By ROBERT K. CUNNINGHAM, Personal Finance Coach/Consultant
RIGHT OUT OF THE GATE: This blog/website and all its content is designed and produced for information purposes only. No representation is made to guarantee the accuracy of any of the content contained on this website, nor should it be interpreted that specific investment recommendations are being made. The reader assumes any and all risk for strategies which are acted on.
In last week’s first installment of our six steps to six figures, with at least six advantages, I wrote in detail about how to go about summarizing your income and expenses.
Yeah, I know that wasn’t exactly a hoot in terms of entertainment value, but it’s a must if you expect to proceed intelligently with personal money management.
Now, we will delve into Step 2 – putting together a budget. What precisely does budgeting mean, for our purposes? Well, the best way to explain it might be like this: Last week, we deduced where your money is going. This week, we will determine in advance where it’s gonna go.
Over-simplification? Perhaps. But when it comes right down to it, only you are in control of where your money goes. What it’s spent on, or where and how much is saved, is decided by no one else. So if you care enough to read this blog and get some suggestions on how to go about controlling all of this, why not go the distance and actually implement these techniques?
Looking back at the numbers you arrived at last week, in which of the following categories do you fall: A little money left at the end of the month, or a little month left at the end of the money? Let’s consider each scenario, and lay out an example budget:
Some extra money available: Good for you! It means at the very least that your income is satisfactory for your current lifestyle and your spending isn’t ridiculous. But it doesn’t mean you can’t drastically improve your situation (yes, I used a double-negative. I find them handy on occasion. Please don’t bother the writing police).
Are you saving any money on a regular basis? If not – and we will discuss why this is so vital in future posts – you’re going to remedy that here and now with a commitment to save at least an amount equal to your current monthly surplus. For example, if your monthly net income is $2,500 and your expenses added up to $2,300, you’re going to put at least $200 into savings (or investing) monthly. You will do this first, preferably automatically via a payroll withdrawal conducted by your employer, with the money transferred directly to your savings or investment account of choice.
Making this automatic is more efficient, and it reduces the chance that you will blow off this step in favor of the $229 dress at Forever 21 that you believe makes you look hot and is on sale for $179. Don’t get me wrong… people need clothes and I like to see folks dressed up, but there should be a category in your budget that this fits into – pun intended. And honestly, $179 will buy you a whole friggin’ wardrobe at Ross.
So we have our $200 set aside for savings, and the next step is to total up our fixed expenses – rent, car payment, cellphone bill, gym membership, etc. – because these are (usually) constant and unable to be significantly altered. When we have that figure (let’s say it’s $1,500), we add it to the $200 and what’s left is for our monthly discretionary spending.
$2,500 income – $200 to savings – $1,500 for fixed expenses = $800 discretionary money available per month.
Discretionary, or variable expenses, are things we pay for that cost us different amouns each time. Food (groceries and eating out), gasoline/car maintenance, utility bills, entertainment costs, and we will also include a miscellaneous category.
The last step is just a matter of attempting to spend less than the $800, so we can add to our $200 monthly savings total. If we spent, for instance, $300 on groceries and $300 on eating out, might we able to drop that $300 restaurant cost to $240 or $250? Seventy-five dollars a week for groceries (this includes toiletries, pet supplies, and anything else bought at the grocery store, not just food) seems reasonable. But $10 a day eating out might be excessive. Perhaps you could commit to giving the fast-food dollar menus a longer look and reduce that overall cost to $8 a day. Do that and you just gained $60 more for savings.
What about your cellphone? Do you need unlimited data, or might you be able to go on a cheaper plan and be just as connected? That gym membership… are you going regularly? Can you change your routine to allow for exercising at home and eliminate it? Go to Starbucks a lot? Could you taper that back a little, being that it’s at least $4 a pop (just three “coffee breaks” a week is $50 per month. Small changes can really make a difference). Find that extra $40 of savings somewhere, and combined with your cutback on eating out, you can boost your monthly savings up more than 30%, or another C-note.
Spending more than you make: The difference between this scenario and the first is that instead of choosing whether you want to decrease costs in order to save more, you HAVE to cut costs just to save anything at all. This is where discipline comes in – you have to want to improve your financial life, long-term. Bypassing instant gratification – at least some of the time – is crucial to accomplishing more important goals, short- and long-term.
Let me take a quick detour, briefly, to talk about discipline. I’m telling you right now: If you’re looking for a way to get ahead and be smart without sacrifice or discipline, your wasting your time on this site. I can and will coach you, if you’ll have me. I enjoy passing along my decades of experience to folks who can benefit via a much quicker learning curve than I had. But EVERYTHING worth having comes at a cost. Are you willing to pay it?
Last spending category I didn’t yet get specific with is “miscellaneous.” The definition of this category, quite simply, is any expense that doesn’t fall into one of the other categories. Clothing, for example, falls into this slot. I suggest you put entertainment there, too, but the main point is to be reasonably frugal across the board. It’s not a crime to go the movies, of course, but consider going to a matinee and saving as much as $6 per ticket. It’s that type of thinking you should be willing to attempt in order for this process to truly be effective for you.
To practice sound budgeting fundamentals, never let your miscellaneous costs exceed your savings commitment. That simple practice will make it less likely that you spend on non-essentials.
OK, one last reminder – no, two reminders – as you put together your budget. First, figure every cost into this. Do you like stopping at AM-PM to buy those new Reese’s white chocolate peanut butter cups? Me, too. Best damn things since deep-fried raviolis. But figure the $3 a week you spend on them into your costs. Be detailed and thorough, if you really want this to work you.
Secondly, stick with your commitments. Adjustments can be made, but not on the fly. Say you under-estimated your gasoline cost by $30. No problem, but find that $30 somewhere else in your budget. Do NOT automatically reduce your savings allotment to accommodate your lack of foresight.
The savings commitment you have made should only go up, never down… even if you have to skip those peanut butter cups for a while.
Thanks for reading.
For more specific information on DPWLI and related strategies, please go to www.spwealthadvisors.com, and let them know that you were referred to that site via www.buildwealthearly.com.
DISCLOSURE: If you decide to purchase a product(s) from spwealthadvisors.com, I will qualify for an affiliate commission.