How to avoid the most common financial mistakes – Part 2 – Episode 13



Welcome back.  In the last episode we explored common investment mistakes people make.  It’s not really essential that you listen to Part 1 before giving this one a listen, but if you haven’t listened to that one yet, perhaps make that the next episode you grab.

Today we’re going to explore common cash flow mistakes that I see people make.

I mentioned in the first episode that when I was first planning this post, I jotted down 12 ideas – financial mistakes I’d seen regularly over my 18 years as a financial planner.  Last episode we covered the three that I grouped together as investment related – procrastination, being too conservative, and trying to be a share trader.  In this episode I’m going to start with three more, that all have cash flow as a common theme.

Hopefully you’ve listened to a few Financial Autonomy episodes by now, and if so you’ll know that a common pre-cursor to making progress on your Financial Autonomy goal is having a good handle on your household’s cash flow.  How much comes in, and how much goes back out.  In the Toolkit for the episode I’ll make sure that our Budget Tool is included.  I know the “B” word strikes fear into many, which is why I typically focus on cash flow instead.

The thing is, getting on top of your Cash Flow is much easier now than it used to be.  That’s courtesy of internet banking.

Our Budget Planner template has Expenditure first and income second, but if you want to get some quick progress, fill in the income figures as they’re the easiest to get.  You want the after tax number here – how much actually goes into your bank.

Now go back to the top and work through your expenses, referring to your bank statements in your internet banking to get the numbers.  Focus on the bills first because they are easily identifiable.  For things like your phone bill, they’re pretty stable month to month, so you should be able to just check a couple of months’ worth and then get a good estimate of what they will cost you over the year.

Bills like Electricity and Gas can vary quite a bit between summer and winter, so you might need to go back and get the whole years figures for these ones.

Once you’ve filled in the clearly defined expenses, then go back and perhaps focus in on 2 months’ worth of figures and tally up what you spend on food, clothes, and the like.  Things that you will always spend money on, but for which it varies a bit, and drips out over the course of a month.

I would print out the 2 months worth of bank statements and tick items off as I allocate them to a group such as food.  Perhaps you could use a few different coloured highlighters – one for food, one for entertainment, etc.  The end game is that once you’ve completed this exercise, everything you’ve spent money on in the past 2 months has been put into a category in your budget.

So now you total up your expenses, compare that to your income, and hopefully you like the answer.  If the answer is that you should be saving $x per year, reflect on whether that has been your actual experience over the past year.  If not, why not?

One key element of the exercise, probably the most important, is for you to see what you spend your money on, and whether that’s really bringing you the greatest happiness.  Is the way you are currently running your finances bringing you closer to your Financial Autonomy goal?  In know that money and finances can be a point of stress in some relationships too.  Perhaps going through this exercise together might help you both have a deeper conversation about where you are currently going, and whether that is taking you to the destination you both want to arrive at.

So not having an understanding of your cash flow is common financial mistake number 1 this episode. Very much related to this, common mistake number 2 is spending more than you earn.

You don’t need the mental powers of Einstein to figure out that this can’t work, yet it is an easy trap to fall into.  The most common ways I see this unfold is through credit cards, and the generosity of well-meaning but ill guided parents.

Credit cards, and I guess general consumer debt like interest free periods on white-goods, is the most common way of spending more than you earn.  If this is you, you’ll know it.  So do the budget exercise mentioned earlier, understand why your expenses exceed your income, and devise a plan to do something about it.  Perhaps you can come up with a way to increase income.  Most likely there will need to be some strategy to reduce expenditure.  As with the investment problem identified in part one of the post, the key is don’t procrastinate.  Identify the problem and take steps to resolve.  You may not come up with the perfect solution straight away, but make a start in changing things, and refine as you learn more.

The less well recognised way that people fall into the habit of spending more that they earn is through the generosity of well-meaning parents.  I’ve had retired clients over the years whose retirement savings have been drained by adult children constantly putting their hand out for financial help, or just where the parents say “oh well, poor Tina’s doing it a bit tough so we paid her credit card off for her”.  These parents are well meaning, they love their kids.  But by “helping” in this way, their children, who are adults, never get on top of things financially.  They never get to the point of standing on their own two feet.

I’ve dealt with one family where mum and dad provided the daughter with quite a bit of financial help in her 20’s, enabling her to drive a Mercedes and live a really high material standard of life.  She met a lovely guy and they got married.  Her expectations of what life should be like were really high though, and as a couple, that lifestyle just couldn’t be maintained.  The husband felt like a failure because he couldn’t support his wife in the lifestyle she had become accustomed, and ultimately they separated.  It was sad story because they are both lovely young people, but her parents, with the best intentions in the world, effectively sabotaged that marriage by not making their daughter at an early age understand the fundamental need to live within your means and spend less than you earn.  Unrealistic expectation were baked in at an early age.

In contrast to this, I saw an article recently that criticised the celebrity chef Gordon Ramsay for flying in first class, whilst his kids flew in economy.  Now I have no idea if this story is true, or, if it is, what the back story was.  But if his thinking was that he doesn’t want them to have an expectation that every time you fly in an aircraft, it will be in the first class section, then I think he’s doing his kids an enormous favour.  If his kids enjoy success later in life and can buy their own ticket in first class, then good luck to them, they will have earnt it.  But if dad just shells out and they think nothing of it, then surely, roll forward 5 or 10 years and you’ve got a train wreck of a life waiting to unfold.

Continuing on with the cash flow type common financial mistakes that people make, feeling the need to keep up with the Jones is my third offering for you.  Back in Episode 7 – How to retire early, I touched on the interesting findings from the authors of The Millionaire Next Door.  You’ll recall the two authors studied households whose net-worth (ie. assets minus debts) exceeded one million US dollars.  One really interesting finding was that millionaire households were disproportionately clustered in blue collar and middle class suburbs, and not in the higher income, white collar, more affluent suburbs that you would assume.  Digging into why this was the case, the authors found that the higher income earners devoted more of their income to luxury items and status symbols, often funded with debt.  These people tended to neglect savings and investment.

This finding delivers the double whammy of linking the problem and the consequence.  Feeling the need to keep up in a material sense with friends, neighbours, or whoever, results in you being less wealthy.  And in the context of what we’re trying to achieve – your Financial Autonomy, your financial independence, gaining choices in life – less wealth directly pushes against you achieving your goals.

Let’s finish off today’s episode with another financial mistake that I commonly see, and that is often really quite sad.  That is the scenario where one member of a couple handles all the finances, and the other is totally ignorant of all things money in the household.  I say it’s really sad, because I’ve seen this scenario unfold in a number of ways.

One is where the person who controls the finances dies, and the surviving partner is completely ill-equipped to manage their affairs.  Sometime they don’t even know what assets the couple owns.

A variation on this is where a relationship ends in divorce.  The person who took no interest in the finances (or perhaps wasn’t given an opportunity to be involved) is now rudderless.  I can think of one instance where, post-divorce, the wife, who had previously just left everything to the husband, was utterly shocked when she did learn of the state of their finances and how money was being spent.

On the flip side, I’ve had clients in total despair, because they are trying to manage the household finances, but their partner just whips out the credit card at a moment’s notice and buys something that they simply can’t afford.  Sometimes the person in despair feels like a failure because they can’t support the lifestyle that their partner seems to feel is the norm.

So if you’re in a relationship, I really encourage you to ensure that both of you have a working understanding of your finances.  Sure, one of you might do more of the tracking – you’ve got to play to your strengths.  But you need to be able to discuss things as a couple.  Finances are a potential point of stress in any relationship.  Openness is the best medicine.

Well, I think that’s enough for this episode.  That’s 4 more of my original 12 common financial mistakes that I see people make.  I’ve got 5 left, so look out for part 3 in a fortnights time.

A reminder too, don’t forget to download the free toolkit for this episode – I’m keen to help you take action on the ideas that I share, and the toolkit is a really critical piece in delivering on that.  There’s no “fluff” here at Financial Autonomy.

I’ve put together something of a bumper toolkit, covering all 3 parts of this series on common financial mistakes.  I have the 12 most common financial mistakes listed so you tick them off as you’re confident you’ve worked through or around those. I’ve also included the Budget tool to help you get your cash flow under control, a piece on risk vs. reward, useful books, personal insurance options so you can cut through the jargon in this area, and a piece on SMART Goals.

So hopefully tonnes of usefulness in there, so be sure to visit the financialautonomy.com.au website and grab your copy.

How to be financially ready to start a family – Episode 5



Starting a family is a huge step in a great many of our lives.  Bringing a new little human into the world.   So much hope.  Scary too!  Completely life changing.

Financial Autonomy is about you taking control of your finances, and not being controlled by your finances.  The focus of this audio blog is to think through the financial implications of taking this big leap, and what you can do to prepare for this major transition in your life.

Also, if you’re reading or listening to this during the pregnancy phase, and are anything like my household was prior to the birth of our first child, you’ve probably read enough books like What to Expect When Your Expecting, and Up the Duff.  I promise there will be no references to what pregnancy will do to your body, or any of the seemingly infinite ways we can be a terrible parent and ruin our child’s life.

My name’s Paul Benson, and thanks for listening to Financial Autonomy, the audio blog.  Let’s dive into today’s episode, how to be financial ready to start a family.

How to be financially ready to start a family could easily be rephrased as “How to survive on less income and with more expenses”.

The stereotypical scenario is that dad continues to work full time after junior’s arrival, whilst mum stays at home and try’s to maintain her sanity.  Of course there are all sorts of permutations and combinations of how different families make things work, but almost inevitably, there will be less money coming into the household than there used to be.  On top of this, you now have an extra person in the household, who maybe doesn’t eat that much (yet!), but goes through nappies like it’s an Olympic event, and for whom every little cough is diagnosed by the new parents as likely bird-flu, requiring your next month’s wages to be donated to the local chemist.

So financially, starting a family is a very big deal.  But with some planning, it needn’t be stressful.  Sleep deprivation will be stressful enough.

So where to start?  You need to understand your cash flow.  How much money comes into the household, how much goes out, and where does it go?

The cash coming in is fairly straight forward assuming you are an employee.  Possibly less so if you are self-employed, though hopefully you have a good sense of the normal cycles of your business and can forecast your income with a reasonable level of certainty.  If one of you runs a business and the other is currently an employee, there may be scope to split income after the baby arrives.  It’s a bit of a curiosity with the tax system, but two people each earnings $40,000 will end up with more money in their pocket after tax, than a couple where one person earns $90,000 and the other nothing.  This may also point you to a solution of each parent working reduced hours, instead of the more typical one at home and the other working full time.  Something to consider at the very least.

So in terms of being financially ready to start a family, you’ve got a clear picture of what the income piece will look like once bubs arrives.  What about the expenses?

Hopefully you’ve got a budget.  If not, visit the resources page on the financialautonomy.com.au web site and download our template.  Look up your bank statements via your internet banking, fill in the figures, and away you go.

It is important to understand where your money is currently going and then think through how that will change once your family moves from 2 to 3 people (or maybe more if you’re really efficient!).  Maybe public transport fares will drop.  You may spend less on eating out.  But of course you will now have the cost of nappies and all the other bits and pieces a new born demands.

Once you have your head around the numbers, it may be valuable to adjust to living on one wage before the baby arrives, assuming your plan is the most typical scenario of one parent at home and the other in the workforce.  If you can demonstrate that your household can manage on that one income, you can have a high confidence that you are indeed financially ready to start a family.

Another approach that I have seen is where the couple assumes and focuses on mum staying at home for 1 year.  The solution they are trying to find therefore is not necessarily the long term plan, but rather just a one year solution.  Sometimes they approach it that way because planning further ahead is just too daunting.  Alternatively that approach might be adopted to recognise that there is a lot of uncertainty in this phase of a couple’s life.  Perhaps the member of the couple staying at home might hate it and want to return to the paid workforce full time as soon as possible, or at the other extreme, couldn’t imagine leaving bubs with a carer and wants to remain a full time stay at home parent beyond maternity leave.  Options around returning to work part time are not always known 12+ months out too, so sometimes, just focusing on the one year makes a lot of sense.

So if you are focusing in on a one year solution to being financially ready to start a family, items like any maternity leave and perhaps annual leave entitlements might provide a significant portion of the solution.  I know of some couples who have arranged to take leave entitlements at half pay to extend the duration that they continue to have income coming into the household.

The government’s Parental Leave scheme might also provide some very useful assistance.  This is paid at $672.60 per week for 18 weeks.  Eligibility is fairly generous.  Check out the link to see all the criteria.

And whilst the Baby Bonus is now gone, you may still be eligible for its replacement, the Newborn Payment.

In developing your plan to be financially ready to start a family, on-going government payments may well be an important element.

The primary form of government assistance for young families is the Family Tax Benefit and the Department of Social Services web site explains the support available like this:

Family Tax Benefit (FTB) is a payment that helps eligible families with the cost of raising children. It is made up of two parts:

  • FTB Part A – is paid per-child and the amount paid is based on the family’s circumstances.
  • FTB Part B – is paid per-family and gives extra help to single parents and families with one main income.

Family Tax Benefit – Part A. If household income is less than $51,904, you will receive the maximum entitlement.  Beyond that, your entitlement depends on the number of children that you have and their ages. As mentioned in the summary above, this is a payment paid per-child.

For those about to have their first child, you would cease to be eligible for Family Tax Benefit – Part A once household income reaches approximately $100,000.  The link provided shows a table to explain how this works.

If you qualify for the maximum payment, for a new born you would receive $182.84 per fortnight currently (April 2017).  This is certainly a handy amount and well worth incorporating into your cash flow plans.

There is also a Family Tax Benefit – Part B. This is potentially another $155.54 per fortnight.  As per the summary mentioned earlier, Part B is a per-family payment and focuses on households with one income.  It is therefore often relevant for couples starting a family.   Where one member of the couple is at home full time, you will receive the maximum Family Tax Benefit – Part B, if you’re working partner’s income is less than $100,000.

There are also supplement payments added to both Part A & B at the end of the year in some cases, which can act as a handy lump sum.

The various means of government support are certainly not easy to get your head around, but for those eligible they can be very helpful in making the household budget work, so take some time to look at the various links and aim to arrive at an estimate as to what you might receive.  To summarise, there are 3 likely sources of recurring payments:

  • Parental leave scheme – 18 weeks
  • Family Tax Benefit Part A – a per child benefit
  • Family Tax Benefit Part B – target at single income households

 

Child care is another likely new expense that may need to come into the family budget.  Whether it’s to enable you to return to some paid employment, or just to get a sanity break and a few things done in peace, childcare is often a meaningful expense in a family’s household budget.

The cost of child care is subsidised by the government via the Child Care Rebate.  This will cover 50% of the cost of childcare up to certain limits.  A day of childcare at a child care centre is likely to cost around $100 per day, or $50 after the child care rebate.  This varies quite a bit depending on where you live though, and there are solutions like family day care that in some cases are cheaper.

 

Whilst not something that you need to immediately factor into your household budget once bubs arrives, a final tip that has been really helpful for my household.  When our first child arrived we put a few lumps of money into a managed fund with the intention that this would help towards his secondary education fees.  We weren’t real sure where we would send him, but we felt is was likely he’d go to some sort of private or catholic type school.  At the time I worked in a role where I got occasional lump sum bonuses, and these were the amounts we socked away.

My wife and I went on to have a second child, and as the boys got older, and education plans firmed up, we weighed up the best use for those savings that we’d put aside.  My youngest starts secondary school next year and so we’ve decided to use the education savings to assist us during the “overlap” years – the 3 years where we have both boys in secondary school.  The amount put away all those years ago has grown to be enough to cover one boys fees for these 3 overlap years, so that effectively we will just be paying roughly the same amount of school fees that we have been up until now, from our normal cash flow.  I have to tell you that this solution is enormously helpful for our household.  So give some thought what you might be able to do around putting some money into a long term growth investment to help towards education costs down the track.  Putting some money away early will enable the magic of compounding to do much of the heavy lifting for you.

 

Preparing yourself to be financially ready to start a family is a very important and potentially challenging task.  If you need help, we’re here.  Go to the Work with Me page on the financialautonomy.com.au web site and book an appointment.  Helping people do this sort of planning is what we do every day.

 

Well I hope today’s audio blog has brought you a bit closer to being financially ready to start a family.

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.