In the previous blog, we looked at the ‘profit first’ theory which is the same as ‘paying yourself first’. This means putting money into your superannuation fund from your pay check before you spend money on anything else.
So that’s the theory – but how is it actually done?
We’ve broken it down into 4 steps – and it can be applied to any income level.
Step 1 – Disperse your money into smaller portions: Superannuation, investments, expenses and so on. If you compare this step to being on a healthy diet, it would be the same as dividing your food into smaller, more manageable portions.
Step 2 – Serve sequentially. This means putting money into your super first (the most important step), then dividing the rest into other investments and expenses. Using the diet analogy, this is like eating your vegetables first – the most important part of a healthy diet. Once you’ve taken care of your super, we suggest creating an expenses account, worked out at a fortnightly or monthly average (which is not to be considered as ‘leftovers’ and dipped into if it hasn’t been spent for that month). And finally, have a discretionary account for any leftover cash as your ‘spending allowance’.
Step 3 – Keep your profits out of reach. This is exactly the same as never keeping junk food at home. Due to Australian legislation, it is difficult to take money out of your super anyway, and we think this is a good thing. Any other investments or profits should be treated in the same way – you should consider that money as being ‘gone forever’ – that is, not to be touched until you retire.
Step 4 – Enforce a routine. We think it’s best to work out how much you want to put into your investments each year down to a dollar value, and make sure this happens on a regular basis. Thankfully, it’s fairly straightforward to set up automatic bank transfers these days.
For some people, this will seem overwhelming – we often hear people say ‘we hate budgeting’ or ‘we hate thinking about our money so much.’ If that’s you – you’re not alone – but getting things automated is one way to ensure that exactly the opposite happens: that you don’t have to think about your budget every pay check. Once it’s automated, it’s done – just do a check every few months and see how it’s all going.
Dallas Davison, Michael Hogue and Ali Hogue.