A simple and highly effective way to organise your money is to divide it into wealth pots for different areas of your life. This is an idea from Ann Wilson. If salaried then you divide your money into pots after tax, which is taken automatically. If you are self employed then you need to have another pot for tax and national insurance and then divide the reminder.and I learnt from
Pot 1: Financial Freedom 10%
Ten percent of every piece of income you earn goes into this pot. You are paying yourself first rather then last when everything and everyone else has been paid for. With it you invest (in stocks and shares, bonds, property) to create assets that will give an income in the future. This money must never be spent.
Pot 2: Save to Spend 10%
The next ten percent of your income you put aside as long term savings. This is money you will spend for things like holidays, children’s education, deposit on a house, weddings etc.
Pot 3: Education 10%
This is the money you invest in yourself to learn, develop and grow – your personal education
Pot 4: Play 10%
The next ten percent is about you enjoying your money. It is only to be spent on what brings you joy and happiness! This could be treats of coffee and cakes, creative pursuits, meals out, music, massages, dance classes, art materials. Anything for you that makes you feel wealthy, pampered for and cared for by your money. For me this was the hardest pot to get in the habit of spending. And you must spend it!
Pot 5: Necessities 55%
Fifty five percent of your income is about your day to day spending for your survival. This will cover your mortgage/rent, bills, food, transport, insurance etc. This may sound impossible, especially in London! And you will be surprised by looking carefully and tracking closely what you spend your money how can make some adjustments to reduce your outgoings. It may take some time and this is is fine. Learning how to live on less than you earn is an essential wealth habit to reach financial freedom.
Pot 6: Contributions 5%
The last pot is for the charitable contributions you want to make. Your giving pot can also be the time you give to organisations that are making a difference in the world.
So how do you actually sort your money into pots?
Some people and younger people may wish to have real pots they can fill. If you have a bank account and a current account, into which you are paid, you can then set up monthly payments for your investing and saving pots into another account – current or savings. As this is money you are not going to spend you want it out of your account. Opening another of either of these accounts can be done online and is super simple.
If you have started investing the amount your are paying into your investing pot can be paid directly into your account with your online broker. You then have your education, necessities and contributions pots in one account to be spent that month, or used in following months.
There are now a number of budgeting apps to help with managing your money from your phone.