rich people live in order to work, but poor people work in order to live! That’s the difference.

Rich people use money to grow money; poor people spend money and try to earn more money.

So, if you tick every item on this check list, then you know sooner or later, you will become a millionaire. Then what do you do now? Well, enjoy your work as much as you can, boost your income, take care of your financial health and wait for the moment to quit your job because you’ve enough money to do so! Money grows over time, so time is your best friend in terms of personal finance. ^_^

It’s easy to go through this check list by yourself. However, knowing does not necessarily mean achieving (check my earlier posts). If you need assistance, then I’m more than happy to help you or refer you to financial advisors. Trust me: life is better with a coach. ^_^

Dr. C. Richard Wu @ REEAConsulting.com

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