Looking after all the ins and outs of the family finances takes a fair bit of effort. Paying bills, managing a budget, new expenses popping up all while trying to save.
I've been hands on with my money in the past before and now I have a growing family Ive been strengthening my financial systems with the way our family wants to live.
What is exciting is having confidence knowing your money is going in being sent to the right places when you need it. Not having to care which day is pay day and growing wealth over the long term. All because you have structures in place that take care of it all.
I want to share with you how I manage our budget, our family finances and the money rules that we use and follow.
Even though it might some like a complicated process we live through, we mostly follow the budgeting rules Ive used through my adult life to make sure we spend as little time managing money as possible.
Here's what it all looks like in our house:
The idea is to break your income down into how you will use it based on your costs – savings, needs and wants.
Savings is putting money aside for later, needs are the costs you need to live and obviously the wants are the nice to haves – infrequent or impulsive buys.
I'll get into the detail of what exact costs are included in each section soon. Its worth the time setting allocations for each area by percentage first if you are setting up a proper system.
The three areas get split by percentage. Various experts will tell you different things but we go by 30% savings, 60% needs, 10% wants. Other examples my recommend less towards needs and more towards wants but every one is different.
Our 30% savings is split again into 20% long term and 10% short term.
The percentages can always change depending on the situation. When both parents were working our savings rate was 35%+. At the moment with only dad working, its down to 20% with our expenses costing us 70% of income.
Have a look at your spending patterns. To find your percentages its only a matter of adding up all your savings/essential/non essential purchases and dividing by income,
You might see that you are spending 70% on your needs or putting 40% towards wants. That's ok, it's good to know and you can skew your numbers towards what you are aiming for.
Now that you have allocations nominated, you can work on a system to make sure you have the right amounts going to the right places.
Our family financial system
As I’ve written before – I love systems. Especially ones that you can automate so you rarely need to think about them.
Having a consistent financial system in place has been a great base to start ‘getting ahead' and controlling where our money is going. By system I mean a set of detailed methods, not a plan which is an intended course of action. It's all about the actual doing rather than the idea.
To implement a system like the one I’m about to explain, it's best to know what each of your regular incomes are, the total of all your bills and what you'd like to save each month. See my article on spending for a way to work this out.
As for the order of what I will mention, apart from number 1, I do numbers 2 through 5 at the same time. Some people talk about ‘paying yourself first’ as in putting money aside for savings then spending then worry about everything else. I like to make sure we at least have the ability as a family to ‘pay ourselves’ enough spending and saving by making sure our costs and expenses are as low as possible.
Without further ado, here is what I see as the basic flow of our family finances (irrespective of how much money we make).
1. Send all out incomes into the one account
Whether you have one or multiple incomes coming in, I've found that's it crucial that the money you receive does not go into a transaction or spending account. You need it to go into an account that you must transfer out of spending.
Personally, I use an offset account as the money sitting in it offsets the interest I pay on an investment property. Alternatively, it could be an everyday online savings account. It is a place for your money to ‘sit’ until we send it off to do its job.
Every time we make money – income from working, tax returns, rebates, bonuses etc- this all goes into the one account. The balance of this account is irrelevant to how we spend and save so it's never tempting to use the money in it as we’ve set it all up to be transferred out of this account and get to work elsewhere.
Now that your money is sitting somewhere, it's time to set it off. Each dollar in our pot will now head off somewhere.
The order of what you do here can vary based on opinion. I like to do it in the following order:
- Regular Bills, Spending, Infrequent bills and saving.
2. Automatically pay recurring bills
First things first, I’ve setup all my bills I pay monthly like mobile phones, internet, music, childcare and petrol to be debited from my primary account. These are mostly costs from the needs bracket, with a few from the wants.
- For things we don’t get billed on like petrol that, I use a credit card to pay for that then reimburse the card from the main savings account.
- For regular occurring bills I use direct debits or credit card if needed that gets reimbursed.
Automation is so it only gets setup once. You’ll avoid paying late fees and the only manual work you must do is reimburse your credit card. This an incentive to use your CC less at it means less book keeping.
A note on the credit card. We use this to accommodate family finance expenses that are large (so we can pay off over time), valuable (so we can get the cards insurances), buy overseas (no transaction fees) or want to avoid using our money (in case the charge ends up being dodgy).
3. Give yourself pocket money
Pocket money is money we’ll blow and spend as we wish. This is 10% of our income and allows us to remove any reliance on pay day. We use a transaction account for this with joint debit cards. These expenses are all in the wants bracket.
Ever been talking with a friend, colleague or relative and they are waiting for a pay day until they pay for something like rent, money they owe, or to buy something?
I was like this years ago – but when I got stuck into some credit card debt myself needed to stop relying on work to pay me. So I paid myself.
Each week an allowance or spending money so that the day my salary gets paid makes no difference to me. I've set up automatic transfers so that each Monday I get money for coffees, food, clothes, shouts at the bar, gifts or spontaneous stuff.
Even though I get paid fortnightly on a Wednesday, we pay ourselves pocket money every Monday. That means we can go through seven days knowing how much we have to spend. This was a massive saviour in getting myself out of debt years ago.
Setting a spending limit means you never have up and down weeks of managing your dollars. Any leftover money we have we carry over to the next week.
4. Keep enough leftover for infrequent expenses
This is one that catches people out. Planning for expenses that don't come in often. Things like car rego, electricity bills, council rates and car maintenance. These are the bills that can come in and decimate savings accounts if you don't plan.
The difficulty here is you need to set aside money regularly to cover the costs when they come in. You can use an additional account for these bills and transfer an amount along with each pay cycle. Add up the costs over a year and divide by your pay cycle. These might be expenses like insurance, rates, car servicing etc. that don’t come up often.
Here it might be better to set aside money in a separate ‘Bills’ account. This means you can move the money you need to hold on to each pay cycle then move out to pay for things as they occur.
Initially, this setup can take some time and you might need to forgo savings to make sure there is enough in there should enormous costs all come in at once. Over time, though with expenses not taking out the funds that often, you’ll see this account fill up and give you peace of mind that the infrequent bills will be covered.
5. Set an amount to invest and save
Saving is the last in the list. I leave it here because after expenses and spending we save the rest. For instance, with the balanced cost formula example, we have a target split of 30% savings, 60% needs, 10% wants. Some months our expenses may only be 55% of our income as we’ve cut costs or we may receive more income than usual. That means we top up to 35% in savings.
The 30% savings that we save is split into 20% long term and 10% short term. The short term funds are put into a regular online savings account, like the main pot is. I send the long term money to investment vehicles like shares, ETFs, investment funds and investment apps.
This money is all automated so I’m not deciding on where to invest but simple adding to the long term pool of growing funds.
The short term money sits in its account until we are ready to use it and then sent to either the credit card to reimburse it or to our transaction account. These are costs like holidays, education, new gadgets or furniture and anything we can normally cover in a week or two.
There is a lot of here and there, but for us it's a process that puts money in the right places. It took us years to get to this setup and no doubt we’ll keep fine tuning it. So far, it gives us a good quality of life and allows us to live modestly yet comfortably.
The rules of our money
Along with a budget and system which are mostly tactical approaches to money management, we also follow a more strategic set of rules that give us a clarity over how we think about money.
- Treat our family finances like a business – we must make a profit each month
- Invest those profits wisely (for the long term)
- Automate or delegate when you can
- Review net worth, costs and savings rates regularly
This is our mindset and this was our system. It works for us and allows the family to not worry about where money comes from or is used for. Each dollar has a place to be.
A deliberate setup for family finance can save you time and avoids stress
There we go – our budgeting style, our system and some rules on how things operate in our family. What might set us apart from most families is how deliberate we are in our approach to money. There is no umming and ahhing when we spend on the big or little things.
The key is to get your money in balance. Having enough to pay bills and the buy the things your want to. Once you have things in balance, you stop worrying about money.