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.
Believe it or not, you’re almost done creating your budget. See that wasn’t so bad. Now it’s time to put it to the test. Next time you get paid put your dedicated savings amount out of your checking account, and put it into a savings account or any separate account. The point of this is to only the spend the amount you’ve allowed for your bills, survival expenses and choice luxuries. Now during this time, you are going to see that your checking account is going to feel “dangerously” low. This is normal, and means you’re doing it right. Your residual income, is safe and sound, and away from the “black hole,” which means you will have to get resourceful. If you have the urge to go shopping, then time to look in the closet and find the things that have been pushed to the back of the closet. Trust me, as long as it fits, you’ll feel like you bought it for the first time all over again. If you have the urge to dine out, then time to look at the groceries you bought, Google some new recipes, and have restaurant night indoors. I think you get the idea!
Phase 3: Set your goals
This step is very important, and for some reason overlooked by some. Saving for the sake of saving is good, but can become derailed very quickly if it is not for a purpose. When purpose is involved, each dollar saved now becomes motivation for the next. Whether it’s for a new car, getting rid of debt, or to start an emergency fund, writing these goals down and reminding yourself of them when those spending cravings come your way, is extremely helpful. When setting these goals, give yourself short term goals as well. Do the math, and figure out how much you should have saved in the next 5 months, if you stick to your budget. This can be one of your short term goals. Each short term goal met, will give you that internal “pat on the back”, that what you’re doing is working and getting you that much closer to your end result.
In the Red
Red is one of my favorite colors, but not when it comes to finances. Your income is less than your mandatory expenses. Let’s not panic, instead let’s figure out why. Other than rent or mortgage, what is your highest expense? If the primary driver is debt, then have you ever tried refinancing? Interest rates are at an all-time low, and could be utilized for your benefit.
What about monthly bills that may not necessarily be necessary? Do you have a cable bill? If so, could you get your favorite shows through a streaming service such as Netflix or Hulu Plus? If you still have shows that you like to watch live, what about making it a night out at a friend’s house? You already talk about the show together anyway, see if they’re willing to have you over, so you guys can watch it together. The money you save from your cable bill, use $15 to bring over a pizza, as a thank you. Everyone wins.
Is your job paying you enough for what you do? Google the average salary for your position, in your city. Is your salary below average? It may be time to look for other opportunities, and move on to the next step in your career, whether that’s in or outside of your current company.
When is the last time you compared your insurance rates to other providers? At the risk of sounding like Flo, from Progressive, I really love discounts. Most insurance companies offer several; all you have to do is ask. You might be surprised how much you’re able to save.
Is living on your own, a bit more expensive than you anticipated? Try living with roommates to cut the individual cost down. Privacy is great, but it can be expensive. And if all else fails, then see if you can move back in with your folks, until your financial situation improves. There’s no shame in getting yourself together. Sometimes we need to take one step back, to move two steps forward.
Being upside down on our finances, is never a great feeling. However, acknowledging the issue, and implementing a game plan to get out if it, is the only way for it get better.
I hope you found this information useful, and will look for installment 2 next month, November 2016.
Enjoy the rest of your day!