Hi again, so my previous post was about the need to pay yourself. If you missed, I recommend reading that post so that everything said here will make sense. The link to it is here :),
If you have been inspired to start managing your finances and paying yourself, I would like to recommend a system I believe will be beneficial to you. I like to think of it as a divide and conquer strategy and it involves these 3 simple steps;
Step 1: Know EXACTLY what’s going out and where!
The first step is to know exactly how much your monthly expenses are i.e. how much money is leaving your account. This will provide you with the following benefits;
- You will be able to know exactly how much you can save (total income minus total expenses).
- You will be able to identify areas of waste, areas you spend more than you need to or don’t even need to spend at all. This will help you improve your savings.
Step 2: Divide and Conquer
Previously, my finances were divided into two;
- A savings account. If I had some money at the end of the month, I would put it here.
- A current account where all my bills were debited from . I would also use this account for my other purchases such as food, lunch, outings etc.
The problem with this setup was that my monthly bills were not separated from my other purchases, I would spend more than I realized and would not have enough to pay the bills. My solution to this was to go into my savings to top up if I had any or borrow from a friend and then pay them back from next months pay check.
I now use a different strategy to manage my finances. It involves having more than two accounts. Having multiple accounts is not a hard thing to do these days and we can take advantage of that to help us better manage our finances. I recommend opening at least these accounts;
- A savings account. As the name suggests this is where you pay your monthly (savings) to invest in yourself and your future. In fact with time you may need to open several savings account to save for specific things and keep those savings apart. That will be up to you.
- A billing account were ALL your bills are debited from.
- A Pocket Money account where you give yourself pocket money every month. By doing this you will limit yourself and at the same time be able to keep track of to how much you spend monthly. Initially I did not separate my spending money from my monthly expenses. I would often lose track of my spending and end up using money set aside for paying my bills. By separating the two I eliminated that problem. I must add, this is not paying yourself. This is limiting how much you can spend on yourself monthly. How ever you want to spend your pocket money, you MUST do it within this budget.
- A household necessities current account where you put in money for your household necessities such as food, toiletries etc. Now some people might think creating another account just for this is going over the top. You don’t necessarily have to open another account for this, you could withdraw the money and only make these purchases with cash. What ever works for you. But just remember the aim is to separate this from all the other expenses just as we did for the pocket money.
Step 3: The Flow
You can have more than 4 accounts for yourself to separate your expenses how ever you deem fit. Please use whatever means suitable to your situation.
With these accounts, this is how I run them every month when I receive my income.
- Income is paid into savings account.
- From the savings account, I transfer the total monthly expenses into my billings account. This includes bills, pocket money, household necessities etc.This should have already been calculated in step 1.
- From billings account I transfer my pocket money into my pocket money account.
- From billings account I transfer (or take out) what is needed for house upkeep into household account.
Below is an overview on what we have just discussed
This strategy will encourage you to always pay yourself each time you receive an income. Your mindset will need to change from consumerism to wealth creation for it to effectively work. You will have to reduce or keep your expenses in check to be able to save and pay yourself. This may involve making hard decisions and some downsizing but when you set out to control and improve your finances, I believe the divide and conquer strategy will be very useful to you.
If you manage your finances differently and would like to share with us please do so in the comment section of this blog?
If you feel this was beneficial to you or will be to someone please share with your friends and family 🙂