Personal Money Management

Personal Money Management

Now that you can clearly see where all your money comes and goes, because you have it clearly split out in a cash flow table, it's time to carefully consider if you are using your money wisely.

A good way to think about your money is use the following formula.

income = cost of living + fun money + rainy day savings + long term investments

  • Income: After tax and after the costs of turning up to work. These costs include things like a suit, smart shoes, travel costs, childcare costs, tools. Every cost that is incurred as a direct result of you having a job.
  • Cost of Living: This is the actual amount of money you require to live your life. Your cost of living needs to be less than you earn, otherwise you will be eating into your rainy day savings and then your long term investments. It also includes all loan repayments, and the reason for that is to encourage you to save for things rather than take out a loan to cover it.
  • Fun Money: This is the money to enable you doing the completely crazy stuff that YOU enjoy. You need to save it and then spend it with a smile on your face. Life is for living, you have to have fun.
  • Rainy Day Savings: Cash to tide you over and to help with the bigger purchases. Tough times will allways follow good, this makes the tough less tough.
  • Long Term Investments: What will you live on when you retire, or do you trust the government will provide for you.....?

Obviously you want to increase your income and reduce your cost of living. It's easy to get all happy at the prospect of earning more money, but if you look at the formula you can see that earning an extra dollar will have exactly the same effect on your life as saving a dollar.

The reason you want to have your loan repayments as part of your cost of living is to encourage you to save for things rather than take out a loan to cover it. A lot of the time by the time you have saved for it you may decide you don't really want it anyway and can get something far better. Doing this prevents a lot of impulse purchases.

As your income and expenses are clear, you can think carefully about how you can reduce your expenses without reducing your enjoyment of life, and if you think about it long enough you can determine which lifestyle changes you can make to improve your life and your finances.