Budgeting 101

Is there ‘too much month at the end of the money’?

The wise have wealth and luxury, but fools spend whatever they get. – Proverbs 21:20 New Living Translation (NLT)

If you’ve been paying attention so far,  I’ve already touched on the importance of having an emergency fund and avoiding credit card debt in earlier blog posts. There is a reason for these two steps being essential as part of any successful plan to get out of debt.  An increasing percentage of the populace lives paycheck to paycheck, lacking an emergency fund, and using credit cards to fill in the gap. This is a recipe for disaster. You cannot spend your way into prosperity.   The first thing you need to understand is that you and you alone are in control of your finances. The responsibility belongs to you alone, and if you have chosen to shirk this responsibility your finances will be in total chaos. Now is the time to take action and learn to budget.      

What is a budget?

A budget is a saving plan. It is not ‘punishment’, but if your finances are out of control and you’re living beyond your means, you will need to budget very tightly and stick to the plan to break the cycle of debt that you have fallen into. The good news is that it is possible. The bad news is that it will take time and effort, but I promise that if you do the work, it will pay off in the end.

Extra means extra!   

 Does your job pay enough for you to live on? Your paycheck is your biggest source of wealth. Social welfare programs trap you at the poverty level by doling out a meager subsistence and they should be avoided as a main source of income, preferably avoided altogether . Likewise, extra money earned from a second job, or from working overtime should not be essential to make ends meet. If you are starting out in a position of debt, you will need to increase  your regular income stream in addition to budgeting. Trust me, I know from experience.  Due to a series of unfortunate events from December of 1999 through January of 2002, I ended up $50,000 in debt, and it took 8 years of budgeting and working all the overtime I could endure to erase that mess. Overtime was extra income, earmarked for the specific purpose of eliminating my debt. It was never considered part of my regular monthly expenses. I have too many coworkers  who have trapped themselves into working mandatory overtime just to make their monthly expenses. This is a terrible way to live.

Step one :  Analyze

Do you get paid on Friday, only to be broke on Monday,  wondering where your paycheck went? Successful people work from a list and write things down. Get into the habit of tracking your spending, because you’re spending way more than you realize. Write down everything you spend, and always ask for a receipt. If a receipt is not available, (like buying a soda from a vending machine) jot down a quick note and create your own receipt.  Organize your receipts and record them in a journal of some sort listing the date, the store, the purchase, the amount, and the method of payment.  You don’t need a fancy financial ledger for this purpose, I recommend a spiral-bound notebook. I buy these on sale at my local Wal-Mart during the back-to-school sales by the dozen, usually for the low price of just 25¢ each!  Track your spending for about at least a month or two to get an accurate account of where your money goes. After this initial period, continue tracking your spending to see how it lines up with your budget.

Step two : Categorize    

NewBudget

After you’ve collected your initial spending data  break it down into categories.

Suggested categories and percentages are :

  • Living expenses 50% total– Housing 25 to 35%, Utilities 5 to 15% (heat, light, phone, maybe internet and cable but those last two are questionable necessities ), Groceries 5%-15%, Transportation 5 to 10% (Bus/train fare,  or parking fees, tolls if any, and gas.) You’ll need to adjust those four sub-categories based on your individual circumstances. The combined total cannot exceed 50% of your income.
  • Savings 10%
  • Charity 10%
  • Dining and Entertainment 15%
  • Clothing 5%
  • Medical  5%
  • Miscellaneous 5% (this can include gifts, shopping, or anything out of the ordinary)

Step three: Organize

A great way to organize your spending categories is to use the envelope system.  Divide your  cash into the various categories using the suggested percentages.  This is all the allotment for each category.  When the envelope is empty, you have no money for that expense. If at the end of the month there is unused money in any envelope, put it into an EXTRA CASH envelope, and save this for emergencies.  

Step four: Follow the rules

  • First rule of Budgeting –  50% of your income MUST be able to cover 100% of your living expenses. This is absolutely essential! If you get paid bi-weekly like most people, you average 2 paychecks a month, and one of those paychecks should be able to fully cover your rent, utilities, groceries, transportation, medicines etc.  If you can’t achieve this with your level of income, I’m sorry to say you’ll need to find a better paying job, or cheaper living accommodations.   Living in your parent’s basement forever is not a viable option either. You need to stand on your own two feet. Man up!
  • Second Rule – The remaining 50% of your income should be as 20% Financial (savings and charity) and 30% Everything Else (dining, entertainment, misc.)  
  • Third Rule – Did you notice I didn’t include contributions to a 401k Retirement Plan in the two rules? That’s because you should be contributing 10% of your salary to one automatically BEFORE you even get your paycheck, and  this should never ever be thought of as part of your budget. You don’t consider any other payroll deductions like taxes or FICA as part of your budget, and you should likewise think of a 401k contribution as just another in the list of payroll deductions to your check before you even get paid. If you don’t plan for your future, you won’t have one!

 Cash is King!

Get into the habit of paying cash for everything! Credit cards are a tool, and can even offer benefits like cash back, but it’s way too easy to overspend and blow your budget due to impulse spending. Using cash creates a visceral reaction that credit cards lack. You really weigh your spending decisions when you leave through the dwindling banknotes in your wallet.  If you elect to use credit cards for payment, you should be fully prepared to pay the balance in full each month. Paying interest is like throwing away money.  If you lack the discipline to keep your spending in check, eliminate the temptation and get rid of those cards now! You’ll be happier in the long run. As always I wish you happiness and success! 

 

Who wants to be a millionaire?

Just double $1000 ten times!

There are over 6 billion people on Earth.

John D. Rockefeller became the world’s first official billionaire in 1916 as a result of his ownership of Standard Oil.  Just over a century later, there are now 2,043 billionaires in the world as of 2017 according to  Forbes Magazine. This means the odds of the average person becoming a billionaire are quite slim, almost non-existent.

However, according to a 2016 report by global consultancy firm Capgemini there are around 16.5 million millionaires in the world! A million is one thousandth of a billion, but it’s still a large number and you’ve got a far greater chance of joining the exclusive ‘7 Figure Club’ especially if you are fortunate enough to live in the USA, the Land of Opportunity and home to 10.8 million millionaires.

The current population of the United States of America is 325,316,130 as of Tuesday, November 14, 2017, based on the latest United Nations estimates. With that in perspective the odds of a US citizen becoming a millionaire are roughly 1 in 325. So what’s stopping you? 

The longer you wait to do something you should do now, the greater the odds that you will never actually do it.” — John C. Maxwell

A few blogs ago, I covered the Rule of 72 and the miracle of compound interest.

If you take $1000 and double it ten times you end up with $1,024,000!  

freemoney1

Initially the compounding effect barely registers on the above graph, only to skyrocket at the sixth doubling.

Putting off retirement saving until your 30’s or 40’s practically destroys your potential retirement nest egg! 

Dave Ramsey, Tony Robbins and just about every wealth adviser worth their salt will tell you that the S&P 500 has yielded a historical average of over 10.5%. Low-cost index mutual funds allow the average investor to capture those same rates of return. (All 401k plans offer mutual funds in their investment portfolios and I’ll discuss this more in detail in a later blog.)

Coincidentally, (or not) both Dave Ramsey and Tony Robbins each have a chart in their books showing the effects of compound interest on the life savings of two friends. I’ve even seen several other versions online. The names, ages, and savings amounts are different , but the end results are the same. The person who started saving for retirement earlier always invests significantly less money, yet beats the friend who starts later and invests much more. The first time I saw this it blew my mind, but it illustrates the importance of saving for retirement early in life. According to almost every financial expert I’ve consulted, you’re going to need a minimum $1,000,000 to retire comfortably. It is possible for ANYONE to attain this goal provided they begin investing at the earliest possible age.

Dave Ramsey has his version of the aforementioned chart in his book Financial Peace on page 120. The Tony Robbins version appears on page 24 of his book Unshakeable.  I’m going to use Robbins’s version,  because it has a larger annual investment. The assumption is $3600 invested per year, with 10% interest.  Basically,  Joe and Bob are both the same age . Joe begins investing $300 in the stock market every month from age 19 to 27, saving a total of $28,000 and then he decided to quit saving altogether and let it sit and collect interest. Bob doesn’t even start saving until he’s 27 but keeps investing every year until he’s 65, for a total of $140,000. When they both retire at 65, Joe has $1,863,287 and Bob has $1,589,733. Because Joe started earlier, he invested $112,000 less, yet he earned $273,554 more than Bob! This is because of the power of compound interest.

chart1000000

In 2018, the maximum annual 401k contribution allowed will be $18,500. Imagine being a 16 year-old teen living at home and being able to invest  that amount annually for 5 years. You could have over a million before you were 45! So what are you waiting for? Go and take steps to establish your retirement nest egg today, because you’re not getting any younger!  As always I wish you happiness and success!