People of a certain age will remember former US Secretary of Defence Donald Rumsfeld describing ‘knowns and unknowns’ way back in 2002. The full quote is as follows:
There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.
Rumsfeld copped some criticism for what seemed to be a mangling of the English language. But in actual fact, his sentences make perfect sense. And they don’t just apply to global politics. They describe the world of money management particularly well. In fact, everyone can place themselves somewhere on a continuum between what they know they know, and what they don’t know they don’t know.
Some people (like us!) are lucky enough to either have a knack for finance and/or to have received some specialist education. But if that is not you, then do not despair. Understanding personal money management is within everyone’s grasp. Here is our guide about how to better understand your personal finances. How to turn unknowns into knowns.
To understand money management, the best place to start is with your spending. In these days of mostly electronic payments, your bank is really helpful here. Download or dig out a few months of statements for your EFTPOS or credit cards and have a look at what you are spending your money on. Some banks will even help you by allocating different expenses into relevant categories, like food or entertainment. Don’t just spend and forget. Spend and reflect instead: take some time to think about where your money is going.
Next, look at your income. Ideally, it will be higher than your spending! But this is not always the case. If your spending is higher than your income, then your financial priority is probably obvious: you need to either spend less or earn more, or some combination of both.
(Occasionally, we all deliberately spend more than we earn. On a well-earned holiday, for example. But most of the time we need our income to exceed our spending).
So, once you have worked out your spending and compared it to your income, you can better plan your future spending. This is especially the case if that spending is using up too much of your income. If you notice, for example, that you are eating out a few times a week, then you might decide it makes sense to stay in for an extra night and pocket the money you would have spent. But the key here is that you have to turn how much you earn and how much you spend into knowns.
Once you have done that, think about whether and what you are saving for? Are you looking to pay down a loan, for example? Or are you saving for a home deposit/new car/holiday? If yes, then think about how much money you need. And then compare that back to your income/expenditure analysis. Are you saving enough to meet your goal? If yes, then all is well. If not, then the situation calls for more of the ‘less spending/more income’ thinking.
In our experience, the most important unknowns are the things that might go wrong. Very few people expect to get sick, lose their job or marriage, or even die prematurely. But these are the sorts of things that can turn our financial world upside down. And, if they do, too many people regret that they did not have any plan for how they would manage these risks.
Some risks are easy to manage. A decent life insurance policy, for example, can ensure that you and your loved ones do not suffer if you lose your income through illness, injury or death. Other risks take more thinking: divorce is a lot easier when there is enough for each partner to take something out of the marriage. So even couples who are currently very happy together do well to have a buffer just in case things do not turn out as they hope.
If your job is potentially at risk, is there some planning you can do for that? Recruiters will say, for example, that many people leave ‘networking’ too late – often only commencing building a network after they have lost their job. It is much better to create your network while you are happily employed. There are many reasons for this, not the least of which is that your network will be seeing you performing at your best. Remember the old saying: it takes years to gain a good reputation (and five minutes to destroy it!)
Alternatively, you might think about doing some sort of skill development to make yourself more employable (or to increase your capacity, and ideally your income, from your current job).
One of the best ways to guard against losing your income is to diversify your income. This might mean, for example, making some investments that are designed to create passive income, such as dividends or bank interest. Income that you get even when you are lying in bed is the best income of all!
Once you have done the above, then spend some time identifying what you would like your money to achieve for you. Are you looking to invest for passive income? Or are you looking to buy a house so that you can bang a nail in the wall whenever you want? Is retirement looming? Or is early retirement looking increasingly attractive?
The key here is that goals can’t be pursued while they remain an unknown. So, take some time to really identify what you would like to achieve. It will make everything else much easier if you do.
Depending on what you don’t yet know, there are some great places to get more and better information. The bookshelf at your local library or bookshop can be a great place to start. The internet can also be great. (That said, go for sites or books that are well-regarded. Avoid anyone offering a get rich quick approach).
One great website to commence with is our one! Look back over our weekly articles and monthly newsletters to find all kinds of useful information.
If you know the basics, but need help with identifying your personal risks or goals, then why not come to us for a coaching session? We love these – and we always kick at least one goal when we have an open-ended conversation about how money works for your lifestyle. Everyone walks out with fewer unknowns. And that is always a good thing.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
Shanley Financial Planning Pty Ltd trading as Steve May Financial Services (ABN 19 612 825 180) is a Corporate Authorised Representative of (1265706) of Sensibly Pty Ltd (AFSL 533923)
Nick Shanley, Steve May and Luke Styles are Authorised Representatives of Sensibly Pty Ltd (AFSL 533923)