Managing money is simple, you need to spend less than you make. At certain times in your life, this will be harder or easier. You need to find your own balance between enjoying life now, having financial resilience, and putting something away for the future. Less is more, and living within your means is the secret to happiness.

Debt is the leading cause of Financial misery, especially Consumer Debt. It provides an avenue to enjoy things before you have figured out how to pay for them. High interest rates make the items you buy many times more expensive and if left unchecked this type of debt can cripple your finances.

I have listed below 6 steps to putting your personal finances on autopilot. The benefit is that it’s simple and effective at bulletproofing your finances. This is also how I run my own finances and I can testify to the results.

Most of the credit goes to Australian author Scott Pape and his book “The Barefoot Investor”. These steps are largely based on his system with some minor tweaks from other books I’ve read.

1. Start Saving 10% of your Income

Set up an Automated transfer of 10% of your income and move it to a Savings account you don’t have easy access to, preferably with a good interest rate. You will never even miss this money but it will slowly grow over time and surprise you someday.

Maybe it will help your kids buy their first house or allow you to retire 10 years early, or help you do some good in the world, who knows?

2. Cut Down your Living Expenses

Living Expenses are the money you spend on Housing, Transportation, Communications, Food, Education, Family expenses, and Healthcare. Set a target to get your living expenses to no more than 60% of your remaining income.

There are some big opportunities here that you probably don’t even realize. To make this target you will need to be creative, brutal and persistent.

• Do you need a 5G mobile connection or is 4G good enough?
• Can you get your work to pay for your home internet?
• Do you really need a car?
• What if you do your shopping after 9 pm, will you get discounts on some products about to expire?
• Can you buy your bread cheaper from a factory outlet?
• Should you buy a cheaper house or find a flatmate?
• Would putting more insulation in the roof drop your electricity bill?

If you can’t get it down to 60%, get it as close as you can. It will pay dividends down the road.

3. Allocate Money for Guilt-Free Fun

If you have managed to cut your Living Expenses down you deserve a reward. Allocate 20% of your income into two accounts for having fun. This is guilt-free money. One account you can empty every month and the other you can let accumulate for something special.

Splurge Account (10%)

This one is for partying or buying smaller things you want and you can be absolutely reckless with it. No accountability here but when it is gone it’s gone. If you spent it on restaurants then it’s back to rice and potatoes at home.

Smile Account (10%)

This one is for buying stuff that makes you smile. A holiday in Spain, a Ferrari, a new graphics card? You decide.

4. Wipe out your Consumer Debt

Okay, back to business again… Consumer Debt will ruin your life so let’s get rid of it. Not only is it expensive but it usually leads to more stress and anxiety than joy from the things you bought. Dedicate 20% of your income to wiping out your Consumer debt until it is all gone and then get rid of your credit cards if the temptation use them is too great. I keep one Credit card with a very low balance that I can easily pay off in one go.

Other types of debt like home loans are fine because when you do the math, buying often turns out cheaper than renting. Think of it as a forced savings plan. A car loan too can make sense as long as interest is low and the repayments and running costs don’t put a hole in your 60% Living Expenses budget.

5. Build up an Emergency Fund

Instead of relying on Credit Cards when things go unexpectedly wrong, you should have a fund equivalent to 3 months of your bring-home salary. Now your Consumer Debt is paid off, you can focus 20% of your income on building up this fund. Now when the car needs servicing, the dishwasher breaks or you lose your job, there is some money to put out the fire.

6. Sow the Seeds of Financial Freedom

The focus up until now has been on establishing healthy finances and getting a bit of a buffer in place but let’s face it, this is still living payslip to payslip. If you want to change that you need to build up a passive income that earns money for you when you are not working.

We initially started saving 10% of our income. If we now put the extra 20% towards your future that will be 30% of our income going away. Some might want to cap the savings/Investments at 20% and add another 10% to the Smile Account, or allocate a bit more to the Living Expenses, you decide!