The challenge for day 3 is to start a budget and plan on how you are going to spend your money this month. A budget not only ensures that you have enough money assigned for all of your expenses (and avoid running out of money at the end of the month), it also guarantees that you plan ahead and start setting aside some money to pay down debt or to add to your savings. Without putting in a plan, these long-term goals are unlikely to get prioritized and are therefore often forgotten about.
As you start your budget, think about the various expense categories that you have (such as utilities, car payments) and the individual expenses you have within each category (electricity, gas, water) that are likely to come up this month, both ones that are relatively predictable each month (such as rent / mortgage, groceries, utilities) as well as any less regular expenses such as birthday presents, clothes or meals out in restaurants.
Once you have a list of all expenses you expect to have, look at your expected income for the month and start assigning your money to each category, being careful not to budget any more than you have coming in. You can do this again on paper, in a digital spreadsheet or in a budgeting app or online program. Continue reading “Day 3 / 31 – Start a Budget”→
It is unfortunately quite common for many people to avoid checking their money accounts regularly to monitor balances. This can be because they haven’t made their finances a priority or because they are too scared of what they might find. It is a bit like going to the dentist: the longer you leave it, the more scared you get as the more likely it seems that you might have a problem that’s been left for too long.
When you ask these people whether they have enough money in their account to go for a meal out, some of them truly don’t know. They might be down to $10 or might still have $400 left over at the end of the month..
Checking your balances regularly – and ideally daily – has the following benefits:
You instantly know how you are doing financially and how much money you have at that moment;
Although you have a budget and most expenses shouldn’t come as a surprise, some bills that are automated might come in earlier or later than expected or can be substantially higher than expected (think energy bill for example), so you can update your expenses accordingly;
It makes it easier to stick to your budget and to avoid overspending, this is especially true if you are accostumed to paying by credit card regularly.
You can check for any dubious payments that are wrong – an incorrect amount or even an expense that isn’t yours.
On your way to financial independence, you’ll want to become aware of what is happening to your bank accounts to make any necessary adjustments as soon as possible and also to stay in control of your budget and making sure you are sticking to it.
If you wait until the end of each month to update your spending, I’m sure you’ll find you no longer remember whether that supermarket bill for the 6th was correct or whether you even went to the supermarket on that day in the first place.
Checking your balances really is just checking what’s happened since the last time you logged in. It is not about making payments or working on administration items, which you should do during your weekly finance review or during a different specific time you have set aside for this.
Step 91 – Check your balances daily – in summary
Decide on how often you can commit to checking your bank accounts. I strongly advocate a daily check, but decide what works best for you. Don’t leave it to “I’ll see how often I can do it” as that just gives you a cop out to forget about it after a short while.
Think of a good moment / time when to check your accounts that will allow you to do it everyday. Maybe whilst brushing your teeth each morning, just after your lunch break or just before going to bed.
Mark this in your calendar, add it to your journal, set an alarm or put up a post-it to remind you to execute this new habit. It takes a while to make a new habit an automatic one, so don’t make it too easy for yourself by allowing yourself to come up with the excuse “you forgot”. Find out the best way to remind yourself of this new habit.
Decide what balances you should check and which ones you maybe don’t need to. You’ll want to check your regular checkings account, but maybe you don’t need to check your savings or investment account. Do you have more than one checkings account you should check? Be clear on the balances that you should be aware of daily.
When you log in, check for the following:
Are all the movements correct? Check both outtakes as well as any money that might have come in.
If you have any receipts from any purchases, make sure to check these against your account and insert any expenses for cash payments. If you no longer need the receipt then you can now get rid of it at the same time. If you might still need it for declaration, tax or warrantee purpuses however, put it away to be filed later.
Are you not sure a bill is correct? Make a note of it and check it as soon as you can.
Update your budget or spending tracker.
Take note of anything that you see that you’d need to check, or anything you would like to change. Are you still paying a monthly subscription fee for a service that you are no longer using? This is a good moment to cancel the subscription.
Stick to your habit, even if at first what you see is not very pleasant, with time you will feel more on top of your money flow, you will become more and more motivated to take control over your finances and will gradually see things improve. Don’t just give up if you see something unpleasant.
Checking your balances daily is one of the most powerful habits on your way to financial independence: it makes everything much more “real” if you see it every day, instead of waiting til the end of the month. You’ll start to see things coming together quickly, you just need to get through the initial unpleasant feeling of building a new habit and looking at your money disappearing left, right and centre.
We’ve looked in detail at making a monthly budget where you carefully plan your expenses per category per month to ensure that you achieve your goals, both short-term as well as long-term, especially when it comes to savings, pension and investment goals. Without a budget it is easy to overspend and to lose the overview of where your money goes each month.
In addition to making a monthly budget it is wise to also draw up a yearly budget in which you make a yearlong plan for your expenses. We’ve already touched upon this a little when we discussed making a monthly budget, when we looked at the importance of bearing in mind certain yearly expenses that don’t come up every month but might come up just a few times or even just once a year.
A yearly budget doesn’t only ensure that you remember to budget for these expenses though. The added advantage of a yearly budget is that you can make a better and more accurate plan for your expenses by bridging the gap between your long-term financial goals with your day-to-day spending patterns. Of course, having a monthly budget already gives you the opportunity to plan expenses far better than if you just spend without being fully aware of your monthly total spending pattern. But it won’t give you as much insight into whether you are on your way to achieving your long-term financial goals or whether you are still quite a long way off. By making a budget for a full year you get a far better overview of this. Continue reading “Step 77: Make a Year Budget”→
Unlike the rest of the 100 steps mission, this step advocates a little spending and whilst some of the content might sound as if it takes you away from your ultimate goal of a secure financial future, it is indeed a very important step to financial independence. The habit of budgeting to spend on you continuously reminds you of what is important and why you are going through the hassle of all the other steps.
It can be very tempting once you get really into personal finance and see the advantages of building up savings and investing to try to cut down all of your expenses as much as possible, to skimp and save and live a lifestyle of extreme frugality. And although there is nothing wrong with being frugal and some people can indeed get real satisfaction out of this, some take it to a level that is a little too extreme to actually make them happy. Many of them end up giving up on their journey to financial independence as it is asking too much of them, or they become unhappy and disgruntled as they feel they can no longer enjoy life and instead are only thinking about “tomorrow”, “a secure financial future” and “being cheap”.
Of course you have embarked on this mission for your own reasons, but I truly hope that your ultimate goal is to achieve happiness and not actually having an X amount of money in the bank. There is of course nothing wrong with wanting to have that money in the bank, but never lose sight of your why: Why do you want that money? Wanting just for wanting’s sake is foolish and will not make you happy. But if you know why you want that money (to become a stay-at-home-parent to spend more time with your family, to travel, to live a more fulfilling life by volunteering or being able to set up your own company… ), whatever it is, you need to keep just that in mind. As that is what will bring you happiness, the money in itself won’t, it will only allow you to achieve your goals faster.
To make sure you keep happiness and enjoying life at the centre of our mission, you are going to do some spending on yourself! You need to keep this journey it fun, keep your motivation up, see short-term results and just simply reward yourself now and again. Budgeting something for you is a great way to achieve all of the above. You need to spend a little extra on yourself now and again, ideally on something you otherwise wouldn’t do. It should be something extra, maybe a little luxury.
Some examples of how you can spend a little extra on yourself:
Luxury bath or shower product or make-up;
A new magazine or book;
A new accessory for a gadget;
An item of clothing that is extra and maybe not something you need and outside of your clothing budget.
A new plant or some flowers.
A massage or beauty treatment
It can be anything that gives you some special joy and happiness and that feels like splurging a little. You’re looking for something that you would like to buy for yourself but that you don’t normally do. It should take you maybe two or three months to get that money together, so you really feel you’ve earned it and it built up anticipation of getting the money together so you start thinking what you can buy with it. It should be something relatively common and easy to acquire, it is not a savings goal in itself, it is just a kitty with some money you set aside each month so you can buy something with it every 2 – 3 months. We’re not talking about a new iPhone here as that is a bigger savings goal in itself, it should be something smaller that gives you the feeling of a reward.
Whatever you buy, it should be something for YOU. Maybe buying your daughter a new jumper makes you happy, but that isn’t YOU, that’s your daughter. Buying your partner an extra present for their birthday is not YOU.
Step 75 – Budget and Spend on YOU – in detail
Decide what would be the ideal reward for you that would give you pleasure and a sense of achievement every time you were able to use it or purchase it. Ideally it would be:
something that is not a long-term saving goal, as the whole point here is that you get more regular rewards and not a long term reward.
something that you can set relatively small amounts of money aside for each month (say $5 – $20) and that after 2 or 3 months gives you enough to buy the item.
Create a separate kitty or a nice jewelery box where you put the money in if in cash. Alternatively assign the money to this category in your new budget each month.
As soon as you have enough to buy something with it: go out and buy it! The whole point here is that you get to see the advantages of setting money aside, but without having to wait 20 years in order to collect your prize.
Don’t feel guilty for spending this money. Life is to be lived and the small pleasures of life form an important part in this. So don’t NOT spend this money just because it is an extra or luxury category. You have worked hard enough to earn save this money and are allowed something extra from all of this as well!
In the previous step we looked at how setting aside even small amounts of money can give your (grand)child(ren) a very nice mini-fortune by the time they turn 18 if invested well. Of course you (or they) might be unlucky and the market might just hit a bad year when they turn 18 (or 21 or 25) but who’s to stop you from waiting another year or 2 until the market has recovered again before you hand over the investment account?
But then what’s to stop them from spending all of the money – the money that you set aside deligently for years, making the most of that compounding interest – in one weekend, on one holiday or on a (in your view) stupid purchase?
Of course the problem with this is that you might be skimping and saving to get this money together, but once you give it to your child, remember it is their money. Whether they splurge on a luxury vacation, use it to fund their college or as a first downpayment for their house is ultimately their own choice..
That said, as a parent or grandparent you have a responsibility in educating your children about finances. Funnily enough we are totally cool and understanding of having to teach our children social skills in order to make friends and to respect others, help them with any maths or French homework and teach them basic personal care skills like cooking and the importance of having showers, but the financial education is often neglected. Whether people don’t want to bother innocent children with grown up matters, think that school will teach them this stuff or just generally feel uncomfortable about discussing money with their children I don’t know, but teaching children about money is an important role any parent has. And if you do your job well and teach them the real value of money, your children might be less likely to spend all of that money you gift them when they turn 18 in one go.
So let’s look at some ideas on how to teach children the real value of money from an early age on:
On a day out, or weekend away or even a holiday, give children a mini budget for themselves or tell them that as a family you have a total budget of say $40 that together you need to decide on how to spend. They get to vote (or decide) whether to have a simple sandwich and some money for an ice cream and a small souvenir or whether to go for that slightly fancier meal but not have any extra money for an ice cream nor souvenir. This helps them develop skills in budgetting.
Make them aware of bills that need to be paid, such as utilities and get them to play their part in turning off lights, closing doors and not letting the tap run when brushing their teeth.
Turn grocery shopping into a competition by finding offers, 3-for-2 deals etc.
Give them a small amount of pocket money from an early age on to get them to save up for a bigger purchase they want. It teaches them the value of saving, planning and prioritizing.
Open a savings account and get your child to deposit money in it, even if it is small amounts. Explain interest and compound interest to them and get them to see their money grow.
When your child is a little older, explain the concept of the stock market and investing and mention the investing account that you have opened in their name so they can also see how their investments are growing. Show them to sit tight when the market falls and the importance of patience on the long run.
Teach children about debt and how this is expensive in the long run. The best way for them to learn this is by giving them a small loan and charging interest on it. A tough lesson to learn but it will be a very valuable lesson. Even if they end up paying $5 on a loan of $10, those $5 will teach them a life long lesson on how interest and compounding interest on a loan will ultimately be a killer to their personal finances.
Go through credit card statements together with children or spend your weekly administration and filing system together with your “personal assistant” to teach them the importance of checking financial statements regularly for errors and to stay up to date on how (un)healthy your finances are.
Consider some type of “savings match” or interest you give children for every dollar they save if they haven’t yet got a savings account. This could be done monthly by showing you how much they have saved and after you count it together you give them a certain amount of interest or match their monthly contribution.
Explain to children how we are constantly tempted to spend money by adds and peer pressure. Teach them how these adds work and get them to evaluate whether they really need that new gadget or toy and whether it will add new value to their life.
Get children involved in sharing their wealth through donating to charities or fund raising for charities so they get to appreciate that there are many others who are far less lucky than they are and that that they can make a difference to the world by giving some of their money away or by getting involved in deciding which charity you should donate to.
Step 69 – Involve your Children – in detail:
Discuss with your partner the importance of teaching your children about the value of money and agree on a basic approach to this. It is important to discuss this and be aware of each other’s involvement and ideas so that you don’t clash over this.
Consider a set time a week, maybe at the weekend, which is dedicated to finances. This could be 30 minutes in which you discuss something new, go through a new target for the week or count savings and update financial statements. Depending on your child’s age these activities might evolve into more complex activities and the 30 minutes might become longer.
Find a balance between teaching your children the value of money, saving and investing without taking away from the fun. Make sure not to turn ALL of your fun family days into skimping or budgeting days – kids should also be able to enjoy these days! Don’t overload your children with information but see it as a step-by-step progression that takes time, skills and awareness to develop (a bit like compounding interest come to think of it!).
If done well, these finance lessons can become a great headstart for your children in life as it gives them so many skills that others might take years to discover by themselves when they are in their 20s and 30s. Just make sure to make it appropriate to your child’s age and awareness. Happy teaching!
I admit that this step should have probably been way earlier on in the list, since if you share your household and finances with your partner, then discussing money matters and making sure you have the same short-term and long-term goals in mind is essential to not only achieving your financial goals but also keeping your relationship healthy and happy. At the end of the day if you are trying to save, invest or grow your capital whilst your partner is more of the “let’s spend it all now” school, you likely both wind up frustrated with each other, meaning both your financial goals and your relationship happiness will take a hit and suffer at some point.
Sad but true: finances and a lack of shared financial goals or financial compatibility are not uncommon reasons for people to end a relationship, so let’s get this sorted once and for all and make sure that you and your partner discuss your individual and joint financial beliefs and goals. You might not have exactly the same ideas about how to spend or save your money, but discussing will at least create more understanding and hopefully pave the way to an agreement that satisfies both and leaves some (financial) room for both to do your own thing.
Of course it might be that your partner is not into finances at all and is happy for you to take control of the (majority) of the money decisions and responsibilities. If that is the case, it might sound easier in the short-term to simply assume that role not inform or even consult your partner, but remember that long-term this might not be in the interest of neither your relationship nor of your finances. Continue reading “Step 55: Discuss Finances with your Partner”→
When you were making your first budget in step 17, you might have felt it was a bit of a stab in the dark. Maybe you would have appreciated a simple formula that indicated how to allocate your money in a way that would just make it faster and easier to budget. A formula that also ensured you’d work towards you goals. Or maybe you were happy to rely on your own methods but would now like to find out about a general indicator of how much to allocate to each area.
In this step we are going to have a closer look at a very common concept in budgeting, the so-called 50 / 20 / 30 rule. I’d like to think of it as a guideline more than a rule, as depending on your financial position and your goals, your expense patterns change and you might spend more or less in certain categories at certain moments in your life. It is therefore wise to not just adopt but to adapt this guideline and adjust it to your own specific needs and circumstances. Continue reading “Step 19: Budget with the 50/20/30 rule”→
Step 18 is all about starting a new and incredibly powerful habit, one that will allow you to focus on your mission, realign your spending and savings patterns to your goals and get closer each time until little by little one day you tick off your first goal, then your second one, your third, until you realize you are able to hit your goals one after the other.
This new super habit is starting a weekly finance review, during which you will go through your goals and some of the main steps we have covered up til now, and when you work your way through the next 82 steps that are still to come, you will add some of those steps to your weekly review too. In that way you consistently hold yourself accountable for your success as you review whether you are on track (or not) for the rest of the month, and what adjustments need to be made in order to make sure you will achieve your goals for the month, and with that ultimately those much desired long-term goals.