I am excited to finally get back to writing after a rough week. This week my topic is going to be about personal finance – budgeting, what bank accounts do I need, and saving for retirement. About 2 months ago I sat down and looked at my bank accounts and realized that I had zero dollars saved for an emergency or put away for the future. I realized that I was one bad break away from a really tough spot and thought I need to fix this but I had no clue where to start. So I dove into a bunch of books on personal finance to come up with a better understanding of money and create a plan. There are 3 books that really helped me and if you want to read through them yourselves, here they are:
- I Will Teach You to be Rich by Ramit Sethi
- Rich Dad, Poor Dad by Robert Kiyosaki
- Profit First by Mike Michalowicz
The first book (IWT) is a step by step guide for the average person to erase debt and build money and is a great read for anyone. The second book (RDPD) is great for getting you to think about money in a different way however he spends a lot of the book bashing people who work for other people unnecessarily so make sure you are ready to brush that off if you read it. The last one (PF) is geared toward business owners and I would only suggest entrepreneurs to read cover to cover but I use a lot of his “buckets” budgeting ideas in my write-up today. Also one disclaimer before I get into anything. I did get my degree in finance but I am not an expert and have no licenses or whatever you need so all of this advice is simply what I would do, not an expert opinion.
So whenever anyone says I need to start saving money, what is the first thing they do? They make a beautiful, tedious spreadsheet budget and give a use for every dollar that comes in. This is a great plan! Until you see a pair of shoes you have to have and buy them. This blows up your beautiful plan and makes you feel guilty for spending your money on something you wanted. At the end of the day it is your money and you should feel good about spending it where you want to. I think the spreadsheet budget makes us feel like we all have to become monks – give up all of our worldly possessions and save all of our money or else we have failed.
I use two different budgeting systems that don’t require me to create a spreadsheet or write down every dollar I spend. Both plans will require you to sit down and do some math in the beginning but from there they should be really easy to use and just require small tweaks.
I handle my personal money with a really simple method. Sit down and write down how much money you want to be putting away each month first (into savings, ROTH IRA, 401K, etc. – don’t worry we’ll tackle these this week). Let’s say its $200. Next add up all of your living expenses you NEED to pay each month (mortgage, insurance, grocery bill, utilities, gas, cell phone). You don’t need to stress about if something is truly a need – if it is important to you then put it in this category – remember you don’t need to feel bad about spending your money. Also, for this plan I like to estimate things like groceries and gas into this category but you can also leave them for your spending category – it is your plan after all! Let’s say it is $1800 for everything. Add that up with your savings number and you know you have $2000 that has to go out every month. If you bring in $3000 you can do the math and figure out you have $1000 to spend during the month. That means you can follow along throughout the month with your spending, knowing you have $1000. After a few months, you will start to get a feel for how much spending that is and it becomes second nature.
You will notice that you have months where you spend more than others. Look back at your last few months and look at your highest month or two and see what things you are spending more on. For example, I know that my expensive months are from going out to eat multiple times in a week. If you want to cut back some spending, find out what your category is and try to cut back on that one thing. For me, if I focus on eating out less it is pretty amazing how much extra I can save and honestly I usually feel like crap the more I eat out.
The second budgeting system is the one I use for the gym. This one works well for people who are not paid on a salary (freelancers, business owners), people with a lot of transactions, and for people who want more accountability than the system above. To start with this plan, you actually need to open multiple bank accounts under one bank (we’ll go over which banks this week). For the average person, you will need 4 accounts. An income account where all of your incoming money goes. Then 3 accounts to disperse the money out to which are:
Fixed Expenses – this will be your mortgage, utilities, car, insurance, cell phone
Savings – this will be your emergency fund, investments, or debt payments
Spending – this will be your spending money for groceries, gas, eating out, clothes, charity.
For this plan you simply add up all your fixed expenses for the month and divide it by your monthly income. Write down the percentage number for that account (let’s say it’s 60%). Then you put together how much you want to put into your savings account and divide it by your monthly income (15%). Then you are left with your spending amount (25%).
The way this works is the month flows into your income account, then twice a month you disperse it out your other accounts based on the percentages. This basically denotes a use to each dollar you have but without the spreadsheet and in a much more relaxed way. You also can create other accounts for things you want to save money Maybe you want to save for a new couch or have a wedding coming down the line, you could make a big purchases or wedding account and put 2% in that account every month until you can afford it.
This was a long one so if you made it this far, congrats! I hate budgeting and this stuff but I do think there are 2 important things for success. The first is to have a plan and the second is to take out your fixed expenses and saving money first so that you are left with your spending money. Often we spend all our money first and then take what’s left (which is usually nothing) and put that to savings, investing, or debt.