In my last blog I wrote about replacing £70 somebody took out of my wallet from my “Gifts” fund. I can just hear people say: “That’s all right if you’ve got extra cash sloshing around.”
There are various ways of getting to this point. For instance, some people put a certain sum aside for gifts every month or every week. After all, Christmas and birthdays come around regularly and it makes sense to have money ready for those as well as for other, less regular events, such as christenings, graduations, weddings etc.
Most people divide their surplus into different “pots” or “buckets”. Sooner or later virtually everybody who diligently uses cashflow planning has a surplus at the end of the month or week. And for most it’s rather sooner than later.
There are endless variations on how that surplus can be divided. The simplest one is most useful for people who still have debts to repay. We have actually adopted it from Debtors Anonymous (www.debtorsanonymous.org). The suggestion is that any surplus funds, no matter how small, get divided into 3.
One third goes to repaying debt (in addition to any negotiated debt repayments), one third is used to treat oneself and make yourself feel good, and the last third goes into a contingency fund for unexpected expenditure. For instance, I could have replaced the stolen £70 out of that fund.
To people who have no more debts to repay (where even the mortgage is paid off) we recommend the “prosperity formula”. Here you use one half, or 50%, for your day-to-day spending. The remaining 50% gets divided into five equal parts, i.e. 10% to charity and 10% each into various savings funds for specific purposes, e.g. replacement funds for car(s), furniture, home appliances etc, and/or to build up an investment/pension lump sum. Some of our clients apply this formula to all their income, others to surplus and windfall funds, yet others only to windfall income.
It doesn’t really matter which strategy somebody adopts. The important point here is to have these “pots” or “buckets”, and that each serves a specific purpose. It’s no good vaguely saving “for a rainy day”. Each £, $ or € needs to have a “job”.
Saving “for a rainy day” makes us reluctant to touch the cash; i.e. we are more likely to run up credit card debt than to use those savings. Whereas the idea of “pots” or “buckets” of money for specific purposes, such as holidays or home improvements, makes us more willing to use those funds when the need arises – and also to juggle cash around between them. In fact many of our clients tell us that they enjoy this moving cash around, especially since it’s their money and not debt that gets juggled.
Sanni Kruger is a finance coach helping people to become competent and confident money managers who live within their means without stressful money concerns. She does this by supporting them in creating systems that enable them to reduce their debt whilst building up savings, as well as clarifying their desired long term vision and learning how to expand their resources to reach it. This includes determining what they really want from their lives and focusing on the kind of lifestyle they’re looking for.
The full colour edition of her self-help book “Making Friends with Money – How to start feeling wealthy without waiting till you’re rich” is available as a downloadable PDF from http://dld.bz/KsG4 The ebook is available from http://dld.bz/SJpQ , the Amazon Kindle store http://dld.bz/afkv7 or the Apple ibook store http://dld.bz/Wb7b
Neat post, Sanni
you’re right about creating little pots for yourself too!