The Finance Lesson I Gave My Sister

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Tuesday Deep Dive: The Finance Lesson I Gave My Sister

Since high school, I've been passionate about personal finance. Friends might remember me talking endlessly about the stock market in class, as if I were some kind of expert. In university, I majored in Finance and loved diving deeper into the subject - that was until I lost a little too much in Crypto :(

I'm no financial advisor or guru, but finance has been a long-time interest. Recently, my sister asked for some advice (God knows she needed it - sorry Bella 🤣), so I took some time to collate my thoughts and give her my two cents.

Most of my suggestions, and what I practice myself, come from The Barefoot Investor, The Richest Man in Babylon, Rich Dad Poor Dad, and my finance major/experiences over the past five years.

I know these methods aren't always the most optimal, but I resonate with Barefoot's (Scott Pape’s) advice: less is more. Simple solutions are easier to stick to than complex ones. For some reason, complex excel spreadsheets are not everyone’s jam 🤷‍♂️.

Again, I am no expert, just a little more experienced than my sister. Here’s what I told her and pretty much how I run my own show:

Step 1: Set up your accounts

You are going to set up five accounts (we will refer to these as your ‘buckets’):

• Mojo

Mojo is your financial safety net, your rainy-day fund, your "oh sh*t" money. You will never touch it unless unexpected $$$ emergencies occur. Think: you accidentally smash your phone or laptop, you crash your car, you completely forget about an upcoming bill or there is a medical emergency. This will always be liquid cash in the bank (in a savings account).

• Fixed Expenses (short-term)

This covers all of your regular fixed expenses. Think: rent, phone bill, car rego, insurance, gym membership etc. This will be a transaction account (you will have a card).

• Splurge (short-term)

Splurge is your weekly money to… splurge. Think: going out for dinner or drinks, paying for an activity, shopping etc. I also include variable expenses such as groceries and fuel in this account. This will be a transaction account (you will have a card).

• Savings/Fire Extinguisher (long-term)

Quite self-explanatory, but savings, or ‘fire extinguisher’ is used for extinguishing debts and building long term wealth. Think: paying off credit cards or loans, investing in shares, saving for a house etc. This will be a savings account (no card).

• Smile (long-term)

Smile is your long-term savings dedicated to making you smile :). Think: saving for a holiday, saving for an expensive item of clothing, saving for a new car etc. This will be savings account (no card).

💁‍♀️”But which bank do I use!?”

The vague answer: It doesn’t really matter, but the main thing is that you shop around. Do your research and figure out which banks are offering the highest interest rates in their savings account, lowest fees etc.

The direct answer: ING. In his book, Barefoot suggests using ING for a few reasons, but primarily because they don’t charge bank fees. What this means for me and you, is that every time we use an ATM, we get refunded the transaction fee - even when overseas! They also have a pretty killer interest rate right now - 5.5% p.a. (T’s&C’s). How exciting is finance amiright!

Note: They also have a great referral incentive right now. When you refer a friend you both get $100 😎 (T’s&C’s).

Step 2: Figuring out your buckets

Now you have your accounts set up, it’s time to figure out how much $$$ to put in each bucket. Barefoot has his suggestions, but I run my own show with a bit of a twist:

1. Mojo: 2k

The first step is to put two thousand dollars in your mojo account. For most young people (talking to my sister here), this should be enough to cover most unexpected costs.

Make this your number one focus until it is done. Use whatever savings you have or become a marketplace warrior - get it done. This is literally the account that relieves stress.

Note: as you get older, Barefoot suggests building this account to three months’ worth of your salary.

2. Fixed Expenses: figure it out

Write down all of your fixed regular expenses. For example, these are some of mine right now:

From there, you can calculate how much you need to put away each paycheck to tackle the bills. In my case, I am paid fortnightly:

Therefore, I need to be putting $121.65 away every fortnight (paycheck) to cover my fixed expenses. But yes, before you hatemail me back, this is NOT entirely accurate. There are usually 30/31 days in a month, not 28! This means, you are going to be contributing slightly more than you need each pay.

I use a fancy excel spreadsheet to tell me exactly how much I need to put away, but putting a little too much is perfectly fine - after six months you might have an extra $20 sitting there.

Note: the only limitation of this system is the timing of the bills. For example, if all of my bills hit me in week one, $121.65 wouldn’t cover it. The solution, keep a buffer. Start with $50-$500 in the account (depending on the size of your bills 😆) to ensure you don’t go bust. My excel sheet calculates this too - I can share this if anyone is interested!

Barefoot suggests including your variable expenses in this account, like fuel and groceries, but I don’t. I will address this shortly.

3. Savings/Fire Extinguisher: think smart

This one is really up to the individual and their financial goals. If you are saving hard for a house or even just in a situation where you are earning a lot more money than you need, throw as much as you can in here. But if you are running a little tight, throw at least 10%. This is coming from the Richest Man in Babylon’s first law of gold: to save at least 1/10 of your earnings. Once you decide your percentage, calculate the $ amount.

Note: when you reset your buckets each pay day, pour any leftover splurge into your savings (good habit)! 

4. Splurge Part 1: Variable expenses

Consider your variable expenses. For example, some of mine:

5. Putting it all together: Splurge Part 2 and Smile

Now, you’re at a point where you have $ amounts for your Fixed Expenses, Savings and Variable Expenses. The final step is to deduct all of these from your pay and figure out how much you have left over to play!

For example, someone earning $1000 a fortnight:

They would now have to choose how to split the remaining $478 into short-term and long-term play. If they are someone who is desperately wanting to save for a holiday, they could put most of it into Smile. Or if they enjoy going out for dinner frequently, they could push more into Splurge.

If you have a stable regular income, that’s it! Calculate the $’s for each bucket and you can pretty much set and forget. But if you have a casual job with an irregular income, like my sister, you will have to calculate your ‘play money’ each paycheck.

The most important thing here, is that you pay yourself first. That is, pay your savings account before you even think about the play money.

6. Why do I differ from Barefoot?

I only have two real differences:

1) Where I put my variable expenses.

Like I have said, Barefoot combines them with the Fixed Expenses account to make one expenses account. If that makes more sense to you, that’s great, do that.

However, I like it separate because I can put the Fixed Expenses account on auto pilot. Once I have calculated my fortnightly contribution, I know there will always be enough money to pay the bills. It removes worry and stress. We all know how easy it is to overspend on groceries some weeks, so I would rather an overspend dig directly into my ‘play money’ instead of my fixed expenses money - and lead to a missed payment.

2) My method.

The way I calculate my buckets differs a little, I use $$$ amounts rather than percentages. This is because I find that it works better for people with a fluctuating income (i.e. students, like my sister). In his serviette strategy, Barefoot calculates how much $$$ to put in each account based on percentages - i.e. 20% in the expenses account. But if your income halves from one week to the next, this won’t work for you (unless you kindly ask Telstra to half the phone bill that week).

Using my method, students can divvy up their ‘play money’ each paycheck because it will most likely be different each time.

But if you don’t like my method, read Barefoot’s guide, it is a bestseller for a reason!

Step 3: Investing

If you don’t know anything about investing and are not interested in learning too much more, I would open a CommSec account and put your saving into an index fund, (i.e. the SP500), can’t go too wrong there. 

If you want to try do more complex investing, I’d suggest figuring out your risk profile and doing your own research. Everyone has different opinions and there are millions of ways you can invest, so be aware of the Paradox of Choice.

And REMEMBER the third and fourth law’s of gold, which basically say, don’t invest in areas you are unfamiliar in, and don’t take money advice from people who don’t know much about money. Consult only with wise people. PROTECT THY GOLD.

Step 4: Barefoot Date Nights

To keep the ball rolling in the right direction, Barefoot suggests setting aside a night once a month, in the calendar, to review your finances. This can include reviewing how you went with your buckets that month, your investments, or your goals; do any adjustments need to be made?

I tend do this every couple of weeks and find it extremely beneficial 💪.

Step 5: Change Your Attitude

I apologise, this is getting pretty long, so I will leave the rest (my attitude towards money) for another article 😇.

And remember, I am always looking to learn more, so please, if you have any wisdom, send it through!

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