I feel slightly silly writing something on how to become wealthy. I’m anything but. My partner and I are currently living on government benefits, me as a stay-at-home Mum to the Chipmunk, the Raccoon as a college student. A quick glance at us from the outside says we’re probably not the best people to be taking financial advice from.
Unlike many people in my income bracket (or many above it, for that matter!), I do have the following accomplishments to my name:
- We have very little debt – a credit card with a $500 limit is it. And most months the card is paid off in full.
- We saved almost the entirety of Chipmunk’s Baby Bonus. For those not familiar with Australia’s scheme, the Baby Bonus is a payment the Federal government gives parents after their baby is born to help pay for necessities. When Chipmunk was born the Bonus was $5 000. (Statistically, the most common purchase made with the money is a flat-screen TV.)
- We’ve continued to save about 10% of our government payments since then. Most would call this no mean feat on a $2400 monthly income!
- Far from being stingy misers who eat nothing but two-minute noodles and never do anything fun, we have quite a comfortable life. Raccoon regularly indulges his comic book collecting and Magic: The Gathering hobbies (neither are cheap!), we eat varied, healthy and tasty meals each week, we have all the books, movies, games and fun times with friends we could want. We fly interstate to visit my family every year or so. In fact, we even have money left over each month to donate to charity.
So I thought I should write a quick little primer, condensing all the information I’ve managed to distil over the years. Personal finance has always been something of a hobby of mine. I’ve read far and wide on the fine art of making my money do my bidding, and over the years have refined what I do and how I do it to be as simple and pain-free as possible.
Pay Yourself First. Also, out of sight is (mostly) out of mind. You know how almost every personal finance book and blog says somewhere “Save some of every paycheque, and take it out before you pay any other bills”? Turns out there’s a reason for that. If you don’t, all your money mysteriously vanishes into the ether. I got around this problem by 1) scheduling an automatic payment into a separate savings account every payday, and 2) making that savings account inconvenient to get to.
We actually have two savings accounts set up: a big one for a house deposit/early retirement, and a smaller one for relative expensive “frivolities”. The smaller one is currently half-way to buying us an electric conversion kit for our Yuba Mundo cargo bike. Both of these accounts are with an online only bank, without a debit card attached, and without online shopping facilities. If I want to access the money, my only option is a direct debit transfer to another account. That takes at least 24 hours to process, so it’s next to impossible to spend our savings on a whim.
If you can pay a bill automatically and regularly, do it. In fact, the more of your finances you can put on auto-pilot, the better. Most banks nowadays will let you set up any number of automatic transfers from your working account to other places, so take full advantage of that fact to make your life easier. I currently have the following bills set up on automatic payments:
- Our rent and water bill (these are both paid directly to the real estate agent.)
- Our mobile phone bills
- A monthly donation to WSPA
- Web hosting for mine and Raccoon’s sites
All except the electricity are regular, recurring monthly payments. Exactly the same amount is paid each and every month. That makes these bills easy to budget for.
For bills with fluctuating totals, average your yearly expenditure and pay that amount every pay period. For us, our utility bills hover around $360 per quarter. Slightly more in summer, slightly less in winter. So it was easy to divide that by six fortnightly pay periods, and set up an automatic debit (using BPAY) for $60 every payday.
Annual bills are not an emergency. I don’t know about you, but my car registration was due the same time every year. So is my licence renewal, ambulance cover, insurance premiums and vehicle maintenance. They normally cost the same amount every time, too. So why do so many people act shocked when a big bill like this comes due?
The easy (and sensible) way around this is the same as the monthly payments above. Add up all the bills you can only pay in one annual lump sum, and divide the total by the number of pay periods you get every year. Then set up an automatic transfer for that amount each pay, to a “big bill” paying account. Make it hard to get to, if you have to. You’ll only be taking money out of it a few times a year, and it’s better to be inconvenienced every now and then rather than have your rego money frittered away by the latest fashion “must-have”.
IF you can trust yourself with a credit card, use it to smooth over the regular bills each month. Our internet bill is due the 12th of the month, our phones get billed on the 15th, and WSPA on the 20th. Trying to keep enough money in our debit account to pay these when they fall due would drive us both mad. Not to mention sooner or later, one of us would spend more money than we should, and we wouldn’t be able to cover things. The easiest solution I’ve found is to use a credit card with a low limit to smooth over the month. Everything gets paid off the credit card automatically when it’s due. Here’s how it works:
- Billers have my credit card details linked to our account with them. Every month they automatically deduct whatever we owe.
- Every fortnight on the day we get paid, an automatic payment deducts half the monthly total of all the credit card-ed bills from our debit account and transfers it to the credit card. If you get paid weekly, divide the monthly total by four.
- Those of you who are astute mathematicians may have noticed that while each monthly bill is paid twelve times per year, there are twenty-six fortnights being paid onto the credit card. Don’t worry, there’s a use for that extra money! And that use is the annual card fee. I have a 55-day interest free card, so I get slugged $49 a year for the privilege of using the bank’s money to make life easier. This way I don’t have to consciously budget for it – the extra money covers it. Very occasionally we also have rough months – unexpected doctor appointments, one of us will go over our phone cap, or there will be an INSANELY good online deal on coconut oil that I can’t quite cover. That little bit extra paid onto the card helps smooth those unexpected bumps, too.
DON’T TAKE ON DEBT. This is the hardest for many people, but ultimately the most freeing. If you can’t pay cash for something, don’t buy it. If you don’t have the cash today, but you will tomorrow, come back tomorrow and pay cash. It took me a few years of slugging, slaving, and mighty determined behavioural reprogramming (no electric shocks, promise!) to get to the point where I can practise and preach this, but I did it. You can too.
Aside from all the regular bills mentioned above, I try to pay for almost everything else in cash. Sure debit cards are convenient, but they’re also much easier to overspend with. I find that if I’m forced to fork over actual coinage, and I know that I only have the amount in my wallet to work with, I’m much more careful about my purchases. “That sweet little throw rug would look fantastic in the lounge room, but if I buy it can’t get as many cushions as I wanted, so do I REALLY want four cushions? Or will two cushions and a new throw rug do better?” That sort of thing. Conscious spending is happier spending, because I’m more likely to truly love what I’m buying.
If you already have debt, or are forced by strange and unusual circumstances to take some on, treat it like the emergency it is. Debt is bad, bad, bad. Every dollar you owe someone else is MORE than a dollar that you could have working for you instead. The sooner you pay it off, the more money you’ll have to do other things.
It’s not always mentioned, but there’s also a huge mental component to being able to say “I don’t have any debt”. I LOVE the feeling of not owing anyone anything. I sleep better at night, I’m less stressed, and the world is generally a happier place.
Covering the first five points above will have you most of the way to living within your means. And living within your means will start on the happy, happy road to becoming wealthy. Tune in next time to see how I budget our money, and how I make our money work for us instead of slouching around our accounts like an apathetic college student on break.