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Finding your disappearing dollars

20 December 2017

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Do you earn a decent salary but still find it hard to live within your means or save? If your strategy is to save what is left in your bank account at the end of the month, you probably won’t have any savings at all. Invariably there is nothing left at the end of the month, so this is not really a strategy.

We talk to two CERTIFIED FINANCIAL PLANNER® professionals about how to do more with your money and put some towards a better future. Both CFPs® agree that people who say they will save what is left after paying for everything else won’t be able to save any money because “there’s never anything left”.

Tell ‘em they’re dreaming

David Sharpe, CFP® professional and principal adviser at Globe Financial Planning in Perth says the single biggest mistake that most Australians make is they operate one bank account. “So everything goes in, everything goes out, and fundamentally, the finance mentality of most of us is to spend whatever is in the account. And the more you earn, the more you spend,” says Sharpe.

Being located in Western Australia, Sharpe says he has had a lot of clients who “went to the mines and earned quite a lot of money, but then because they put it all in one bank account, it would no sooner disappear. Their idea of making a killing and paying down some debt just doesn’t happen because they get trapped in this expenditure cycle,” he says.

Sharpe says if you ask most people what they earned in the past year, 95% would be able to tell you within 30 seconds. But ask the same people what they spent, and “no one knows” he says.

“Wealth creation is pretty simple, it is ‘spend less than you earn’. So, if people don’t know what they spend, it becomes problematic.”

Create sub accounts

The “biggest piece of advice” Sharpe would give is to ensure you don’t spend from the account your pay goes into.

“Let’s say you have a thousand dollars come into that account and you need $300 a week for bills. Create a bills account. Put that money into that bills account before you’ve spent it. Then put $300 into a general expense account for groceries, fuel, clothes and all that stuff.

“Then you’re leaving money in that main, central account, because you’re not spending it. But you can spend everything in the other accounts. Go for your life.”

Good medicine

Affluence Private Wealth in Perth specialises in providing financial planning advice to medical specialist and health professionals. Managing director, principal adviser and CFP® professional, Yves Schoof, says although his doctor and dentist clients are generally on big salaries, regardless of their level of income, “they nearly always complain that they are unable to save any money.”

He says medical professionals all face the same cash flow pressures: high tax bills, mortgage repayments, private school fees and a reasonably expensive lifestyle which often includes overseas holidays and luxury cars.

Schoof says the reason they are unable to save is very simple: they don’t have any structure to manage their cash flow. “Most people spend at will and then save whatever is left over. But there rarely is anything left over.”

He says in his practice they flip this around. “We help our clients identify their most important goals, using tools such as setting up automatic savings plans and increasing mortgage repayments. Through financial modelling we also show clients the long-term outcomes of those savings and investment strategies, so they fully understand the benefits of being financially disciplined.

“It is very enlightening to be able to show someone that if they are able to save say $20,000 p.a. extra, they may be able to shave years off their mortgage and be able to access certain lifestyle choices much earlier.

“They become more accountable for their own spending and more conscious of the financial and spending decisions they make,” he says.

Getting the balance right

When it comes to discretionary and essential spending, Schoof says every family is different and will have different priorities.

“It is not up to us to judge where people should spend their money. Rather, we ask our clients to list their goals and values in order of importance to them, and then help them to adjust their spending and savings behaviour to reflect this.

“The will to be financially disciplined is much stronger if you know that this will help achieve your most important goals in life. This will lead to a natural reduction in discretionary expenditure over time.”

Track your spending

To get a picture of what you spend your money on, try using one of the phone apps such as Pocketbook or Track My Spend for a month, but you need to put in every dollar you spend.

This will help you identify where your money is going, it might be scary to know how much you spend on takeaway coffees each week, but knowing this will empower you to understand where you can start to reign in your discretionary spending and start to help you formulate a plan to budget and save more.

For more tips and tricks on how to manage your money, avoid mistakes that can derail your financial future, and secure your financial freedom, download our free eBook.