With Christmas coming up and all the rampant spending that goes with it, it is time for me to finally admit that I am a scrooge.
I am also a grinch, but that is a story for another day.
I’ve always been fairly conservative with money, but as I’ve got older I got more scroogey (if that is a word).
In my 30’s I started to take a much more serious approach to money, thanks to the conservative but very helpful advice of the Barefoot Investor .
Over the last few years I have learned a lot about different aspects of money management: budgeting, saving, investing etc.
THIS DOES NOT MAKE ME A FINANCIAL EXPERT, but given the links between financial wellbeing and physical and mental wellbeing, it would be neglectful to not address financial wellbeing on this blog now and then. This is especially the case given that many students are operating on limited budgets.
In this blog I want to address what I think are the three key pillars of financial wellbeing and security: budgeting, saving, investing.
Those wishing to learn more about these topics should probably start their journey here: https://barefootinvestor.com/books/.
Budgeting is about knowing exactly what money you have coming in (e.g. wages, salaries, scholarship) and what money you have going out (e.g. bills, insurance, medical, daily expenses, subscriptions).
I did this by conducting a detailed analysis of my bank account(s) tracking what I spent and what I earned for the last 2 years. I put all the items in a spreadsheet and update them regularly as things change.
Having this level of detailed knowledge of your cash flow allows you identify places to save money. For example, once I knew what I was spending on bills/insurance etc, I started looking around to find better deals. Having found some expenses that I had forgotten (subscriptions), I cancelled them.
A detailed understanding of your cash flow also helps you understand what disposable income you have. Disposable income is income you have that isn’t allocated to any ongoing expenses so is free to be spent (or saved) as you wish. You might allocate some of this money to savings (see below) or simply as spending money.
Budgeting gives you a brutally honest assessment of your current financial situation and of your spending habits. This isn’t always easy to stomach. I found it quite uncomfortable to realise that I had been squandering money by not seeking out better deals on key expenses like insurance. I was also shocked to find out how much it costs to maintain a car.
But budgeting also gives you the freedom to start making deliberate decisions about where you money goes. This is where saving and investing come in.
Having done a detailed budget, you will now know whether you are spending more than you are earning (deficit) or earning more than you spend (surplus).
If you have a deficit, your primary goals are to cut costs AND/OR increase your income. Look for where you can save money on cheaper utilities or everyday expenses, or look for ways to increase your income (increase work hours, side hustle). If debt is a big problem for you, consider booking an appointment to speak with the financial counsellor here at Flinders.
If you have a surplus, then overall you are earning more than you spend – well done! Now you have the capacity to save.
Saving is simply the act of putting money aside for some future goal – and this is where financial wellbeing and other types of wellbeing collide.
In making decisions about what you are saving for, you need to think about what will bring you the greatest value. What is the most powerful use of that money in terms of your wellbeing (or your family’s wellbeing)?
Perhaps you have the desire to travel, so you are saving for that. Perhaps you’d like to buy a home one day, so are saving a deposit. Perhaps you have a highly desired object in mind (e.g. guitar) and are saving to purchase that.
It isn’t my job to tell you what to save for. It is simply my job to encourage you be strategic about what you save for. Money isn’t happiness, but it can help create the conditions for happiness. Be mindful about how you will allocate your surplus funds.
However there is one recommendation that I would make in terms of saving: an emergency fund. An emergency fund is an amount of money that you keep aside for an emergency: car breakdown, health crisis, accident etc. Emergencies happen to us all, and having some money aside for when it happens can make it much easier to deal with. How much should you have? Recommendations vary from $1000 to 12-months of expenses. I’d start by trying to put aside $1000, then work up from there to having at least 3-months of income set aside. That could take a while, so don’t fret if you aren’t anywhere close.
Even if you can only save a small amount each week (e.g. $10), it is the discipline of saving that is the important thing. There will come a point where you aren’t studying and earning more income. At that point, you will be thankful of having developed the discipline of saving.
If you’ve organised your savings and your emergency fund and you still have some surplus money, then maybe it is time to consider investing.
If you have surplus money, even after saving for the things you want and putting aside an emergency fund, then you might be in a position to invest.
Investing involves allocating money to assets that grow (or hopefully grow) over time. Investing is done with the future in mind (e.g. 5, 10, 15, 20+ years ahead). Investing is different from saving because the intention is to purchase assets that generate more money over time. You buy a property hoping that the cost of the land will increase, or you can rent the house out. You purchase shares in a company with the hope of sharing in their profits and growth over time.
Common types of investing include purchasing property, shares, or investing in a business idea.
One of the simplest ways of investing, that is often automatic, is through your superannuation. A portion of your income is allocated to a superannuation fund. That fund then invests that money, so that (all going well) when you retire, you can access that money to support your retirement. Getting to know how your superannuation works would be an excellent first step in shaping your understanding of investing. For many people, the only investing they’ll do in their lifetime is to boost their superannuation account.
But many people, myself included, like to invest outside of superannuation.
That is where things get a bit difficult.
The range of investment options available to you is large, overwhelmingly so. You’ll find lots of people telling you that their investments are the best, but many of them will be dodgy. Lots of people will happily take your money to give you dodgy advice. Investments also vary in terms of their risk/reward. Low risk investments typically give modest returns over time. High risk investments have the potential to give high returns but with much greater risk of you losing all your money.
Whilst I have my own beliefs and views about investing, you will need to develop an investing strategy that is matched to your needs and preferences
So my recommendation is don’t make any quick decisions. As long as you are saving and putting money aside, you have some time to learn about investing and make the right decision for you.
Start reading and learning – https://www.moneysmart.gov.au/
Never invest in something that you don’t fully understand. I’ve done this before and always lost money doing so. Wait until you are starting to feel more confident about different investing options before you actually start investing.
I am not a qualified financial expert, so my recommendations should be treated with some caution. However I have received some excellent, conservative, reliable financial advice over the years and it has served me well and I have shared just the basics in this post. I still consider myself very much a learner when it comes to budgeting, saving and investing and I read quite a bit on the topic.
If you follow just one piece of advice from this blog post, it should be the one about creating a budget. Understanding your cash flow is a critical starting point from which you can then start planning your financial future.
From there, start the process of educating yourself about managing money. Scott Pape’s book ‘The Barefoot Investor‘ is an excellent starting point. You might not find yourself following all of his strategies or ideas, and I certainly encourage you to read beyond him, but his advice is rock-solid, uncontroversial and I find it echoed by many other financial advisors I’ve encountered along the way.
Some people are reluctant to talk about money, because it feels crass to do so, or they are embarrassed about not knowing a lot about how to manage money. I’m of the opposite view. I think money is a central and unavoidable facet of life, that if we take control of, we can open up opportunities for ourselves and the people we care about. The more we talk and learn about money, the better.
I want to start you on your journey of thinking about money as early in your life as possible. Good habits you form now will resonate positively through your future. Bad habits will set you back. I know that I wish I had started educating myself about money a lot earlier than I did.