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Saving and budgeting has gotten a negative reputation. I’ve heard comments like “You’ll never save enough, so what’s the point. There’s always something to spend money on, so saving is unrealistic.” And to those comments, I politely and passionately disagree. However, at the same time, I do agree to a point. I realize that things happen, and sometimes the bit of money you had is now gone to car repairs, family emergency, or just a “treat yo self” moment. However, we can agree those things happen, and still find room to save. Let’s begin.
Phase 1: Find the black hole
Have you ever truly thought about what you spend money on? Of course, there’s rent, food, gas etc., but is that all your paycheck is truly going towards? Ladies and gents, time to get out our pens and paper.
First, write down how much you make a month, after taxes. Next, list down your current monthly bills, and the bare necessities that you need to survive (groceries, transportation, rent, etc.). Now add them together.
Subtract that total from your monthly income. Where do you stand? Are you in the red (negative balance) or are you in the black (positive balance)?
If your expenses are more than your income, then it’s time to reevaluate. Examine your bills and list them from largest to smallest. What is the primary driver of your high expenses? We’ll get into ways to decrease your expenses a little later on. If you would like, feel free to jump down to the “In the Red” section to gain a better understanding of your next steps.
If your income is more than your monthly and survival expenses, then good news, you’re already one step in the right direction of financial freedom.
Let’s say your residual income after your expenses is $200. Are you putting any portion of that money into a savings account? If the answer is no, then ask why not? This is where we identify, what I call “the black hole.” The place where your excess money seems to be disappearing.
Now it’s time to take a look at your bank account. Most of us have direct deposit, and therefore should have access to see our transactions online, or via a paper bank statement in the mail. When combing through your spending, write down on the side, the expenses you mentioned before, and categorize them as you did when you initially wrote them down. This will fact check your estimates, and be sure that your numbers are realistic. After you excerpt your monthly bills and survival expenses, what’s left? Scan through and begin categorizing these black hole items. Some of your categories may be shopping, dining out, grooming (hair, nails etc.), or even adult beverages. (Gasp!) Sorry guys, wine and beer is not considered a survival expense. However, that doesn’t mean you have to do without them.
Phase 2: Implementing a budget that works for you
After you’ve categorized your black hole items, it’s time to take a look at what, and how much, of those things you would like to keep. Of course, you would like to keep all of it, but is it realistic? Time to give yourself an allowance. This allowance will be the monthly amount you award yourself for these black hole items. I recommend 20-30% of your residual income go towards these luxuries, and the rest goes to your savings. This may seem aggressive, but it will be worth it when you see your debt dwindling, and your residuals rising.