If you have read any of my previous articles, you probably hold the mistaken belief that I am sensible with my money. Well, not so apparently. Even as I write this article, I am on a lavish holiday in Margaret River on a secluded property on a lake. The down side is that on returning to reality (read: Perth) both my partner and I will be on severely tightened budgets. Whilst such restrictions may have been avoided by waiting a few months until we both saved the money for the holiday, I insisted on a holiday NOW! And not just a holiday, but a holiday where no expense was spared. Don’t get me wrong it was fantastic; however, on returning to the aforementioned ‘REALITY’ my savings will be drastically depleted! And so, I must confess to a massive hypocrisy in my management of finances. I have, in the past broken most of my rules. I know… shame on me….
However, I believe there are times when treating yourself is appropriate and others when you need to be realistic about the money you have. My flatmate refers to the latter of these as Millionaire’s Syndrome (Note: this is very different to my Sulking Holiday or Sulking Shopping as those rely on a different set of stimuli). Whilst undiagnosed by current medical knowledge, the symptoms of this alarming and often contagious condition result from having so much money on payday you feel you have excess to spend. You therefore commence purchasing the latest toy that catches your eye, pay for rounds of drinks and so on. The sufferer of Millionaire’s Syndrome feels completely justified because they have the money to splurge. In reality, though this might be the only money they receive for the month or the fortnight, and at their rate of consumption, it will not last.
So, you’re asking yourself, how do I prevent catching this alarming condition? Is there a cream for this rash? Do I require an urgent wallet-ectomy? A friend of mine, we shall call him ‘Jim’, asked me what to do with his savings as he was feeling the onset of this disease. I informed him that, in my opinion, he should continue to save until he has at least $1000 in his working account and $1000 in his savings account. These amounts are not classed as traditional savings because they form the basis of his financial stability.
As Jim gets paid he will have in his account the $1000 buffer, any unspent money, and his latest pay. His next step is to allocate money to cover his bills, and transfer savings to his savings account. This will then give Jim a clear indication of the money he has left to play with – I call this the shoe and chocolate allocation…
Referring to chart one (ooh, charts!) – The $1000 buffer forms a safety net in case Jim has unexpected bills. For example, say he gets a speeding fine, or his gas heater chooses to stop working, this is the money that can be used to cover these unexpected expenses.
The money to cover bills is the amount beyond the $1000 that Jim must spend on living costs. This includes food, travel, insurance, rent, mortgage, entertainment, bills, etc. (If you wish to find out what to include in a budget, see my article in OUTinPerth circa 2 months ago – check hoarded back copies or www.www.outinperth.com)
The money remaining after all living expenses have been accounted for can be enjoyed. After all, you have worked hard for it, and you can relax as you know you have enough money to cover the bills and a little savings.
This savings account is slightly confusing. The first amount – my ‘if shit happens’ account – is only to be used if shit does happen (e.g. if you lose your job or you suddenly find yourself homeless). A new shoe sale at David Jones does not count! This money should be saved and never thought of again until that day ten years from now when you really need it. For a personal example, earlier this year my Father passed away and this was the money I used to cover bills while my brain was still too in shock to transfer money or sell shares.
The next level is the goals you may be working on, such as your next holiday, a house, or a car. Beyond that, the top level of savings is surplus. Now, what to do with it? The responsible option would be to set up a share portfolio or other investment strategy. I have just set one like this up in Sydney. The minimum amount required was $5000, so I had to save that in addition to saving for a lavish trip to Margaret River. Hence, the third level. Alternatively, this additional savings can be used to acquire a shoe collection that would make Carrie Bradshaw blush.
The third level of the chart is hard to achieve, but once you cultivate a savings mentality this will become easier. One of the most important things to remember with savings is that as your bills and expenses increase, so too must your buffer. To return to the example of my friend Jim, his bills are small now, but as he say, purchases a car, enters a relationship, and/or purchases a house, his bills will increase and so too must his buffer and bill allocations. My personal buffer never drops below $10,000 without me stressing and placing myself on a strict budget. While this seems like a large sum, in reality, it is only two months worth of repayments. So, if I were to lose my job, this is the money that would cover costs while I found new employment.
Shoestring’s Insider Tip
When I initially set up my buffer account I had a good friend who worked in a bank. She suggested I place this money into an offset account, which meant my money sits in an account that is part of my home loan. In a regular bank account the interest rate is less than a percent. However, in the offset account, every dollar is saving me 7.6% interest off my home loan. It costs nothing to transfer money into the account or out of it and there is no minimum or maximum amount.
