This is not financial advice!
As the subheader indicates, this is not financial advice. I'm not qualified. Most people giving financial advice these days are, ironically, not qualified. To give out financial advice you need to have had education, training and certification. And from what I've understood, also held multiple internship-like positions in advisory firms. A lot of people will have had none of those. No most financial advice given by non-advisors is reliant on things that have worked for them (nothing wrong with that but it's not financial advice), or are part of get-rich-quick schemes and other scams. No, thank you... As you might be aware I now hold a PhD which sits at the intersection of behavioural science and consumer finance. So yes, I know quite a bit about those fields. So much so, that I'm quite comfortable to tell you what behavioural science has to say about being able to manage your finances just that much better.
1. Know Thy Enemy
Where is all the money going? Track it, religiously. I don't care if you do it by hand, heart (probably not a good idea, we underestimate expenditures terribly), or via app. And I also don't mean tracking as in, you have the numbers somewhere: you need to actively know where the money is going.
After a couple of weeks go through all your transactions. You might surprise yourself with some expenditures, especially their frequency and summed total... Who is your enemy? Is it expensive dinners out? Late night online shopping sprees? The fact that you live in an expensive area? Your desire to always own the latest tech? Or is it just those morning coffees tallying up to a waaaay higher monthly expenditure than expected?
Knowledge is power!
2. Failing to Plan is Planning to Fail
Now that what we have the knowledge, it means we also have the power to change our behaviour accordingly (if so desired). As your finances stand now, what do you want to change? What do you need to change?
If it's a "simple" too much out, as it so often is, we need to figure out how can you spend less. Your list of transactions should have revealed your downfall, so how do we rise again? We rise whilst being SMART.
For long-term followers of the blog, you will have heard me touting SMART: Specific, Measurable, Attainable, Relevant and Timely - a goal achievement tool. Set yourself a goal that follows those criteria and you should be golden.
A SMART goal would look something like: "My goal for this month is to spend a maximum of $500 on clothes." Or, "my goal this week is to save $200 and leave it in my savings account for at least a year." Key items are amount and duration.
Other key items are it being attainable and relevant to your life. If you make $200 an hour, well, saving $200 might be slightly a too low bar for you to have any real relevance to your life (granted that you don't blow through $200+ an hour). Also, if you make $200 a week, being able to save the full $200 might also be pushing it. No goal is too small or too insignificant, but it does have to be feasible.
3. Just like Bills, Accounts Are For Splitting Granted that you've set yourself some goals and know where the pitfalls are, it's time to get creative to make it happen. I have written about splitting accounts before, as inspired by the Barefoot Investor, who's recommending all types of behavioural science tricks, despite not knowing that the field exists. The idea of splitting accounts is easy: one for the necessities (all bills (rent, utilities, insurance, gas etc.) as well as groceries and "need this to live" stuff), one for each of your goals (so savings, essentially), and one for "funsies", or whatever you'd like the rest of your money to be dedicated to. The lucky thing with this approach is that once you've got your necessities and goals met whatever you do with your "fun" account really doesn't matter. You don't need to optimise it, you can just let loose and have some fun with it. Granted, and this is a big caveat, that you don't overdo it and need to drain your goal account(s). Which is something we address in the next point. 4. Save First
Ever notice that if you aim to save money, but you leave that to the last moment, e.g. you're spending money left, right and centre and then try to save whatever's left, that it doesn't work? Strange that...
People are very adaptable creatures. Realistically, we can adjust to almost anything. That anything is unfortunately also a bank balance. If the money is in a spending account, you bet your (digital) wallet that that account will be run down to zero before you reach the end of your payment cycle.
What's the solution? Re-prioritising. Granted that you are splitting your accounts, make sure that the accounts are "paid into" in the order I proposed in the previous point: first the necessities, then the goal(s) and lastly the fun account.
I have written about Save First before, it's often also referred to as Paying Yourself First. Yes, you just treat yourself as another bill. And what a great bill you are :)
5. Automatic Adjustment
For all those lucky folks who have stable enough income cycles, you might make life a lot easier for yourself if you automate a lot of the processes I've just described. Have the account that's for your necessities be the account the income comes into, and then set up direct debits from that account to your goal account(s) and then also to your fun account. It's just a tiny bit easier to have that done for you.
Even if you don't have stable income or predictable income cycles, you can automate savings, but you might want to do it a bit differently. Rather than having larger amounts redirected for you, you're going to have to be a tad more conscious about it. Maybe set the amounts redirected for goal(s) and fun a bit lower. And then decide what to do with the remaining money in the necessity account, granted that there's any left, what to do with it. Don't fall pray to the present bias, and do set yourself a stringent and SMART goal for your goal account(s).
In addition, and this is valuable regardless of income stability, install an app or activate an online banking feature which helps you save-as-you-pay. Every single transaction gets rounded up (e.g. if you spend $57.38 at the grocery store, it gets rounded to $58 (or in more extreme cases to $60) and that rounding difference gets moved to your savings account). Unless you're doing boat loads of transactions this won't be a goldmine, but as the Dutch say: alle beetjes helpen (all little bits help).
6. Out of Sight, Out of Mind
A long time back I wrote about Monzo activating a feature in which you could hide money. Rather than being a tax evasion scheme, it meant that a user could not have all their accounts and balances displayed to them on the homepage. And that, it turns out, is very smart.
Why is that smart (just in lowercase letters)? Because if you can see all your money available to you, you tend to adjust to all of the numbers on the screen. As I mentioned before, we adapt to our circumstances. And all that money will be spent.
Trick: hide it. Don't show it. Out of sight, out of mind. We now adapt to our new circumstances: only the money that we actually want to spend is being displayed to us. And our savings? Well, they are safely tucked away.
Don't feel the urge to switch over to Monzo? I feel that. There's still issues with neobanks, make no mistake. An easier way of going about this is to not have your goal account(s) in the same app as your other accounts. This splits them as well. You can do that by simply not having your goal account(s) with the same financial service provider. Maybe have your choice of those driven by who offers the best savings rate? It might take some googling...
Now of course, there's many more tips and tricks. In line with my PhD, you can increase spending friction by not having 1-click-buy systems activated, you should parttake in any employer-contibution retirement scheme and you should look into investing options: make your money work for you. But I don't need this article to take 20 minutes to read.
If, however, you'd like more non-advice, well let me know, and I'll write a part 2!
Is there any other non-advice you'd like to share with me? Please reach out via the socials :)