Step 75: Budget and Spend on YOU

Step 75 of the 100 steps mission to financial independence: Budget and spend on YOU
Step 75: Budget and spend on YOU

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!

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

Step 74: Get one Month Ahead

Step 74 of the 100 steps mission to financial independence: Get one Month ahead
Step 74: Get one Month ahead

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 .

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Step 68: Set aside Money for your Children

Step 68 of the 100 steps mission to financial independence: Set aside Money for your Children
Step 68: Set aside Money for your Children

Children cost money of course, even just their day-to-day expenses seem endless: clothes, food, extra activities and birthday parties to name just a few. But I take it for granted that if you have children, grandchildren or nieces / nephews (even if they are “adopted” and your friends’ children), that these expenses are covered in your budget, either in your regular categories, or under ‘presents’ if they aren’t your own children. If you haven’t yet got children, but are planning to have children, I again assume that by now you are financially savvy enough to have set up a savings account in order to pay for the initial “start up costs” for children: baby room decoration, push chair, car seats, clothes and all other assecories you’ll need.

But what about “later”? This might sound like a long time away still, but those children will at some point reach their 18th birthday and will go and try their luck in the real world, whether that is at college, travelling or trying a “real” job, there will come a time when they no longer depend on you (at least not officially – they might still come back home from time to time to ask for some extra money).

Wouldn’t it be nice to be able to give them something more than just a $50 bill when they leave the house, to get them set up? Or what about giving them something when they get married, buy their first house or have their first child.. Whatever it is that you decide, think about what you can do now to help them later. And remember that if you start on time you have the advantage to look ahead and use that best friend of ours: compounding interest to create a small fortune for your (grand)child(ren).

What and how to save

Let’s just calculate through some different scenarios to give you an idea on how to get started. For all of these we assume that you start contributing to these saving plans from the moment the baby is born (or let’s be realistic and say you do it as soon as your (grand)child is a month old).

  • Scenario 1: Open a savings account and set aside $10 a month. Assume an average return of 5% (which unfortunatley is not likely at the moment though!), an inflation rate of 2% and that you keep contributing $10 a month until you give the child the full amount. Your (grand)child would then receive the following amount: (numbers in 3rd and 4th column rounded to $50).

Years

Total paid in Nominal value at end

Adjusted for inflation

18

$2160

$3550

$2450

21

$2520 $4500

$2900

25 $3000 $6000

$3600

  • Not at all bad if you could give your (grand) child some $3550 when they turn 18 or even $6000 when they are 25.
  • Scenario 2: What about instead of opening a savings account (which is unlikely to give you anything close to 5% for a while), you put that money in an investment accout, assuming a 7% return and 2% inflation rate? That works out as follows:

    Years

    Total paid Nominal value Adjusted for inflation

    18

    $2160 $4350

    $3050

    21

    $2520 $5750

    $3750

    25 $3000 $8100

    $4900

  • As you can see, by just putting away $10 a month, even if you held it only til they were 18, you’d be able to give them more than $4300 or the equivalent of $3000 in today’s money.
  • Scenario 3: Of course, you might be able to set aside more than $10 a month. Let’s assume you’re lucky enough to live in a country that has a child benefit scheme in which you get some financial support from the government to help with the expenses for raising children. Imagine you were able to set all that money aside and invest it for your child? Child benefit varies greatly per country but let’s take the average of about $75 per month. Let’s assume we’ve still got an average of 7% return and 2% inflation rate. This is how much you’d have if you keep investing that child support:

Years

Total paid Nominal value Adjusted for inflation

18

$16,200 $32,500

$22,750

21 $18,900 $43,200

$28,250

25 $22,500 $60,900

$36,750

  • By their 18th birthday you’d be able to give your child $32,500 (with a current value of $22,000)! That’s a small fortune to me and it for sure would be to most 18 year olds!
  • That said, child support is generally likely to adjust for inflation, meaning that you get $75 this year, but $76 next year and $77.50 the year after. As long as you keep adjusting your investments along with this, remember that you would then end up close to the nominal value anyway. In that case your child would receive around $32.500 on their 18th birthday.

Of course the above are just some examples of have careful financial planning might give your child a nice head start when they turn 18 or 21 or whatever age you decide. Maybe you can’t survive without the extra child benefit that you are receiviving and therefore can’t invest all of that money. But what about half of it? Or even just $25 a month? $10? Go back to the budgetting steps to read more about how to budget and to build in priorities to decide whether you really can’t or whether you decide to prioritize other goals for your money. Even just the $10 will still give your child a nice pot of money to start their adult life that not everybody gets.

Step 68 – Set aside Money for Children – in detail:

  • Let’s start with how many children, grandchildren, nieces / nephews or other children in your life you (might) have and who you’d like to help financially when they come of age.
  • Investigate and decide how much you can invest either monthly or yearly. Remember that if you have several children (or might have several children) or grandchildren, you probably want to set it up equally, so that you don’t invest $100 per month for child one and only $20 for child two. Plan ahead and try and keep it equal!
  • Open an investing account for each child but carefully check how to do the legal side: make sure you can open it in their name (in some cases only parents can do this). If you are a grandparent and you can’t open it in your grandchild’s name, consider opening it in your name, but stipulate the child as the beneficiary and make sure to include conditions in your will that the money is to go to the child when they turn 18 and not to your heirs.
  • Set up automatic payments into this investing account.
  • Remember that the earlier your start, the more time the interest can compound, but even if your (grand)child is a little or a lot older, that doesn’t mean you shouldn’t still open it.
  • Decide when you want to give the money or the original investing account to your child. Instead of giving them the money, consider that your child could just continue to grow the money. Tell you child beforehand so they can start planning on what to do with the money, as otherwise they might be tempted to take it all out and spend it in just one crazy weekend.
  • Remember to open a new account for any additional children

Saving / investing and seeing your money grow can be really rewarding, but there’s an extra sense of satisfaction you can get from setting money aside for somebody else, and seeing their fortune grow even before they are aware of it.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.