Little by little you are improving the financially weak areas in your life: with an emergency fund building up you are taking away the risk of having to go into debt when an emergency expense comes up and by paying off your debts you are regaining control over your finances and reducing the amount of interest you are paying in the long run.
There is another very powerful safety net you can create for yourself: a 3 months living fund. Such a fund would have 3 months’ worth of expenses saved up in case you are without an income for a while. There can be many reasons you might find yourself without an income for an amount of time such as loss of a job, taking an upaid sabbatical to look after an elderly parent, or taking time off for yourself to name just a few. Continue reading “Day 10 / 31 Build a 3 Months Living Fund”→
Now that you have created a budget (Day 3) and started tracking your expenses (Day 1), I am sure that you are becoming aware of some expenses that you currently have that seem way bigger than you thought they would be.
Day 4’s challenge is to have a quick and stern look at your expenses and then pick one (and only 1!) that you are going to limit for the rest of the month.
Look at the budget you made yesterday as well as your expenses up to now, and pick one expense to reduce. Make a rough estimation of how much you might be spending on it each month, then set yourself a goal of how much you can save during the next 4 weeks. Remind yourself of this goal every day, as at first I am sure you will get tempted to go back to your old habit! Continue reading “Day 4 / 31 – Limit one Expense”→
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.
Now that you’ve got a bigger picture of your long-term financial goals, it is equally important to identify ways to achieve those goals. Hopefully by now you’ve set yourself some big financial goals to work towards to in the near future. These could range from earning some extra cash, becoming debt-free and paying off your mortgage, to reducing your work hours or retiring early.
Why exactly do so many people still have debt or no financial or pension plan for their future? Ask anybody in your environment and a vast majority will say that they just don’t have enough money to pay off their debt or to throw at their pension fund. They’ll tell you that they might plan to pay off their debt as soon as they get that promotion and accompanying pay raise. But by now you probably know that even when they get that increase in income, they still most likely won’t be using that money to pay off their debt, nor will they tuck it away and use it to invest in their pension. They’ll simply spend it on new things and without them even realizing it, their lifestyle will gradually inflate to a new level.
And are you maybe still telling yourself a version of this story as well?
Let’s think about how you can speed up your savings goals. Simply speaking and as we have already discussed in earlier steps, there are generally two ways to increase your savings:
increasing your income
decreasing your expenses
The disadvantages of looking at achieving your savings goals in this way however is that it is easy to focus on the finding excuses for not saving more: “I don’t make enough money”, “If only I earned another $1000 a month”, “It’s so much easier for my neighbor, he earns a lot more than me”, or: “I wish I didn’t have a mortgage for 30 years, it’s a big expense each month”, “It’s easy for you to say, I came out of university with a $50,000 debt”, “I have two young children, do you know how expensive they are?”…. And the list goes on and on and on. Continue reading “Step 80: Your Savings Rate”→
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”→
Every time you spend money you spend time. It’s not the good old “time = money” adage you should worry about, but the exact opposite: “money = time”, which although might seem to mean the same, is much more pertinent and important to remember than the first one. If you are like most people, the bulk of the money you have to spend each month comes from your job in the form of income. Each month you start afresh with a new paycheck of money coming in on one hand and also new bills to pay on the other.
It’s a logical sequence of how things work: You have bills to pay therefore you need a job so you can generate an income to pay these bills. Your job provides you with money so you can pay your bills (and then spend some more). The next month it starts all over again when there are new bills to pay and another month to work to pay these bills.
You are working for an income and regardless of your profession, your job is designed to trade time for money. You put your skills and expertise to use and in exchange your company gives you a salary. Change from a full-time job to a part-time one and you’ll likely get less money (less time = less money) and vice versa. Continue reading “Step 76: Translate Expenses into Time-Costs”→
This step is a hugely important advance in getting control over your finances with the ultimate goal of moving away from living paycheck to paycheck and instead working towards a situation in which you live on last month’s income. Being one month ahead of your finances takes away a lot of stress and worries and gives a small extra financial cushion in your account. I’ll discuss the advantages and disadvantages of this practice first before looking at how you can implement this.
Being one month ahead essentially means that you are using last month’s income for your current month’s expenses. It means that you are ahead of your finances by having an extra month’s pay in your bank account. The money that you are earning this month won’t be used until next month.
The advantages of getting one month ahead
The biggest advantages of being one month ahead include:
It doesn’t matter if you get paid 2 or 3 days late, or if a bill comes in earlier than expected.
You don’t have to worry about going out next week instead of this week if you haven’t yet been paid.
If a bill is larger than expected or budgetted, you don’t have to worry about not having the money and it gives you time to readjust your budget next month.
Lastly, if you have a variable income, you can see a lower income month coming with some warning in order to make any necessary adjustments in your spending .
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”→