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Being financially successful begins with learning to manage your money effectively. Trying to invest before you can effectively manage income and outgoings to save regularly is like trying to run before you can walk.
An awesome money manager squeezes every drop of value from each dollar. This allows him to annihilate debts, fund dream (stretch) goals and purchase his most precious resource, time.
We weren’t born with these skills, and very few were taught them as kids. Most of us learned along the way, often through screwing up.
Have you racked up a load of consumer debt on those MUST HAVE items (that you now can’t quite remember)? Have learned these lessons the painful way, or plan to skip this life lesson by reading about my screw-ups instead?
Like most things in life, there are levels of success. How far are you towards black belt money manager status?
White Belt Money Manager
– Know Your Income & Paying Bills
How much cash do you take home per year? Are you paying all your bills without incurring late fees?
Your Mygov account can tell you how much you have earned this year so far. You will also be able to see how much you earned last financial year, along with the tax paid. You should know the yearly amount and monthly net income.
Managing your money well enough to pay off debts and bills reliably is the first step in financial adulting. If you are not managing, drastic immediate change is needed to avoid a nasty outcome. Ask a family or friend to help you (not with a handout), borrow a copy of Barefoot or contact Financial Counselling Australia.
Yellow Belt Money Managers
– Know Your Net Worth and Which Direction it’s Heading
List all assets and liabilities. Calculate your net worth.
Total assets – liabilities = Net Worth
|House worth $700,000||Mortgage outstanding $500,000|
|Term Deposit $5,000||Credit Card Balance $3,000|
|Total assets = $805,000||Total liabilities= $503,000|
|Net Worth = $302,000|
A new graduate is likely to have a negative net worth. But if all that debt is productive (a student loan leading to a good career, a mortgage of a good quality property), good financial habits will result in a positive net worth soon.
If the net worth is positive, but the liabilities are depreciating assets (cars, maxed-out credit card), the situation may well get worse without a change in financial habits.
The initial net worth is not that important, but the components, and trends over a few years are. Monitoring your net worth each year can tell you if you are heading in the right direction, and provide some positive reinforcement.
Note that improvements in net worth will initially be pretty small. If you are practicing good habits as a money manager, this will increase dramatically over the years so hang in there!
Orange Belt Money Manager
– Understand How Much you are Spending
No judgment. This is probably going to be painful. Many people avoid facing up to their spending for years.
Most of us spend more than we realize or intend to.
It is important to face the music. There may be forgotten subscriptions and other expenses which provide you no value, that you can cancel without any effect on your lifestyle!
Spend some time looking through your last 3-12 months of bank account statements. Using an excel document or expense tracker, note the different spending categories and your spending in each.
Pocketbook is free and a great app for tracking outgoings. It can automatically track your expenses into an appropriate spending category, making it easier to see where you spend, and waste resources. But if you make a lot of ATM cash withdrawals, the type of expense will obviously not be recorded. You will probably need to manually recategorize outgoings to ensure the data is accurate.
There are also some security issues with expense trackers, that can be overcome by manually uploading your banking data instead of sharing log-in details.
Manually entering expenses into an excel document for a 3 month period is the most practical for those with only a single account. Those with multiple accounts and credit cards may choose downloading data from each account and upload into Pocketbook or a similar program.
Green Belt Money Managers
– Have a Short Term Emergency Fund Saved Up
Financial green belts are in the great position of netting letting their bank account run dry. Having enough cash to get you out of strife in a short-term emergency is a major milestone. The car breaking down is now an annoyance, rather than a crisis.
– Have a Plan for Longer-Term Emergencies
At this stage, you also have a plan in case a longer-term emergency occurred. If you were out of work for 3 months how would you survive?
This can include insurance, cash savings, a list of expenses you could cancel (but don’t currently want to), and even a flyby points balance that will cover a few weeks’ food.
There are few expenses more painful than an insurance policy. You pay these premiums hoping they will be a complete waste of money!
Insure against catastrophe. Life insurance, income protection, and house & contents insurance are critical for those with dependents, and many without. Check what insurance you have and whether this is adequate every few years (or with marriage, childbirth).
Reduce costs by increasing excess/waiting period, and hold onto any agreed value insurance product until you don’t need it anymore.
Make sure you notice when you can finally self insure. Once you can cover the cost of the catastrophe you are insuring for (even at a pinch), it is probably time to cancel the insurance.
Blue Belt Money Manager
– Have an Organised Banking System
You should never pay a late or overdrawn fee. You need to spend some time thinking about a system that will work for you. Here are some options.
Automate all your upcoming bills, credit card payments, and everything you can. Setting up direct debits to pay bills is a bit of a pain, but will save time every month for years to come. It will also eliminate the risk of an overdue fee, or black mark on your credit record.
Set up a direct debit with your credit card to pay the full balance every month automatically. If money is too tight to do this without worrying about becoming overdrawn, cut up the credit card, and close the account.
– You are Regularly Saving Money by Spending Less than you Earn
Blue belt financial managers have managed to create a gap between their income and expenses. This gap allows regular savings to occur. This is a huge step, one that many struggle to achieve.
At this stage, you save up for significant Purchases that decline in value over time (TVs, cars, other consumer goods). Delaying gratification, by saving up can build anticipation and allow us to enjoy the product or experience even more!
Blue belts can resist or delay impulse purchases. Most of us have way too much stuff. A delay (from 48 hours to 30 days) between the urge to purchase and actually punching your card details will help you buy things you really want.
Blue belts also plan ahead for irregular, semi-predictable spending such as replacing old appliances and paying for car service and tyres.
They are also committed to shopping around for the best deal for purchases, squeezing more value from each dollar. Blue belts bother to get quotes for insurance renewals and avoid the lazy tax whenever they can.
Blue belts don’t let any small increase in income, tax cut, or reduction in spending go to waste. That money is diverted to savings automatically. Even tiny increments really add up when you do this every time a little regular cash is freed up.
Find out more about how to save more money.
Purple Belt Money Manager
– Minimize Tax (Legally!)
As you earn more, you will pay a higher proportion of your gross income in tax. I now pay more in tax than all our other annual costs combined! Even a small saving in tax can be enough to fund a regular investment.
Get organized for tax time to ensure you claim all deductions.
Think about the tax implications of investments. You shouldn’t make your investment decisions based on tax, but if there are two similar options but one provides a tax advantage, this should be your favourite.
Brown Belt Money Manager
– Have Financial Goals & a Written Financial Plan
Brown belts are really thinking long-term. Instead of saving up just to spend, these are dreaming up goals and then working out how to achieve them.
What do you want to achieve in the two years, 10 years, and during your lifetime?
You need life goals before you can set financial goals around these.
There always seem to be more goals than the cash available! Prioritize which are the most important, and make these financial goals. The others can be added back if your financial situation changes. And it often seems to, once you become an elite money manager.
Then make a written financial plan. Start with the long-term goals and work backward. Review it every 5 years, or with major life changes.
Some will need professional, personal financial advice. Take care to choose the financial advice provider carefully. We don’t all have to plan without help, but you have to invest enough time and energy to understand your plan.
Red Belt Money Manager
Buy Assets > Liabilities
You choose what to do with the money coming in. Most people spend their cash on liabilities – cars, boats, iPhones, and laptops that lose value from the moment of purchase.
How much money have you directed towards building assets? These increase in value over time, eventually replacing your paycheck with passive income.
To be a good money manager you want to start directing income to build assets.
Invest regularly and automatically to improve your ability to stick with the game plan.
Black Belt Money Managers
Black belt money managers have achieved all the above. They regularly save and invest towards written goals in accordance with their written financial plan. Plans are in place in case of catastrophic life events, and an adequate emergency find. They either avoid debt or only utilize productive investment debt and pay credit cards off in full every month, reaping the benefits of free insurance and frequent flyer miles.
Black belts are thinking ahead by monitoring their credit record in case of future borrowing needs. They will get the best rate and maximum loan as banks know black belts are ultra creditworthy.
Black belts purposely surround themselves with positive influences and role models, either in real life or virtually. It’s not uncommon to be surrounded by people encouraging you to blow your cash. People want you to validate their own (often unwise) decisions. It can be isolating to be the only one trying to make smart financial decisions.
These ultra money managers listen to podcasts, read books, and subscribe to finance blogs to continue to grow knowledge and find more ways to improve. Finding support through a similarly minded friend, or an online group can help black belts stick to the plan over the years.
Black belts are careful to circle back and make sure they have a good balance between spending and saving for themselves, their spouse, and their kids. They know what really matters, and that money is just the way to achieve these goals.
Black belt money managers move away from an All or nothing mindset to continual growth. They understand everyone makes slip-ups, and occasional overspending is the not the end of the world.
Ultra money managers are usually keen to pass as many of these skills to their children. By the time these kids leave the home they have a far better understanding of finance and money management than we did, and hopefully, go on to design and live their ideal life.
Money management is an essential skill, with many levels to achieve. Where are you on the colour belt scale?
Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.