My Money System

Diagram

Earning

For this system to work, you will need to decide on a single monthly income number even if your income is variable. The system will accommodate for fluctuations but this number will be the basis of spending and saving calculations so choose a conservative amount (e.g a low average).

It is important that all your income is deposited into your central account which is just any bank account that gives you all the features you need with minimal fees.

Spending

In this system, all expenses are one of two types, each paid for from a separate account.

• Automatic: Bills, subscriptions and transfers regardless of whether they are a fixed amount or vary each month
• Manual: Purchases you make on a card or transfers you initiate in real time

Central account: All automatic expenses will come out of your central account. For variable automatic expenses, make a conservative estimate (higher rather than lower) to come up with a fixed amount. You should be able to easily sum these up to get a single total per month.

Subtracting this amount from from your income leaves your spending allowance. Setup a recurring transfer for this amount from your central to your spending account, treating it like another automatic expense.

Spending account: Spend this allowance freely on anything you need or want knowing that all automatic bills will be paid regardless. You should budget by time not by category. For example, if you're half way through the month and have less than half your allowance left, try to rein in your spending.

Buffers: A one month buffer in each transactional account will handle any deviations from the planned amounts and mean you are always paying this month's expenses with last month's income. Less expensive months will increase the buffer and more expensive months will consume this increase to create a fairly consistent average.

Maintenance: At the start of every month, top up the buffers from your savings account if needed. If your buffers are increasing consistently, just increase your savings contribution or your spending allowance, don't do more transfers than are necessary.

Saving

In this system, savings are treated like any other automatic expense. Setup a recurring transfer from your central account to your savings account for a fixed amount each month. This amount will directly reduce your spending allowance so choose a realistic amount and commit to it.

Future expenses list: Some expenses are not able to be easily absorbed by your spending allowance so they can be saved for ahead of time by noting the amount and when they are due in a list. These can then be drawn from savings just before paying for them from the spending account or at the monthly maintenance session if the expense is automatic and will come out of the central account.

For unplanned but necessary expenses or in case you lose your income, you will also need some savings set aside, note this on the list as a single sum, it will act as a floor for your savings account. This can be estimated based on historical trends or otherwise 3-12 months of living expenses based on how stable and secure your income is.

Saving for the list: Based on the list produced, a total required amount should be calculated. Subtracting this from the current balance will reveal either a surplus or deficit for these future expenses when forecasting future savings contributions.

If a surplus, this can be allocated to future spending by adding more items to the list or reducing the savings rate to allow for a higher spending allowance.

If a deficit, a forecast should be made to determine if the current savings rate will be sufficient to cover these costs when they arise otherwise less important expenses should be removed or scaled down or the savings rate increased, reducing the spending allowance.

Investing: If there is a surplus and all known future expenses have been accounted for, the savings contribution should be redirected to a higher performing investment like a shares portfolio which can be contributed to automatically every month.

Investing should should be done along side regular savings since it will produce a better return than cash and can one day be used to subsidise or fully fund your lifestyle. This is done by amassing a large enough portfolio such that the yearly returns are larger than your required withdrawals. A good target is 25 times your annual expenses which represents a 4% withdrawal rate.