BLOG

A collection of things I sometimes write about. Comments? Questions? Get in touch

Create Your Own Personal Finance System

July 14, 2018

Not all of us are accountants, but all of us, whether we like it or not, need to manage our money - here's how. 

 

 

Previously, we discussed how to allocate your paycheque into certain percentages to suit your priorities and lifestyle. If you haven't done this already, this article won't make much sense, so go do that first. 

 

My own allocation consists of 6 different categories (and even subcategories within those categories, just to make life more exciting), but for the purpose of illustration, we will use my recommended allocation of 4 categories instead, which are:

 

 

At the theoretical level, the above is simply a matter of basic math: pick your numbers and make sure they all add up to 100%. Super easy.

 

What’s not so easy is actually putting those numbers into practice in real life - how do you actually split your paycheque into several categories? How do you keep track of how much money you put where, and how much money you’ve used from where?

 

 

Option 1: The Envelope System

 

The Envelope System, as the name suggests, makes use of actual envelopes. 

 

 

In this scenario, we will assume, for convenience, that I receive my salary in cash – that every month, my employer hands me $1000 worth of bills in a briefcase like a true mafia boss. 

 

I take that money, sprint back home hoping I won’t get robbed, and grab 4 envelopes. I label each envelope according to the categories, and put in the appropriate amount of money as calculated above.

 

Then, for the rest of the month, I make sure I take out money from the right envelope – if I’m about to pay the internet bill, I open the Living Cost envelope; if I’m purchasing stocks via a mutual fund, I open the Investment envelope; and so on and so forth.

 

If one of my envelope runs out of money, I have two options: 

  1. I stop spending on that category, or

  2. I steal from the other envelopes, knowing full well that it means I have less to spend in the category I’ve stolen from. This is perfectly okay, especially for emergencies, as long as you don’t spend more than all the envelopes combined. 

 

 

 

In a cashless world…

 

Now, the above is fine and well if we lived in the stone age and actually bartered things with cash. In the age of electronic banking and credit cards, we never actually have to touch money. It’s all numbers on a computer screen. Piggy banks are obsolete, and so are envelopes.

 

That being said, the principle remains the same as the Envelope system: have separate containers, be they physical or virtual, for each of your categories and make sure the right amount of money flows into the right container. Which leads us to...

 

 

Option 2: Separate bank accounts

 

In lieu of envelopes, you create a separate bank account for each category. 

 

 

In this scenario, once the paycheque is transferred in by my employer, I then transfer the appropriate amounts to the other bank accounts. (You can even automate this by scheduling the transfers as recurring, and let your bank do the hard work each month.)

 

Then, for the rest of the month, I make sure I withdraw money from the correct account – if I’m about to pay the internet bill, I withdraw from the Living Cost account; if I’m purchasing stocks via a mutual fund, I withdraw from the Investment account; and so on and so forth.

 

If one of my accounts runs out of money, I have two options:

  1. I stop spending on that category, or

  2. I transfer money in from another account, knowing full well that it means I will have less to spend in the category I’ve transferred from.

 

 

Option 3: The Spreadsheet System