Spend Your Way to Wealth
Content
Creating
YOUR PLAN TO YOUR DREAMS A plan, that’s what you need. A simple step by step guide to creating wealth. A plan that will excite you and motivate you, get you out of bed in the morning kind of plan. Well if I promised you that then I would just be another quick buck artist out to rip you off. Truth is if you intend to be wealthy the information I will be offering here can do that but it will take work and dedication on your part. There will be times you will want to quit, there will be times that it just wont seem like it is worth it, there will be other times that it will seem like you will never make it so you might as well blow it now, but don’t. What makes the difference between the truly wealthy and those who just get by day after day is persistence. So if you are interested in spending your way to wealth then you must understand there is no way it will happen if you are not willing to take the bull by the horns and just hang in there. It is tough, but it is doable Ok, so lets get into the meat and potatoes of this plan. Here is your first “get over it” term; budgeting. This word is often hated and for the most part, misunderstood. Most people think of budgeting as something poor people do to be able to make it from paycheck to paycheck. Or they think of it as that mysterious process whereby wages and materials are dispensed in great big corporations, while that is all true most of us think of budgeting as something cheapskate and the modern marketers are quick to capitalize on this way of thinking. No one wants to be thought of as a cheapskate so we will pay two dollars more
for that bottle of dish soap rather than buy the bargain brand even though the bargain brand will do the same thing just as well and often is made by the same people just labeled differently. Now it would be easy for me to write this book and pompously spout the principals and rewards of budgeting, but, truth be told I am not any better than the rest of us. I didn’t learn about budgeting until after my first divorce, I used budgeting to get out of debt. I got married again and forgot about budgeting until that marriage fell apart. Got out of debt and even got a nice nest egg going, then got married again and was making enough money that I just didn’t worry about it. Can you tell, I don’t like managing money, but as the preacher says, if you don’t manage your money it will manage you. So here I am a half century old and re-learning what I learned back when I was in my twenty’s. The best definition of budgeting that I have come across is that budgeting is a plan for spending, it is a deliberate, intentional, goal driven tool for controlling the funds that we create for our own welfare. Much of the information that I am about to share here is a retelling of much of what you have already heard or read, it is my goal to help you understand it in simple terms that even a High School dropout like me can get. First is where are you today. Ya I know, it sucks to be broke the day after payday but why are you broke, do you know? It is said that to start a journey you must take that first step, I disagree, first you have to know where you are and where you are going, and then you can take that first step.
So, where are you? What do you spend your money on? When you get your paycheck do you cash it and pay off loans with your buddies or the catering truck at work? Maybe you borrowed some cash from mom to buy some smokes. Whatever it is write it down, that is the first step. Write down everything that you spend money on in a notebook, don’t forget the price of the notebook! To find out where you are you must account for every penny you spend, every penny! I can not emphasize this enough, if you are going to get in control of your spending you must know what you are spending money on, there is no shortcut here. Do this for at least one week. Four weeks are better because it gives you a better picture of where you are today. In your notebook, (and I recommend a pocket size so you can have it with you always), start with your paycheck, which should be your first entry. Write down your gross pay, which is the amount you make before taxes and insurance, and then subtract each item from your gross pay, FICA, Federal withholding, State withholding, Insurance and whatever else your employer may deduct from your paycheck, your boss doesn’t pay this, you do, so you need to know what you are spending here, there are legal ways to reduce some of this spending so if you don’t already know what you are spending, find out, write it down and deduct it from your gross pay. If your married or shacked up, this step must be done by both of you, you both spend the money and I can safely assume you both make a paycheck. If only one of you makes a paycheck you still both need to keep a “spending book” but only one of you need to enter the taxes and stuff that they deduct from your wages before you get them
because we are going to put both of your information into one master “spending book”. If your on welfare or are receiving any kind of Government assistance, you still need to keep a “spending book” for at least one month. Don’t complicate things, it’s very simple; record everything you spend money on! Ok, now you got a month’s worth of earning and spending history, what are you going to do with it? Bean counter time! Sorry, there is no other way to do it. You are about to become an accountant. Lets start by categorizing just what you have spent your money on. Do you spend money on coffee every morning, ok, make a column on a piece of paper titled coffee, now go thru your “spending book” and write down in that column every time you spent money on coffee. Do this with every thing you spent your hard earned dollars on for the entire month; be careful not to duplicate an entry.
Date 1/1 1/2 1/5 1/7 Totals
Payroll Deductions 100.00 0 0 100.00 200.00
Groceries Gas 100.00 0 21.5 150.00 271.50 30.00 0 10.00 30.00 70.00
Eating Out 25.00 0 0 30.00 55.00
Drinks 5.00 5.00 5.00 5.00 20.00
Smokes Misc. 56.00 0 0 56.00 112.00 35.09 0 30.00 10.00 75.00
Video Rental 10.00 0 10.00 10.00 30.00
The above example does not include rent/ mortgage, utilities, phone and other “fixed” expenses; we will deal with those in a bit. If you borrowed money that too must be listed, same with credit card spending. Absolutely all spending must be categorized and accounted for.
By now, you should be seeing a pattern. For example that 32-ounce soda you picked up for less than 5.00 per day adds up to a whooping amount by the end of the week, meals out cost a good 30% more than the same food cooked by you at home. I am sure there are other areas where you can see how that innocent dollar or two, here and there, add up to a lot at the end of the month. Now, take those numbers and lets do some interesting things with them. Start by making a graph like the one in the next example, (all the numbers I am using in my examples are fictional but reasonable). Plug in the numbers from your previous chart. You are likely to have a negative balance at the end of the month like in the example. A negative balance means you borrowed some money somewhere, it may have been from mom, dad, the bank, a credit card or a payday loan shark, you are going to have to pay that money back. If you borrowed on a credit card or with a loan shark, your going to have interest too, so that adds some more expense to next month and more the following month and on and on it goes. Your only hope is to make more money, or is it? We will plug in the figures from the weekly spending chart and see just where we are for the month. It may surprise you; then again it may not after all you do feel the pain of being broke the day after payday don’t you?
Gross Income Payroll deductions Net Income Monthly Expenses Rent Utilities Phone (cell and house) Car Payment Car Insurance Credit Card Total Net Spendable Income Monthly Spending Food Groceries Eating out Convenience 600.00 220.00 80.00 600.00 200.00 130.00 200.00 150.00 100.00 400.00
3000.00 - 400.00 2600.00
-1380.00 1220.00
-900.00 320.00
Gasoline Entertainment Smokes Misc. Balance
160.00 80.00 224.00 65.09 -457.09 -137.09
Let’s go back to your monthly spending chart, what could you cut? Quit smoking, there is $224.00; I know it’s not easy, but it is worth it! Cut out that 32oz soda and you’ve saved another $80.00; and the miscellaneous junk, did you really need that piece of beef jerky or that donut? Spend some time thinking about it; cut it out and you added $65.00, now instead of a deficit you have a surplus of $232.00. Do you really have to have that steak? Or that brand whatever? Can’t you use coupons? Could you cut maybe $100.00 from your grocery spending, and cut back eating out to one time a week that’s a savings of $50.00, wow with all of those cut backs we now have a surplus of $382.00 and I bet if we look at our taxes we can find even more that we can add to our surplus. Nearly everyone overpays his or her taxes. A tax refund is money you overpaid the Government that they borrowed from you for free, that should make you mad. Sure, this example is a bit absurd, but then spending like most of us do is absurd too and that is my point, no matter how rich or poor you are, your spending is the key to your wealth and if you do not control it through a budget you will spend away your wealth. The budget that we will create in the next section will show you how it all works. We have one other item to discuss before we move on to setting up your budget; that is goals. To many people, goals are a word associated with New Years resolutions, and we all know that New Year resolutions are nearly always a flop. Why? Simply because those resolutions we make on New Years eve have little emotional pull to complete them, no plan to achieve them, no way to measure success, in short they are doomed to failure before they even get started.
Why do we need a goal in financial planning? Because if you don’t you wont. What I mean is without a goal you will not see a reason to control your spending, You will have no reason to cut back or buy less and save more, your budget will fail even before you get started. I assume you got this book to figure out how you can have more money at the end of the week and that is an admirable goal but it lacks the fundamentals that will give you that extra push to discipline yourself to make a budget work So what does it take to make a goal workable? A goal must be achievable. If you want to save a million dollars by the end of five years and you make minimum wage you have already lost, you cannot bank what you do not have and you still have to pay those living expenses, so a goal must be realistically achievable. Start small. Small goals are great motivators because they are achievable and when you do succeed in meeting your goal you will enjoy the success and be motivated to attain the next goal, which can be a bit bigger. Small goals that are part of a larger goal are in fact the best way to achieve a larger goal and actually do two things for you. First they give you the plan you need to arrive at the bigger goal. Secondly, they give you that all-powerful emotional pull to achieve your bigger goal. To set your goal you must do some good old fashion dreaming. Just what do you want to do or to have in your life? A trip to Hawaii? A Harley Davidson Motorcycle? A backpack trip in the Himalayas? Or maybe that fancy food processor that does everything? Or maybe it’s just to get out of debt? Only you can decide what it is.
Now write your goal down.
It helps to get pictures of your goal and glue them on to the piece of paper that you wrote the goal down on. Put it up somewhere where you can see it daily. Imagine how good it will feel when you achieve that goal. A word to the wise, if you are married, you must be in agreement with your spouse. If you have one goal and your spouse another then you will end up either competing or canceling each other out, either way fighting is for sure. Here most authors on goal setting would ask you to find out what that goal will cost and write it down also, and set a date for achieving it. I don’t want you to do that yet, if you do you are more likely to make your budget unrealistic and an unrealistic budget will undermine your ability to set realistic short term goals, thereby frustrating you. Another thing I want you to have is a clear understanding about credit. Credit seems like a good thing and when used properly it is. However, most of us do not use it correctly, We use it to buy impulsively, we see something that emotionally excites us but we know we can not get it now with the cash we have so we whip out the credit card and “buy now pay later”. Problem is you don’t know if in fact you can pay later. Then there is the interest, lets say for example at the first of the month you see a great deal on a stereo that you want, it normally sells for $200.00 but is on sale for $190.00 if you buy today! So you whip out the plastic and take it home, but at the end of the month the bill comes in and now that stereo costs $194.75. You still don’t have the cash so you make the minimum payment of say $25.00. So the bill comes in next month (assuming you didn’t charge more) and now you owe $173.99 and paid a total of $9.00 more, but one more time you don’t have the cash to pay the bill in full so you make
another $25.00 payment, now on the third month you will owe $152.71 and you have paid $12.71 in interest so now you have paid $202.71 for your $200.00 stereo and to make maters worse you just saw the same stereo at a different store for $150.00. This example is based on paying 30% interest (which is common), on your plastic and no finance charges. Can you really afford it! Truth is credit cards were designed to buy today and pay the full amount at the end of the month with a small charge by the banker for letting you use his funds. And they are great for emergency expenses when you don’t have a rainy day fund but of course they can keep you from saving up a rainy day fund that you get interest on. So bottom line is do not use credit cards unless you can afford to pay them off at the end of the month! I mentioned some pretty big goals after I had suggested that you start small that was to get your creative juices going. When it comes to setting your first goals they need to be small, such as buying that accessory for your car you don’t think you can afford or a new set of drapes you would normally put on the credit card, something that you want but don’t think you can buy without credit. That’s a good place to start, but make sure it is something you really want, if it’s not then you won’t have the motivation to get control of your spending. If you insist on starting with the big goals, then you need to break them down into much smaller, easier to achieve goals. For example, say you want to take a trip that is going to cost $2,000 dollars, do you think you can realistically save twenty dollars a month? Or better yet twenty dollars a week? If you can, then get an envelope and put it in a drawer, then when you get your check, put twenty dollars in it just as soon as you get
your check. If cash is a problem for you, then write yourself a check and in the memo write your goal, don’t forget to deduct it from your balance, because if the money isn’t in your checking account then you wont spend it on things you don’t need or wont help to achieve your goal, it’s just a little mental trick that helped me. So now we will get into the budget part. Budgeting doesn’t have to be chore or a taskmaster, remember it is a spending plan, it’s a way to help you achieve those things you want in your life that cost money. It does take a little work to get started and if your going to keep it working for you the words “not right now” are going to have to become your mantra So now you have your “what I have been spending money on” chart and your first goal. Take a look at the “what I have been spending money on” and see if there is anywhere you are willing to cut, be realistic, if you smoke you can’t cut that expense until after you have quite long enough to be sure your not going to start again. Food is the biggest category that most of us waste money on. You say hey I’ve got to eat and of course your right, but do you have to eat Mc Donald’s every day for lunch? Wouldn’t once a week be ok? If you have a family that’s on the go and it just seems like you don’t have time to prepare meals wouldn’t it be better to set aside some time to pre make some quick and easy meals you can freeze or store in the frig, you pay handsomely for the convenience of fast food, in my experience I can feed my entire family of five at home for what it cost’s to get just my wife’s and my burger at Mickey D’s and the home meal it is more filling and healthier.. And what about those grocery stores do you really have to shop at the giant food chain? There are discount grocery stores in nearly every community find them and use
them. My wife and I shop at two different discount stores one is sixty miles away and yes it does pay for us to travel that far as what we buy there is mostly meat and we save somewhere between seventy five and a hundred and twenty dollars per trip. The other store is a damaged can food store and the savings there is astronomical as well. Of course more perishable foods we do have to go to a regular grocery store but even then we avoid big brands like Hunts. Some items of course are not worth compromising on, for example macaroni and cheese, (the box kind) all the discount brands taste like cardboard and only Kraft is worth buying, but that is an exception and even then, we wait until it goes on sale and buy a bunch of it. In saving on food another tip is to write a menu. It really is simple to do and there are many computer programs out there that can help, but if you want to save money just make a chart like the one below and fill it out. Don’t think of it a taskmaster either. It’s a guide, say you planned pot roast for Friday but you wont have time to fix it on Friday because you forgot about a ball game your kid has, hay, that’s ok, you had hot dogs planned for Saturday so, just switch it, no big deal. Sun. Breakfast Lunch Dinner Snacks Mon. Tues. Wends. Thurs. Friday Sat.
The advantage to doing a meal plan like this is it helps you to be able to make a grocery list and stick to a budget easier. Impulse items (things you don’t really need but look good) are one of the enemies you have to do battle with when you go to the store,
but don’t feel bad we all have that battle and most people loose, the food companies spend large parts of their budget figuring out how to package, advertise and place their stuff in the store in such a way to make sure you break you budget, they don’t care about you and your financial or physical health, only theirs. Snack foods do take some thinking about, most packaged snacks are not good for you and are many times more expensive than what it would cost you to make your own healthier snacks. There are tons of helps out there in this area just check recipe books, women’s and health food magazines and of course the web. Bottom line is, food is the single largest item on your budget that you have the most control over and the easiest to find ways to cut down on. The next biggest area is the miscellaneous column on your budget, this would be things that most often you spend cash on or add to a gasoline purchase or those impulse items that I talked about earlier. Be honest with yourself here! Did you really need that item? If you told yourself “not now” would you have gone back and bought it later? So by now, you should have come up with several ideas for cutting your spending so you can have more money at the end of the week to apply towards your goal. That’s Great! But if you don’t chart it your not as likely to keep it under control because your not as able to see progress towards your goal. The dollar amounts that you put into your columns on the budget are at this point a wish list, it is the money that you plan to spend but hope you don’t spend as much as your planning. At this point I think it is time to introduce the budget or more correctly the chart that you’re going to measure your progress with. Remember, this is a spending plan and it is not a taskmaster you are not it’s slave’ you are it’s master, you make the money and
you decide how it’s going to be spent, if you don’t like it change it, or don’t do it, it’s up to you. I am only offering you a tool to manage your funds in a way that makes sense. We start with the monthly budget then break it down to the weekly budget. The
advantage to doing this is it is easier to think in the terms of weekly than it is in monthly. Of course you can break it down to a daily spending plan if you wish, or if you only get paid bi-weekly then you will have to make that adjustment. Event Gross Income Taxes Federal withholding State Withholding FICA SS 600.00 60.00 300.00 300.00 - 1260 Rent/ Mortgage Loan Payments Car Credit Card Payments Utilities Car Insurance Gasoline and car upkeep Food includes eating out Misc. Goal -600.00 -400.00 -75.00 -100.00 -120.00 -450.00 -600.00 -200.00 -195.00 2740.00 2140.00 1740.00 1665.00 1565.00 1445.00 99500 395.00 195.00 0.00 (-) (+) or (=) $4000
Of course this example assumes several things, first is that you and your spouse make 4,000 dollars a month to do that you both would have to make 2,000 a month each or $12.50 an hour based on a 40 hour work week, your actual income may be more or
less, remember this is all gross income that comes into your home. The other main assumption is that you have already figured out what you spend your money on and how much you are willing to spend on each category. These numbers are both guides and goals. Guard yourself against becoming dogmatic about your budget. A budget must be flexible, if it is not you will abandon it. If it turns out that you spent more in one category then make an adjustment for the next month and if you spent less money in a category than adjust it appropriately, but pay attention to your adjustments if you find your adjusting the same category every week or month than there is a spending problem that needs to be fixed. Problems in this area are almost always thinking problems. We say things to ourselves like,” it’s ok I’ll make it up next week”, problem is we rarely do and it even begins to set a pattern that becomes a snowball rolling downhill. So once again our mantra has to be “do I really need this now”, followed by “will this purchase help me reach my goal?” Thinking like this before making a purchase will feel odd at first, but as they say, practice makes perfect and as you see your surplus grows and your goal gets closer it will make this kind of thinking easier. That is why you need a goal that is emotionally important to you. To make a budget work your objective is to make all expenses fixed expenses. What I mean is, for example, you had decided that you can spend $100.00 on miscellaneous stuff for the month, that’s twenty-five dollars a week or $3.57 a day. Put 25 one-dollar bills in your wallet or purse on payday, and if you spend it all by Wednesday then you don’t spend any more until after you cash your check the following
pay day. The neat thing is as you apply the mantra “do I really need it now”, you may find that by Friday you still have five dollars on you and now you have thirty dollars for next week, but if you keep applying the same principle you may find that by the end of the next week your surplus has grown to fifteen dollars. Carry this scenario out to the end of the month and you may find an extra thirty or more in your pocket and you hardly noticed that you weren’t buying as much. Now this extra money can be carried forward into the next month or put into your goal envelop. The object is to plan to spend a certain amount and then spend less so you will have more. It’s very rewarding emotionally. Now, Let’s talk about those monthly bills. Many blue-collar people pay their monthly bills by gathering the money out of one or two paychecks while they are receiving four checks a month, while this may seem the right thing or logical thing to do, it is in fact the most stressful way to manage your bills and is often the cause of too much week at the end of the paycheck.
A better way to deal with those monthly bills is to take an even amount out of each check. For example, your rent is $600.00 per month so we simply divide that by 4 and take $150.00 per week and set it aside for rent, then when it is due you will have it in hand without stressing yourself or your budget. You do the same with your car payment, utilities, insurance and any other monthly expense. Quick sides note about rent or mortgage, before the days of easy credit, it was a rule that you could not get a loan for a home if the monthly payment was going to be more than 25% of your monthly net income. Although this is no longer true it is still a
good rule in financial planning. If your payment for the place you live is more than 25% of your take home pay it will be hard to feel good about yourself as you will feel like a slave to your home. Utilities are a tough area for all of us, never is the bill the same from month to month as the weather is forever changing and seldom predictable for more than a few days so the best way to deal with this bill is to plan for it by taking your highest bill and subtracting your lowest bill from it and then dividing the balance by 3 and adding it to your lowest bill. For example, in your area December is your highest bill, and let’s say, it is $150.00, then June is your lowest bill, of say, $75.00, the difference is $75.00 divided by three and you have $25.00. Now for your budget you will add that $25.00 to the $75.00 of your lowest bill and you will budget $100.00 for every month or twenty-five dollars a week. If your bill is less than the $100.00 you do not spend the extra, this money must stay in this account so when you get hit with a much higher bill you will have the money with out having to take it away from something else. Then at the end of the year if you haven’t spent all of it you will have a nice amount that you can add to your goal account. I have now mentioned several times the “setting aside” of budgeted amounts, just exactly how do you do that? My grandparents had this terrific way of doing this, they had a wooden box that had a door on it that slide open, inside of this box were about fifteen little drawers that had labels on each drawer for the type of account that they were setting aside money for, as the money came in they would divide it up accordingly and deposit it into the appropriate drawer. I never did find one of these “budget boxes” for my self and honestly cash laying around the house just isn’t a good idea for me and
probably isn’t a good idea in general, so I devised a system that worked for me and here it is. I would start by having as many envelopes as I had budget items and labeling them according to the categories I had on my budget, then after I made my paycheck deposit I would sit down with my check book in hand and write out checks to each category and put them inside the envelope. I would deduct the money from the balance in the register just as if they were checks being cashed by the creditor. Then on the fourth paycheck I would take those checks out of the envelopes, void them, write the money back into the balance as if I were making a deposit and finally write the check to my creditor for the full amount of the then due bill. If there were a balance to be carried forward into the next month as there would be on a utility bill then I would write another check for that balance and place it back into the envelope deducting it from the register balance
Why such an elaborate system? Because it worked for me. Will it work for you? That depends on you and your circumstances and how bad you want it to work. There are literally hundreds of variations on this system and they will all work if you want them to. The whole point of the system is to make the money unavailable for you to spend on something other than what it is intended for. The old adage “ out of site, out of mind” is the rule for any system you may devise.
Ok so let’s give you an idea of what a weekly budget will look like. I will use the figures from the previous example Event Gross Pay Taxes Rent Car Payment Credit Card Utilities Car Insurance Gas and Car Food Misc. Goal (-) Budgeted $1000.00 $316.25 $150.00 $100.00 $18.75 $25.00 $30.00 $112.50 $150.00 $50.00 $48.75 (-) Actual $1000.00 $316.25 $150.00 $100.00 $18.75 $25.00 $30.00 $60.00 $120.00 $60.00 $120.00 Difference from Budget 0 0 0 0 0 0 0 +52.50 +30.00 -10.00 +71.25 Balance $1000.00 $683.75 $533.75 $433.75 $415.00 $390.00 $360.00 $300.00 $180.00 $120.00 $0
Ok, did you catch the problem in this example? In my miscellaneous category I spent ten dollars more than planned, but that is ok as I had two other categories that I spent much less than was planned so I borrowed from one of those categories. Using my envelope system I would write an IOU from the Misc. account to the one I borrowed from and note it on the outside of both envelopes so the next time I under spent in the Misc. category I would “pay back” the other category. In my Gas and Car category I would roll that money onto the next week as I may have an unplanned trip to take, a breakdown, service due, blown tire, or whatever so I would always try to build that account up as fast as I could. How much should you build it up to? I don’t know, the more the better, unforeseen things happen to automobiles and they are expensive to repair. And of course fuel prices are very unstable especially in the summer.
YOUR PLAN TO YOUR DREAMS A plan, that’s what you need. A simple step by step guide to creating wealth. A plan that will excite you and motivate you, get you out of bed in the morning kind of plan. Well if I promised you that then I would just be another quick buck artist out to rip you off. Truth is if you intend to be wealthy the information I will be offering here can do that but it will take work and dedication on your part. There will be times you will want to quit, there will be times that it just wont seem like it is worth it, there will be other times that it will seem like you will never make it so you might as well blow it now, but don’t. What makes the difference between the truly wealthy and those who just get by day after day is persistence. So if you are interested in spending your way to wealth then you must understand there is no way it will happen if you are not willing to take the bull by the horns and just hang in there. It is tough, but it is doable Ok, so lets get into the meat and potatoes of this plan. Here is your first “get over it” term; budgeting. This word is often hated and for the most part, misunderstood. Most people think of budgeting as something poor people do to be able to make it from paycheck to paycheck. Or they think of it as that mysterious process whereby wages and materials are dispensed in great big corporations, while that is all true most of us think of budgeting as something cheapskate and the modern marketers are quick to capitalize on this way of thinking. No one wants to be thought of as a cheapskate so we will pay two dollars more
for that bottle of dish soap rather than buy the bargain brand even though the bargain brand will do the same thing just as well and often is made by the same people just labeled differently. Now it would be easy for me to write this book and pompously spout the principals and rewards of budgeting, but, truth be told I am not any better than the rest of us. I didn’t learn about budgeting until after my first divorce, I used budgeting to get out of debt. I got married again and forgot about budgeting until that marriage fell apart. Got out of debt and even got a nice nest egg going, then got married again and was making enough money that I just didn’t worry about it. Can you tell, I don’t like managing money, but as the preacher says, if you don’t manage your money it will manage you. So here I am a half century old and re-learning what I learned back when I was in my twenty’s. The best definition of budgeting that I have come across is that budgeting is a plan for spending, it is a deliberate, intentional, goal driven tool for controlling the funds that we create for our own welfare. Much of the information that I am about to share here is a retelling of much of what you have already heard or read, it is my goal to help you understand it in simple terms that even a High School dropout like me can get. First is where are you today. Ya I know, it sucks to be broke the day after payday but why are you broke, do you know? It is said that to start a journey you must take that first step, I disagree, first you have to know where you are and where you are going, and then you can take that first step.
So, where are you? What do you spend your money on? When you get your paycheck do you cash it and pay off loans with your buddies or the catering truck at work? Maybe you borrowed some cash from mom to buy some smokes. Whatever it is write it down, that is the first step. Write down everything that you spend money on in a notebook, don’t forget the price of the notebook! To find out where you are you must account for every penny you spend, every penny! I can not emphasize this enough, if you are going to get in control of your spending you must know what you are spending money on, there is no shortcut here. Do this for at least one week. Four weeks are better because it gives you a better picture of where you are today. In your notebook, (and I recommend a pocket size so you can have it with you always), start with your paycheck, which should be your first entry. Write down your gross pay, which is the amount you make before taxes and insurance, and then subtract each item from your gross pay, FICA, Federal withholding, State withholding, Insurance and whatever else your employer may deduct from your paycheck, your boss doesn’t pay this, you do, so you need to know what you are spending here, there are legal ways to reduce some of this spending so if you don’t already know what you are spending, find out, write it down and deduct it from your gross pay. If your married or shacked up, this step must be done by both of you, you both spend the money and I can safely assume you both make a paycheck. If only one of you makes a paycheck you still both need to keep a “spending book” but only one of you need to enter the taxes and stuff that they deduct from your wages before you get them
because we are going to put both of your information into one master “spending book”. If your on welfare or are receiving any kind of Government assistance, you still need to keep a “spending book” for at least one month. Don’t complicate things, it’s very simple; record everything you spend money on! Ok, now you got a month’s worth of earning and spending history, what are you going to do with it? Bean counter time! Sorry, there is no other way to do it. You are about to become an accountant. Lets start by categorizing just what you have spent your money on. Do you spend money on coffee every morning, ok, make a column on a piece of paper titled coffee, now go thru your “spending book” and write down in that column every time you spent money on coffee. Do this with every thing you spent your hard earned dollars on for the entire month; be careful not to duplicate an entry.
Date 1/1 1/2 1/5 1/7 Totals
Payroll Deductions 100.00 0 0 100.00 200.00
Groceries Gas 100.00 0 21.5 150.00 271.50 30.00 0 10.00 30.00 70.00
Eating Out 25.00 0 0 30.00 55.00
Drinks 5.00 5.00 5.00 5.00 20.00
Smokes Misc. 56.00 0 0 56.00 112.00 35.09 0 30.00 10.00 75.00
Video Rental 10.00 0 10.00 10.00 30.00
The above example does not include rent/ mortgage, utilities, phone and other “fixed” expenses; we will deal with those in a bit. If you borrowed money that too must be listed, same with credit card spending. Absolutely all spending must be categorized and accounted for.
By now, you should be seeing a pattern. For example that 32-ounce soda you picked up for less than 5.00 per day adds up to a whooping amount by the end of the week, meals out cost a good 30% more than the same food cooked by you at home. I am sure there are other areas where you can see how that innocent dollar or two, here and there, add up to a lot at the end of the month. Now, take those numbers and lets do some interesting things with them. Start by making a graph like the one in the next example, (all the numbers I am using in my examples are fictional but reasonable). Plug in the numbers from your previous chart. You are likely to have a negative balance at the end of the month like in the example. A negative balance means you borrowed some money somewhere, it may have been from mom, dad, the bank, a credit card or a payday loan shark, you are going to have to pay that money back. If you borrowed on a credit card or with a loan shark, your going to have interest too, so that adds some more expense to next month and more the following month and on and on it goes. Your only hope is to make more money, or is it? We will plug in the figures from the weekly spending chart and see just where we are for the month. It may surprise you; then again it may not after all you do feel the pain of being broke the day after payday don’t you?
Gross Income Payroll deductions Net Income Monthly Expenses Rent Utilities Phone (cell and house) Car Payment Car Insurance Credit Card Total Net Spendable Income Monthly Spending Food Groceries Eating out Convenience 600.00 220.00 80.00 600.00 200.00 130.00 200.00 150.00 100.00 400.00
3000.00 - 400.00 2600.00
-1380.00 1220.00
-900.00 320.00
Gasoline Entertainment Smokes Misc. Balance
160.00 80.00 224.00 65.09 -457.09 -137.09
Let’s go back to your monthly spending chart, what could you cut? Quit smoking, there is $224.00; I know it’s not easy, but it is worth it! Cut out that 32oz soda and you’ve saved another $80.00; and the miscellaneous junk, did you really need that piece of beef jerky or that donut? Spend some time thinking about it; cut it out and you added $65.00, now instead of a deficit you have a surplus of $232.00. Do you really have to have that steak? Or that brand whatever? Can’t you use coupons? Could you cut maybe $100.00 from your grocery spending, and cut back eating out to one time a week that’s a savings of $50.00, wow with all of those cut backs we now have a surplus of $382.00 and I bet if we look at our taxes we can find even more that we can add to our surplus. Nearly everyone overpays his or her taxes. A tax refund is money you overpaid the Government that they borrowed from you for free, that should make you mad. Sure, this example is a bit absurd, but then spending like most of us do is absurd too and that is my point, no matter how rich or poor you are, your spending is the key to your wealth and if you do not control it through a budget you will spend away your wealth. The budget that we will create in the next section will show you how it all works. We have one other item to discuss before we move on to setting up your budget; that is goals. To many people, goals are a word associated with New Years resolutions, and we all know that New Year resolutions are nearly always a flop. Why? Simply because those resolutions we make on New Years eve have little emotional pull to complete them, no plan to achieve them, no way to measure success, in short they are doomed to failure before they even get started.
Why do we need a goal in financial planning? Because if you don’t you wont. What I mean is without a goal you will not see a reason to control your spending, You will have no reason to cut back or buy less and save more, your budget will fail even before you get started. I assume you got this book to figure out how you can have more money at the end of the week and that is an admirable goal but it lacks the fundamentals that will give you that extra push to discipline yourself to make a budget work So what does it take to make a goal workable? A goal must be achievable. If you want to save a million dollars by the end of five years and you make minimum wage you have already lost, you cannot bank what you do not have and you still have to pay those living expenses, so a goal must be realistically achievable. Start small. Small goals are great motivators because they are achievable and when you do succeed in meeting your goal you will enjoy the success and be motivated to attain the next goal, which can be a bit bigger. Small goals that are part of a larger goal are in fact the best way to achieve a larger goal and actually do two things for you. First they give you the plan you need to arrive at the bigger goal. Secondly, they give you that all-powerful emotional pull to achieve your bigger goal. To set your goal you must do some good old fashion dreaming. Just what do you want to do or to have in your life? A trip to Hawaii? A Harley Davidson Motorcycle? A backpack trip in the Himalayas? Or maybe that fancy food processor that does everything? Or maybe it’s just to get out of debt? Only you can decide what it is.
Now write your goal down.
It helps to get pictures of your goal and glue them on to the piece of paper that you wrote the goal down on. Put it up somewhere where you can see it daily. Imagine how good it will feel when you achieve that goal. A word to the wise, if you are married, you must be in agreement with your spouse. If you have one goal and your spouse another then you will end up either competing or canceling each other out, either way fighting is for sure. Here most authors on goal setting would ask you to find out what that goal will cost and write it down also, and set a date for achieving it. I don’t want you to do that yet, if you do you are more likely to make your budget unrealistic and an unrealistic budget will undermine your ability to set realistic short term goals, thereby frustrating you. Another thing I want you to have is a clear understanding about credit. Credit seems like a good thing and when used properly it is. However, most of us do not use it correctly, We use it to buy impulsively, we see something that emotionally excites us but we know we can not get it now with the cash we have so we whip out the credit card and “buy now pay later”. Problem is you don’t know if in fact you can pay later. Then there is the interest, lets say for example at the first of the month you see a great deal on a stereo that you want, it normally sells for $200.00 but is on sale for $190.00 if you buy today! So you whip out the plastic and take it home, but at the end of the month the bill comes in and now that stereo costs $194.75. You still don’t have the cash so you make the minimum payment of say $25.00. So the bill comes in next month (assuming you didn’t charge more) and now you owe $173.99 and paid a total of $9.00 more, but one more time you don’t have the cash to pay the bill in full so you make
another $25.00 payment, now on the third month you will owe $152.71 and you have paid $12.71 in interest so now you have paid $202.71 for your $200.00 stereo and to make maters worse you just saw the same stereo at a different store for $150.00. This example is based on paying 30% interest (which is common), on your plastic and no finance charges. Can you really afford it! Truth is credit cards were designed to buy today and pay the full amount at the end of the month with a small charge by the banker for letting you use his funds. And they are great for emergency expenses when you don’t have a rainy day fund but of course they can keep you from saving up a rainy day fund that you get interest on. So bottom line is do not use credit cards unless you can afford to pay them off at the end of the month! I mentioned some pretty big goals after I had suggested that you start small that was to get your creative juices going. When it comes to setting your first goals they need to be small, such as buying that accessory for your car you don’t think you can afford or a new set of drapes you would normally put on the credit card, something that you want but don’t think you can buy without credit. That’s a good place to start, but make sure it is something you really want, if it’s not then you won’t have the motivation to get control of your spending. If you insist on starting with the big goals, then you need to break them down into much smaller, easier to achieve goals. For example, say you want to take a trip that is going to cost $2,000 dollars, do you think you can realistically save twenty dollars a month? Or better yet twenty dollars a week? If you can, then get an envelope and put it in a drawer, then when you get your check, put twenty dollars in it just as soon as you get
your check. If cash is a problem for you, then write yourself a check and in the memo write your goal, don’t forget to deduct it from your balance, because if the money isn’t in your checking account then you wont spend it on things you don’t need or wont help to achieve your goal, it’s just a little mental trick that helped me. So now we will get into the budget part. Budgeting doesn’t have to be chore or a taskmaster, remember it is a spending plan, it’s a way to help you achieve those things you want in your life that cost money. It does take a little work to get started and if your going to keep it working for you the words “not right now” are going to have to become your mantra So now you have your “what I have been spending money on” chart and your first goal. Take a look at the “what I have been spending money on” and see if there is anywhere you are willing to cut, be realistic, if you smoke you can’t cut that expense until after you have quite long enough to be sure your not going to start again. Food is the biggest category that most of us waste money on. You say hey I’ve got to eat and of course your right, but do you have to eat Mc Donald’s every day for lunch? Wouldn’t once a week be ok? If you have a family that’s on the go and it just seems like you don’t have time to prepare meals wouldn’t it be better to set aside some time to pre make some quick and easy meals you can freeze or store in the frig, you pay handsomely for the convenience of fast food, in my experience I can feed my entire family of five at home for what it cost’s to get just my wife’s and my burger at Mickey D’s and the home meal it is more filling and healthier.. And what about those grocery stores do you really have to shop at the giant food chain? There are discount grocery stores in nearly every community find them and use
them. My wife and I shop at two different discount stores one is sixty miles away and yes it does pay for us to travel that far as what we buy there is mostly meat and we save somewhere between seventy five and a hundred and twenty dollars per trip. The other store is a damaged can food store and the savings there is astronomical as well. Of course more perishable foods we do have to go to a regular grocery store but even then we avoid big brands like Hunts. Some items of course are not worth compromising on, for example macaroni and cheese, (the box kind) all the discount brands taste like cardboard and only Kraft is worth buying, but that is an exception and even then, we wait until it goes on sale and buy a bunch of it. In saving on food another tip is to write a menu. It really is simple to do and there are many computer programs out there that can help, but if you want to save money just make a chart like the one below and fill it out. Don’t think of it a taskmaster either. It’s a guide, say you planned pot roast for Friday but you wont have time to fix it on Friday because you forgot about a ball game your kid has, hay, that’s ok, you had hot dogs planned for Saturday so, just switch it, no big deal. Sun. Breakfast Lunch Dinner Snacks Mon. Tues. Wends. Thurs. Friday Sat.
The advantage to doing a meal plan like this is it helps you to be able to make a grocery list and stick to a budget easier. Impulse items (things you don’t really need but look good) are one of the enemies you have to do battle with when you go to the store,
but don’t feel bad we all have that battle and most people loose, the food companies spend large parts of their budget figuring out how to package, advertise and place their stuff in the store in such a way to make sure you break you budget, they don’t care about you and your financial or physical health, only theirs. Snack foods do take some thinking about, most packaged snacks are not good for you and are many times more expensive than what it would cost you to make your own healthier snacks. There are tons of helps out there in this area just check recipe books, women’s and health food magazines and of course the web. Bottom line is, food is the single largest item on your budget that you have the most control over and the easiest to find ways to cut down on. The next biggest area is the miscellaneous column on your budget, this would be things that most often you spend cash on or add to a gasoline purchase or those impulse items that I talked about earlier. Be honest with yourself here! Did you really need that item? If you told yourself “not now” would you have gone back and bought it later? So by now, you should have come up with several ideas for cutting your spending so you can have more money at the end of the week to apply towards your goal. That’s Great! But if you don’t chart it your not as likely to keep it under control because your not as able to see progress towards your goal. The dollar amounts that you put into your columns on the budget are at this point a wish list, it is the money that you plan to spend but hope you don’t spend as much as your planning. At this point I think it is time to introduce the budget or more correctly the chart that you’re going to measure your progress with. Remember, this is a spending plan and it is not a taskmaster you are not it’s slave’ you are it’s master, you make the money and
you decide how it’s going to be spent, if you don’t like it change it, or don’t do it, it’s up to you. I am only offering you a tool to manage your funds in a way that makes sense. We start with the monthly budget then break it down to the weekly budget. The
advantage to doing this is it is easier to think in the terms of weekly than it is in monthly. Of course you can break it down to a daily spending plan if you wish, or if you only get paid bi-weekly then you will have to make that adjustment. Event Gross Income Taxes Federal withholding State Withholding FICA SS 600.00 60.00 300.00 300.00 - 1260 Rent/ Mortgage Loan Payments Car Credit Card Payments Utilities Car Insurance Gasoline and car upkeep Food includes eating out Misc. Goal -600.00 -400.00 -75.00 -100.00 -120.00 -450.00 -600.00 -200.00 -195.00 2740.00 2140.00 1740.00 1665.00 1565.00 1445.00 99500 395.00 195.00 0.00 (-) (+) or (=) $4000
Of course this example assumes several things, first is that you and your spouse make 4,000 dollars a month to do that you both would have to make 2,000 a month each or $12.50 an hour based on a 40 hour work week, your actual income may be more or
less, remember this is all gross income that comes into your home. The other main assumption is that you have already figured out what you spend your money on and how much you are willing to spend on each category. These numbers are both guides and goals. Guard yourself against becoming dogmatic about your budget. A budget must be flexible, if it is not you will abandon it. If it turns out that you spent more in one category then make an adjustment for the next month and if you spent less money in a category than adjust it appropriately, but pay attention to your adjustments if you find your adjusting the same category every week or month than there is a spending problem that needs to be fixed. Problems in this area are almost always thinking problems. We say things to ourselves like,” it’s ok I’ll make it up next week”, problem is we rarely do and it even begins to set a pattern that becomes a snowball rolling downhill. So once again our mantra has to be “do I really need this now”, followed by “will this purchase help me reach my goal?” Thinking like this before making a purchase will feel odd at first, but as they say, practice makes perfect and as you see your surplus grows and your goal gets closer it will make this kind of thinking easier. That is why you need a goal that is emotionally important to you. To make a budget work your objective is to make all expenses fixed expenses. What I mean is, for example, you had decided that you can spend $100.00 on miscellaneous stuff for the month, that’s twenty-five dollars a week or $3.57 a day. Put 25 one-dollar bills in your wallet or purse on payday, and if you spend it all by Wednesday then you don’t spend any more until after you cash your check the following
pay day. The neat thing is as you apply the mantra “do I really need it now”, you may find that by Friday you still have five dollars on you and now you have thirty dollars for next week, but if you keep applying the same principle you may find that by the end of the next week your surplus has grown to fifteen dollars. Carry this scenario out to the end of the month and you may find an extra thirty or more in your pocket and you hardly noticed that you weren’t buying as much. Now this extra money can be carried forward into the next month or put into your goal envelop. The object is to plan to spend a certain amount and then spend less so you will have more. It’s very rewarding emotionally. Now, Let’s talk about those monthly bills. Many blue-collar people pay their monthly bills by gathering the money out of one or two paychecks while they are receiving four checks a month, while this may seem the right thing or logical thing to do, it is in fact the most stressful way to manage your bills and is often the cause of too much week at the end of the paycheck.
A better way to deal with those monthly bills is to take an even amount out of each check. For example, your rent is $600.00 per month so we simply divide that by 4 and take $150.00 per week and set it aside for rent, then when it is due you will have it in hand without stressing yourself or your budget. You do the same with your car payment, utilities, insurance and any other monthly expense. Quick sides note about rent or mortgage, before the days of easy credit, it was a rule that you could not get a loan for a home if the monthly payment was going to be more than 25% of your monthly net income. Although this is no longer true it is still a
good rule in financial planning. If your payment for the place you live is more than 25% of your take home pay it will be hard to feel good about yourself as you will feel like a slave to your home. Utilities are a tough area for all of us, never is the bill the same from month to month as the weather is forever changing and seldom predictable for more than a few days so the best way to deal with this bill is to plan for it by taking your highest bill and subtracting your lowest bill from it and then dividing the balance by 3 and adding it to your lowest bill. For example, in your area December is your highest bill, and let’s say, it is $150.00, then June is your lowest bill, of say, $75.00, the difference is $75.00 divided by three and you have $25.00. Now for your budget you will add that $25.00 to the $75.00 of your lowest bill and you will budget $100.00 for every month or twenty-five dollars a week. If your bill is less than the $100.00 you do not spend the extra, this money must stay in this account so when you get hit with a much higher bill you will have the money with out having to take it away from something else. Then at the end of the year if you haven’t spent all of it you will have a nice amount that you can add to your goal account. I have now mentioned several times the “setting aside” of budgeted amounts, just exactly how do you do that? My grandparents had this terrific way of doing this, they had a wooden box that had a door on it that slide open, inside of this box were about fifteen little drawers that had labels on each drawer for the type of account that they were setting aside money for, as the money came in they would divide it up accordingly and deposit it into the appropriate drawer. I never did find one of these “budget boxes” for my self and honestly cash laying around the house just isn’t a good idea for me and
probably isn’t a good idea in general, so I devised a system that worked for me and here it is. I would start by having as many envelopes as I had budget items and labeling them according to the categories I had on my budget, then after I made my paycheck deposit I would sit down with my check book in hand and write out checks to each category and put them inside the envelope. I would deduct the money from the balance in the register just as if they were checks being cashed by the creditor. Then on the fourth paycheck I would take those checks out of the envelopes, void them, write the money back into the balance as if I were making a deposit and finally write the check to my creditor for the full amount of the then due bill. If there were a balance to be carried forward into the next month as there would be on a utility bill then I would write another check for that balance and place it back into the envelope deducting it from the register balance
Why such an elaborate system? Because it worked for me. Will it work for you? That depends on you and your circumstances and how bad you want it to work. There are literally hundreds of variations on this system and they will all work if you want them to. The whole point of the system is to make the money unavailable for you to spend on something other than what it is intended for. The old adage “ out of site, out of mind” is the rule for any system you may devise.
Ok so let’s give you an idea of what a weekly budget will look like. I will use the figures from the previous example Event Gross Pay Taxes Rent Car Payment Credit Card Utilities Car Insurance Gas and Car Food Misc. Goal (-) Budgeted $1000.00 $316.25 $150.00 $100.00 $18.75 $25.00 $30.00 $112.50 $150.00 $50.00 $48.75 (-) Actual $1000.00 $316.25 $150.00 $100.00 $18.75 $25.00 $30.00 $60.00 $120.00 $60.00 $120.00 Difference from Budget 0 0 0 0 0 0 0 +52.50 +30.00 -10.00 +71.25 Balance $1000.00 $683.75 $533.75 $433.75 $415.00 $390.00 $360.00 $300.00 $180.00 $120.00 $0
Ok, did you catch the problem in this example? In my miscellaneous category I spent ten dollars more than planned, but that is ok as I had two other categories that I spent much less than was planned so I borrowed from one of those categories. Using my envelope system I would write an IOU from the Misc. account to the one I borrowed from and note it on the outside of both envelopes so the next time I under spent in the Misc. category I would “pay back” the other category. In my Gas and Car category I would roll that money onto the next week as I may have an unplanned trip to take, a breakdown, service due, blown tire, or whatever so I would always try to build that account up as fast as I could. How much should you build it up to? I don’t know, the more the better, unforeseen things happen to automobiles and they are expensive to repair. And of course fuel prices are very unstable especially in the summer.
