Friday, 12 September 2014

We all need to withdraw money from savings...but make sure you put it back!

If you have ever set yourself a budget you will know that things don't always go to plan.  Sometimes there are unexpected expenses and sometimes you just spend more than you wanted to on a night out.

If you have budgeted for almost all of your income this means that one of two things will happen in those months where things don't go to plan:

  1. You will not save as much as you intended to in the month; or
  2. If things really get out of hand you will need to dip into savings

Don't write off the bad month...

One thing I realised since I started tracking my expenses fairly religiously was that if you 'write off' a month as bad you will never really catch up again.  You need that bad month to be made up by a good month later down the track.

Writing off the month mentally makes you reset to zero and you go back to trying to make your budget in following months.  I think this is a bad way of approaching it.  Bad months need to be compensated for.  You need to replace that amount you have taken out of your savings account or actually contribute that amount you didn't contribute in a previous month.

So how do you do this?

What you need is a way of tracking your unexpected withdrawals from savings...

If you have a way of tracking your unexpected withdrawals from savings then you can keep track of how much you 'owe your savings account' on a real time basis.  Not only does this motivate you to save more or be more wary of your expenses, it also reminds you that when you are having a good month that you may need to contribute a little bit extra to your savings account.

If you want a way of tracking the deviations from your budget I recommend the following method.  I have been using it for a few months and have found it quite effective.

1. Have an excel file which tracks what you do with your money when you get paid.  I call mine my 'wage day' file

This is a super simple spreadsheet which every month tracks what you do with your cash.  It is not a budget of any sort but it interacts with your budget.  For example I get paid monthly so my Wage Day file is updated monthly 

Below is an example of a month where your income doesn't quite cover all the expenses and savings plans that you had for the month

Let's work through this tracker:
  • Income
    • In this (fictitious) example I had $500 in my account before I got paid.  
    • I then got paid my wage of $5,000 for the month and had no other income.  
    • This tracker also lets you 'un-save' for items when you actually spend on them
    • The total available to spend line is the amount of cash you have in your bank account available to spend and save this pay check
  • Bills
    • I assume you are like me and pay your bills before you start doing anything else so these come first
    • Obviously customise them for your situation but as you pay bills list them in this section
    • After you have paid all your bills that are due you will have an amount to 
      • 1. Save; and 
      • 2. To keep in your bank account for the following months saving (don't forget this one...otherwise you will have to keep dipping into your savings
  • Savings targets
    • Your savings targets come from your budget (which is completely separate to this file)
    • You will have your own goals and targets.  For example this year I have been saving for 
    • If you put away cash for these purchases every month it makes it a lot easier when it comes time to pay for them - I call it 'expenditure smoothing'
  • Spending in the coming month
    • Don't forget that you will be spending cash in the coming month and you may want to keep a minimum balance in your bank account
    • Only you know what you spend in cash so it will be totally dependent on your lifestyle
After all of this you may have a positive OR a negative balance at the end of the pay period.  Over the course of the year these should even out if you have budgeted effectively and reasonably.  However from period to period they will vary.

In the example above if I was to try to save everything I want to and spend on everything I need to I would be short $1,350.  Most of us would just save less and then try and catch up.  However I add a new section to this tracker to help me keep track of how much I 'owe myself and my savings account.

2. Track how much you owe your savings account

In the above example, because I am short for the month I would take a 'loan' from my savings account.  How would I do this?  I would actually transfer the cash into my savings account under the different target labels above and then transfer it BACK calling it a loan to myself (the highlighted section) of the tracker above.  I would then add the following section to my excel file:

So at the start of this pay day I already owed my savings accounts $2,250 and on pay day I needed to add another $1,350 to the balance.  At the end of pay day therefore I owed my bank account $3,600!  However don't forget that pay day isn't the only time we need cash to cover bills.

There are often times when we need to dip into savings during the month to cover unexpected bills or where we run short of cash and we just need a little bit to tide us over until pay day.  You need to account for these too.  Every time you dip into cash (or indeed are able to pay some cash back because you got a bit of unexpected income) you can record it in this 'loans to self' section.

In the example above I assumed that I got a cash inflow of $500 during the month and I used this to pay back my savings account and so at next pay day I only own my bank account $3,100!

3. Treating withdrawals from savings like a form of debt will encourage you to pay it back

This is an entirely psychological exercise. There is no great secret in it.  If you are the type of person that will always remember to replace an amount you have withdrawn from savings then you will not need this.  However I am not and most of us aren't.  

This system just encourages you to remember that you have withdrawn money from savings, and that you do need to pay it back.  It also doesn't force you to remember every dollar you have withdrawn because you have a running total which you know needs to be paid back

Do you have a system that works for you?  I'd love to hear about it!

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  1. I wouldn't say I have a religious system like this however I have ASP's (Automatic Savings plans) with UBank and there is a set amount transferred in there as soon as I get paid.. Then there's investment accounts that I have set up as well..

    1. I think Automatic Savings Plans are great! They are actually the best way to save.

      The system I have above is to address the problem that I found that I had which was occasionally having to dip into savings...which then never got replaced. I find it is a system that is super simple and works really well

  2. Even without the ASP, I'd still go okay (have probably a bit more discipline than most) except when spending to travel ;)..

    Yeah, it is tough cause I find you're constantly putting it on credit and then playing catch-up rather than paying yourself first :O

    1. You're right about the impact of credit. I probably use my credit card far more freely now than I used to. When I lived at home my balance was rarely larger than $1,000...when I moved out of home it crept up to $2,000 per month and now it has regularly been hitting the $3,000

      Probably something to think about...