Over the last few years I have had many meetings with clients who would like to break the debt cycle or find a system that prevents them from going into debt. So I made it my mission to find a basic system that could be implemented to prevent the above arising. It has taken a year or so to get it right, but even today I still tweak the system to personalise it for a client or a couple.
The idea came, when I thought about what our basic needs are when it comes to finance…. and that is, our banking structure. Some of us can run everything out of one account and use a credit card with no issue, but others of us see money, and that we have easy access to it, be it credit or debt, and well, shops here we come. So how do we use our bank accounts to our advantage?
This is the basic structure. Your salary gets paid into your cheque account to ensure all your debit orders are paid. You then pay yourself a salary, basically your spending money for the month, into a debit account. Now the trick here is, whether you have the debit account at the same bank as the cheque account and this depends on whether you are strong enough to not look at the money in the cheque account.
Yes, debit accounts have higher fees, but you can’t go into a negative balanced and once your money is spent, it is spent. You can have a balance run on your phone so that you always know how much you have left, but the beauty is that you do not have to worry about debit orders and that they could bounce because you spent too much. You also know exactly how much you have to spend each month, which really helps.
So the next question is, well if it is so simple, why don’t we do it? The reason is the admin aspect, setting up the system takes time. The ideal situation is ensuring that your cheque account always has 2 months’ worth of debit orders in it. So if your debt orders are R10 000 per month, then your account needs to hold R20 000. R10 000 to pay for that month’s debit orders and R10 000 in reserve for when something goes wrong. Again it sounds easy, but with rising costs, saving up enough to get to 2 months’ worth of debit orders takes time and diligence. Give yourself 6 months to a year to get to this level. It could take as little as R100 each month to be left in the Cheque account to build up towards your protective balance. It might seem small, but it is R100 more than you had last month.
What if I get paid more or my income is variable? Choose a set amount of money that you are willing to give yourself each month and don’t change it. This way even though your earnings are variable your spending is set. Allow yourself 2 specific months each year to reconcile the Cheque account. What I mean is make sure the account is still at the set 2 times debit order balance. Anything extra gets divided in half, half to your retirement savings and half to your personal savings. This way you get to boost both and continue to build for the future.
If you are a couple, the question you need to ask is, how do we use the system without doubling up? The only change is adding an extra Debit account. You still have one account that all the debit order gets deducted from. You each then get a salary to spend based on the needs you have. This can get tricky, as certain spouses need more as they cover food, children’s needs and general living. But having an open conversation about these needs and setting the goals, removes the problems from arising.
How do I save? You make saving a debit order just like you would for a bill or for retirement savings. This way it becomes an expense that you know you have to save each month and part of your cheque account, so you forget you are even doing it. It is a nice surprise when you do need something and there is money there that you forgot you were saving towards.
Lastly, give yourself a reward. As financial advisers we are often seen as the horrid people that just give us more accounts to pay and take more and more of your money. I believe life also needs to be lived but within the limits we set ourselves. Set yourself goals and rewards for sticking to the banking basics and savings plans. Start with small little rewards, like a meal out with friends to celebrate a successful week. Creating a holiday dream and making it come true. We forget that with a little bit of planning, some of those far off destinations like Thailand can become a reality. Yes, you can do this and save towards the future, it just takes planning and starting with the basics.