Welcome (back) to our Six Stones series. Our financial adviser, Jordan, is sharing as many tips, ideas and advice for people going through a divorce as a humble blog will allow. He’s staying away from specific financial advice – it’s all general advice over here, be sure to get personal financial advice before doing anything – but we hope you find some useful information in here as you navigate through/out of your divorce.
In our last post, we met Louise who’s decided to review her current financial situation to see why she feels things are getting out of her control.
We helped her Explore, Analyse and Diagnose her current spending patterns and found that a few options would make her life a lot easier.
In this post, I want to talk about why Louise’s banking structure might also be contributing to her feeling out of control.
As I’ve mentioned, most people have a few accounts already. Louise is no different – she currently has these accounts:
– A spending account
– A saving account
– A credit card
– Some other random account with a separate bank.
Like most people, her income flows into the spending account, and she uses that to pay for her Needs – it’s where her rent, utility bills, grocery and transport costs come from.
It’s also where all her direct debits come out of. The hassle of moving them is a big reason she hasn’t made any changes.
Louise is paid fortnightly, and whatever’s left at the end of the fortnight – if anything – gets shifted over to the savings account.
Since the separation there hasn’t been much going into that account at all, but Louise would like to start seeing some growth in that balance.
Maybe to go towards some future Wants, or just as a rainy day fund.
Meanwhile, her credit card has been getting a real workout, being used for a mixture of Needs, Wants, Worries, emergencies and anything else in between.
And that other account, well it’s there from when she thought about doing something else at some stage.
There’s nothing inherently wrong with this structure – but it’s not actively contributing to her feeling more in control about her money.
This is what I call an ‘accidental’ structure because it’s come about by circumstance, and is based around habits.
What we want to build is a ‘deliberate’ structure.
This is the kind of structure where everything has a place and a reason for existing. There are – ideally – no unnecessary parts in a deliberate structure.
Done properly, this structure will:
– Reduce the fees you’re paying for your banking;
– Maximise the interest you’ll receive;
– Automate the payment of as many Needs as possible;
– Help you start filling the Smile, Joy and Safety ponds from day one.
First, The Biases
I should confess a few biases before we get started.
1) I’m not a fan of credit cards.
I think the (limited) positives they provide are outweighed by the many, many negatives they come with.
Yes, I know you can get ‘points’ by using the cards properly, and that sweeping funds across from other accounts on the 54th day can work marvelously. I also know that in my entire career, I’ve seen three people do this consistently.
2) Interest is great, but fees are more important at the moment.
This is particularly true when you don’t have a significant balance in there. An extra 0.10% a year on $5,000 is $5 – the wrong account could charge you that in fees each month.
3) Slow and Steady is the way to go.
This is not a get rich quick process. It’s actually not a get rich slow process either. This is about putting a structure in place that makes it easier for you (and Louise) to make progress. It’s that progress that we’re chasing, because that progress will translate into Cash Confidence.
4) My priorities are control and confidence, not complexity.
There is scope to add a few more accounts, or an extra debit card, or throw in a term deposit here and there. It’s entirely possible this would add some marginal financial benefit.
But the complexity that brings – especially starting out – undermines our key goal here, which is feeling in control of your money.
So we’re all about keeping things as simple as possible.
In my next post, we’ll talk about how Louise could set up her banking to start taking back control over her cashflow.