It seems to me that the same can be said for debt, savings and budgeting. Indeed, it’s pretty rare that just one decision puts you in substantial consumer debt. Equally, it’s not just one decision that sees you end the month with your budget in tatters. Certainly it’s not just one decision that results in retirement with no savings.

Unhappily, often we fool ourselves about the substantial cumulative impact of these little decisions. I can speak for many a dieter in my office who tells themselves that “oh, one piece of cake won’t matter”. When I look back on my debt-laden years, I absolutely failed to recognise the impact of such choices too, often convincing myself that another few hundred dollars on my credit card wouldn’t make much difference.

The fact is, lots of little decisions are what makes a habit. The good news is, you can change your habit for the better and to help you achieve what you want most in life just by making good little decisions. The even better news is that if you slip up along the way, that’s okay – if you recognise your little decisions for what they are.

So how can you use your little decisions to improve your financial situation? Here are some ideas:

• Grab a notebook or the ‘note’ function on your mobile (cell) phone and jot down every time you spend less than $10 on something for a week. At the end, take a look back and add up how much you spent. Multiply it by 52 and you have the grand total of a year’s worth of your frittering. Have another look at the list and see what you could have done without. Perhaps a bottle of water you could have waited ’til you got home for, or a magazine you could have surfed the web for similar information.
• Take a look at your bank or credit card statement from last month. Highlight all the transactions on it that were under $100. Were they all really necessary? Can you even remember every transaction occuring?
• Examine your passion – we all have one! Often we develop selective memory when it comes to our biggest source of delight. My big passion / vice involves my wardrobe. This year, I’ve started the habit of noting the source of every fashion-based expense in my budget. Why? Put simply I found that I was purchasing things I didn’t end up getting the use out of. I could absolutely have done without the two dresses, the shirt and the knit top I bought at that warehouse sale last year. No, I didn’t go into debt for it, but the money could have been used for something I truly loved at the very least.
• Get a piggy bank. I’m the exception to this rule, but many people don’t track cash. Start the habit of putting all your coins at the end of the day or week into the piggy bank. You probably won’t notice the difference, but taking a full piggy to the bank and making a payment on a debt or into a savings account will feel great.
• Create a micro-payment toward whatever it is you’re working towards. If you’re paying off a credit card, your mortgage, a car loan or creating a savings stash, set up an automated micropayment toward your goal. Even if it’s as small as a dollar a day, you won’t notice the difference today or tomorrow, but over time you will.

Remember – the point of being aware of your little decisions is to tweak your habits to make them work in your favour. You shouldn’t feel overwhelmed or like you’re trying to discipline yourself, but rather that you’re just being nudged in the right direction.

After all, Rome wasn’t built in a day.

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From a financial perspective, this makes total sense. I’m putting my money to work. From a practical perspective however, it requires a lot of maintenance – I spend a portion of each week tweaking my budget to keep it at a zero base. Personally, I’m okay with this. I understand a lot of people wouldn’t be. Emotionally, it also has the drawback of making me feel like I’m permanently a bit short.

I am also very much an advocate of the “pay yourself first” concept. That is, every time you get paid (or at the beginning of each month, in my case) you put aside money for savings and investments. I’ll be the first to admit I have very aggressive savings/investment goals. So, when the need or desire arises to spend money on something I haven’t necessarily budgeted for in advance, I need to find money that I don’t really ”have”. 

Here’s how I do it without really noticing anything is missing:

1. Services - I’ve learnt over the years that many services we typically pay for are all about practice. Things like having your nails done or your hair coloured is just about putting the hours in. I can honestly say that I’ve never had anyone else do as good a job on a manicure as I can (and trust me when I say I’ve tried all price points). Getting the right tools and being prepared to put in the time to get it right can save you a small fortune.
2. It all adds up- I’ve said it before and I’ll say it again, small amounts of cash spent here and there can really add up at the end of the month. Don’t believe me? Have a look on your bank statement and see how many cash withdrawals you made last month. Going without whatever it is you’re frittering away your cash on can be tough though, so if it’s something you really need or want, find a substitute. For example, if you’re buying things in the vending machine at work – stock up at the supermarket on the weekend and keep a stash in your desk drawer.
3. Unused subscriptions- Often we convince ourselves that we need something we subscribe to – internet access, mobile phones and pay TV are all common ones. Whilst getting rid of it entirely is one option, just reassessing your usage is another. If you’re only watching one show on your premium level channels, why not consider downgrading your pay TV package and getting that show online or on video? Also look to see if the allocated bandwidth for your internet access is being used to the max and your mobile phone “included usage” is being fully exhausted. Downgrade accordingly. This doesn’t just apply to technology either – stuff like gym memberships can be cheaper if you only go on the weekends and newspaper deliveries are a fraction of the cost if you only read Thursday through Sunday too.
4. Utilities – Many utilities have an off-peak time. Have a look at your connection agreement and find out if yours does. (If not, consider switching). You can make interstate / international phone calls at cheaper times or set your laundry to run while you sleep.
5. Regular expenses – Reassess your regular costs to see if there might be a cheaper alternative. Say you drive to work. Ideally, you’d probably catch public transport, ride a bike or walk for the most cost-effective alternative. If these aren’t viable (or desirable) options, consider shopping around for different parking places. I drive to work one day a week. I recently found a different parking place only a little further from the office for $5 a day LESS than I was paying. Perfect! Other examples include gym memberships (is there another gym you could join for less, or will your current gym renegotiate?), a cheaper place to buy coffee in the mornings, or the option to subscribe to a magazine you usually buy at the newsagent.

By putting a few of these into practice, it’s often easy to find a bit of cash you didn’t really have without actually feeling like you’re cutting back. Nice.

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In a way, this is a core part of Robert Kiyosaki’s ‘Rich Dad, Poor Dad‘ philosophy. In fact, he consider ‘wealth’ to not be a measure of the amount of stuff you own, the house you live in or the money you have in the bank, but rather your ability to maintain your current lifestyle indefinitely without exertion on your part. In other words, having your money work for you.

In a different way, this is also the central theme of Tim Ferriss’ book ‘Four Hour Work Week‘. The basic premise is to work out what your dream lifestyle would cost on a monthly/weekly basis, and concoct a method of earning that much (plus a certain percentage for savings) with a minimal input from yourself (four hours a week, to be exact).

Both these books are bestsellers, having sold millions of copies worldwide – yet how many people can you recall having resigned from your workplace to go and explore the Arctic Circle or retire at 40? In reality, most people suffer from what Kiyosaki calls “Analysis Paralysis” – the inability to take action for fear of it being the wrong decision, so instead examining every available option ad nauseum. Moreover, most folks aren’t comfortable with the idea of chucking it all in to go live the dream. Many find security and comfort in a Monday-Friday job, and often society itself clings to the notion that doing any differently is just lazy.

Perhaps then, a passive income of this kind is ideally suited to supplementing an emergency fund. With even a conservative passive income, a modest emergency fund of a few months in expenses could be stretched that bit further. So, here’s my list of 10 potential sources of passive income:

1. Shares / Stocks – Many ‘blue chip’ shares and stocks reliably pay dividends (usually about twice a year). These can often be reinvested if you don’t need the income, and taken when you do.
2. Managed Funds – As with shares / stocks, managed funds often have a return expressed as a dividend.
3. Property – When rented, property obviously produces some level of return. Obviously in most cases, it’s cost-prohibitive to own property outright, so there will be some sort of loan attached. If your rental income is more than the cost (repayments) of the mortgage, then happy days – your property will be “positively geared”. If your rental income is less than the cost of the mortgage and you need to contribute the difference, then it is “negatively geared”. In Australia, this difference is a tax deduction and can have benefits in terms of minimising the income tax you pay. In terms of having a passive income however, this is obviously not suited. Be aware too, of fluctuating interest rates. A property that you purchase that is positively geared in low-interest times, can quite easily become negatively geared as interest rates go up.
4. P2P Lending – There is an increasing market of peer to peer lending transactions as more and more people try to avoid banks. Websites such as iGrin allow people who want money to connect with people who have money to lend. As a lender, you can get fantastic interest rates on your money (you are, after all, effectively ‘being the bank’), although it also comes with the risk of the people you lend money to failing to repay. Most sites do offer information with regard to credit rating and debt-to-income ratio, so be sure to do your homework and make educated assessments about what you can afford to loan.
5. Art – Like property, there is a strong rental market for art. Most of this demand lies in the corporate sector where companies want modern, striking pieces to hang on their walls, but don’t necessarily want the capital expense of potentially millions of dollars in decorating costs. Renting art is a tax deduction, and allows them to have the most popular artists represented on their walls. Unlike property, outright ownership is quite achievable with most galleries considering pieces as low as $5,000 to be eligible for rental. What you’ll get is a fixed return (as a percentage of value) over a defined timeframe. Management fees are often negotiable. Try Art Equity and Art Index in Australia.
6. Monetise Existing Activities – Whilst not technically passive income, if it’s something you already do, why not make it profitable? Into running? Offer your services exercising local pooches. Knitted so many sweaters your kids and family feel obligated to wear them in summer? Sell more on Etsy. Have a talent for photography? Sell your photos on stock sites. Remember, this isn’t about doing more stuff, it’s about making your existing adventures financially attractive. With this in mind, don’t analyse it from a  $/hour of your time perspective.
7. Monetize Your Areas Of Knowledge – Let’s say you’re an architect by trade. Noticed how owner-builders often want to be their own architects? Why not create an eBook on Architecture for DIYers? Using self publishing avenues available, a bit of paid advertising in search engines and a simple online checkout system, you can be selling your knowledge within days. Virtually everyone has knowledge that can be sold in some way to a suitably specific audience. Teacher? How about a Get Your Kids Ahead In Science series? Accountant? Do Your Tax Return Yourself In Less Than An Hour. The point is, that once you’ve set it up, you needn’t do much at all to keep it ticking along.
8. Rent Your Stuff – If you have things about your house that you don’t necessarily want to get rid of, but you just aren’t using, consider renting them. There’s a market for almost everything, from cars (try Drive My Car) to fitness equipment. If you’re going somewhere (or you have a holiday house that is unused when you’re not there) you can even rent your house out for short periods, fully furnished (try Stayz). Even if you’re not going anywhere, consider renting your house for use as a set in movies, TV shows and commercials.
9. Interest Bearing Accounts – It’s not the most exciting place to put money, but interest bearing accounts are one of the most secure places to store cash. More to the point, when we’re talking passive income, they’ll cough up a fairly reliable amount of money at the same time every period. Look for one with a high interest rate that calculates daily and pays monthly (or more frequently). It’s worth noting that you don’t want a term deposit because interest is only paid on maturity, and that’s unlikely to be a regular enough source of income to form part of an emergency fund.
10. Set And Forget Businesses – Unlike many small and micro businesses which are extremely high maintenance, there is a set of no to low maintenance endevours which simply tick over. They don’t make their owners fortunes, but they do provide a passive income. All these businesses are product-based, often online or mail order, and many use the services of a fulfillment agent that arranges shipping of orders and often manage some level of customer service. If you’re considering taking this route, however – be aware of setup costs and teething time.

So, rather than stewing over how many years it’s going to take you to sock away several months worth of expenses in case of emergency, why not consider working to create passive income streams to supplement your savings? A passive income is unlikely to ever complely replace a nest egg on which you can rely, but it will certainly help to extend its life if you were to cease receiving your primary income. Better yet, the more sources of passive income you develop, the greater the level of overall security you enjoy. Nice.

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Different financial folks will advise you keep different amounts in your fund. In the light of recent economic turmoil, many have advised a more conservative approach suggesting you keep as much as 12 months worth of expenses in an emergency fund. Personally, I keep 3 months worth.

[As an aside, the reason I only keep 3 months worth is because I have no consumer debt, no children, my husband is employed and the opportunity cost of keeping more than that is just too great.]

Recently however, I’ve had cause to think this over in more detail. Not to necessarily revise the amount that I keep per-se, but to really consider what my emergency fund is for. Traditionally, I always viewed this as money I’d use if I lost / resigned from my job. If this is the case however, what would I do if I had to leave my job for health reasons? Or if I just wanted to resign to say – pursue other opportunities – and I was was living on this “emergency” stash, what would I do in the case of an actual emergency, like those highlighted above?

In this article about the $0 Emergency Fund, Liz Pulliam Weston discusses this theme of having to deal with more than one crisis at a time, as well as my aforementioned concern about the opportunity cost of a substantial emergency fund. Whilst I don’t agree with her advice later in the article about the use of credit to cover emergencies, I like her thinking around not requiring the source of your emergency fund to be cash – but rather focusing on financial flexibility.

Late last year, Five Cent Nickel also discussed when to use an emergency fund. Here, he makes a good point that if your emergency fund is for multiple purposes – that is, for if you lose your job as well as for unforseeable car expenses or house repairs or health expenses – then you need to pay your fund back what you “owe” it.

Essentially, it seems the clarity of an emergency fund is extremely important - both in terms of the intent of the emergency fund, as well as how it’s broken up. For example, I may do better to rename my current emergency fund as my “Stick It To The Man” or “Follow My Dreams” fund, and then have another, actual, emergency fund of a few thousand dollars to cover more traditional “emergencies”.

Increasing passive income sources too, seems an attractive option. That is - income that is received if not in traditional full-time employment. Investments such as shares (which pay dividends) art (which is rented) and property (also rented) are options for providing an income stream that is not tied to a primary source of income.

Ultimately though, what an emergency fund means to any given person will depend very much upon how financially sophisticated they are. If you’re up to your eyeballs in debt and are just beginning to work your way out, it’s pretty reasonable to assume that your emergency fund is going to be small and many things are going to throw you off your plan. As long as you’re honest with yourself about what constitutes an emergency (your TV breaking, or a birthday you forgot about is not), and you’re comfortable that life can throw you a few knocks without you needing to declare bankruptcy, then that’s what matters.

Emergency funds are not, it seems, a one-size-fits-all concept.

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And superannuation… really – what’s everyone’s issue with that? Hot tip folks, retirement is the longest holiday any of us are likely to take. How is that not seriously exciting?

The fact is, even if all your debt is paid off and you’re quietly working towards your way towards being financially independent, stable and even well-off, you’re actually not in a very good place at all if you haven’t considered the “uncool” parts of personal finance like insurance and superannuation.

Consider this: you’ve dug yourself out of a credit-ridden hole, you’ve got a budget in place and you’re on track to achieving your financial goals. What would happen if you were injured and couldn’t work in your current role any more? How would your bills be paid and what would your family do? If your house burnt down, could you afford to replace it? Realistically, even if you never have to claim on your insurance (and I hope you never do), insurance buys you peace of mind – knowing that if the worst should happen, you’re completely covered.

After the bushfires we had in Victoria earlier this year, a lot of victims were said to have been underinsured. Underinsurance is rampant in Australia, with up to 80% of the population reported to be underinsured. What a lot of people don’t realise is that underinsurance has huge impacts when you come to make a claim. Many people expect that if their home and contents is worth $500,000 and they only insure it for 75% of the replacement value ($375,000) then that’s what they’ll get should they need to make a claim. I believe the thinking here is that you won’t need to replace everything in your home, so this way you keep premiums down. Unfortunately, what this means is that the insurance company will only pay 75% of the replacement value of any damages. So, if your home suffers an assessed $250,000 in fire damage, the insurance company will pay out $187,500 (75% of the cost to repair the damage) leaving you to cover the remaining $62,500. Remember, this is based on the assessed value of the damage – not what you report.

For a comparatively small amount of money that is tax deductible in some circumstances, insurance allows you to ensure (and insure!) that anything life throws your way won’t interrupt you achieving your goals or put you heavily in the red. And who doesn’t want that sort of reassurance? You can get insurance for almost everything from your common health and home & contents insurance to life insurance, trauma insurance, TPD (total permanent disability) insurance and income protection insurance.

Superannuation on the other hand, is a different sort of guarantee. The earlier you start planning the better, and it’s a way of maintaining the lifestyle to which you’ve become accustomed in your working life. So, when you finally do take the longest holiday of your life, it’s one that you want. The easiest way to know how much to aim for is to take a look at the industry-recognised Westpac-ASFA retirement standards which outline how much you’ll need for a ‘modest’ or ‘comfortable’ retirement. (No points for working out comfortable is better than modest). The other rule of thumb is that you need approximately 10 times the annual ’requirement’ for your chosen lifestyle when you retire. Personally, rather than working toward a dollar figure in the bank, I’ve decided to work toward a passive income of the annual amount I want in retirement. I find more security in this as it means two things: 1) I can retire whenever I hit that volume of passive income, 2) I don’t have to worry about running out of cash before I kick the bucket! 

So, next time you’re thinking you want to get your finances in order, or if you feel you already have, ask yourself if you’ve considered all elements of the personal finance equation. It’s not just about saving, budgeting and paying for things in cash. There are lots of other areas that can impact your finances just as much.

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