Hello 2023! It is that time of year (the new beginning) where we all start a new diet, workout more, and make a promise to spend more time with our families. But how many of you have considered adjusting your budget and spending habits? Well, if you have not considered, you really should – it is time for you to keep and invest more of your hard-earned money. If you want to watch this type of information rather than read it, then head to my new youtube channel at this link! https://www.youtube.com/channel/UCVEkJtEyDYS9GCLGEfLJEQQ
Why you need to understand this: We are not Congress and we need to make sure we have more money coming into our bank accounts than what is going out. After all, we don’t have access to a money printing machine… and if you end up spending more than you earn, then you obviously will deplete savings and potentially go into unnecessary debt. Speaking of debt, we need to avoid excess debt (credit cards, car payments) because “interest” means you are paying more than $20 for that $20 pizza when you use a credit card and decide you’ll just pay it off next month after the credit card company applies their interest rate. If you do need to use a credit card or take out a loan to cover an emergency or car, then try to limit the amount you are borrowing. Think about it, if you buy a $25,000 car at a 3% interest rate and after a sales tax of around 7% , you are actually paying closer to $30,000 by the time the term of the car loan is up (based on a 72 month loan term). It is time to stop giving your money away and lining someone else’s pockets with your hard-earned money.
Making Your Budget
Get out a piece of paper and a pen right now so you can start planning your 2022 budget. Here is what I want you to do, write down the following details about your finances (you can use guesstimated numbers). First, write down how much money your household makes per month (after taxes). Next, write down when you get paid weekly, bi-weekly or monthly – this is important to know because yes you may make enough money per month, but when are your expenses due versus when you actually get paid. It’s important to know these things so you don’t have to use a credit card or risk over drafting your bank account.
Without looking at a bank statement, I want you to write down how much do you think you spend per month. Make sure to consider all of the necessary expenses you might have, like rent/mortgage, utilities, internet, phone bill, car loan, gas, groceries, fun money. Again, these can be guesstimates and we are doing this exercise to see how well you keep track of your expenses and if you know where your money is going.
Now, I want you to look at your most recent bank statement to find out if your guesstimates were close or way off! How much was everything actually? I bet you noticed you have some frivolous purchases…. these types of purchases can kill your budget. Trust me you do not need that $6 latte every morning. Instead, buy coffee grounds and creamer and take the time to make your coffee at home. This will help save you around $1,560 a year [ ($6 x 5 days a week) x 52 weeks = $1,560]. Okay, so no more expensive lattes, what other expenses can you cut out that you don’t “need”? Maybe you eat out at restaurants or fast-food to frequently, buying groceries cannot only save you money, but it can help you eat healthier foods. A lot of your budget is going to focus on cutting out thesaze “frivolous” expenses that really just cause you to burn your hard earned cash. So after cutting those frivolous expenses how much will you be spending each month? I bet you noticed a big difference, and all of that additional money can go towards other finance goals you should have (saving, retirement, vacation, etc.).
Here is how I actually budget my money (Hypothetical numbers are used below)
After taxes, before bonuses or any side hustle income, let’s say you bring home per month $4,000. From there write out what the necessities are and see what percentage of my income is being allocated there. After necessities, I pay myself by investing or saving money. Only after paying for necessities and investing a fixed amount do I consider spending money frivolously – and you will notice things like Netflix are included as a frivolous expense, because it is not treated as a necessity.
- Necessities (are about 46%): House/rent, groceries, car payment, gas, utilities, internet, phone bill, etc.
Mortgage is $1,150. Groceries $200. Gas $200. Cell Phone $85. Car Insurance $60. Utilities $100. Internet $50.
- Investing (aim for 24% at the least): Roth IRA, Saving.
Roth IRA $500. Saving $450-500.
- Frivolous (I aim for 15% at the most): Netflix, Hulu, Disney, Dinner, Xbox/Video Games.
Entertainment $250 (hiking trips). Dining out $250. Subscriptions $100 (Netflix, Xbox, etc.).
- Periodic, Quarterly, Unexpected Expenses
Save separately for periodic expenses like: oil changes, HVAC servicing, dental and medical copays. Once this portion of the budget reaches a fixed amount (let’s say $1,000), then start putting any excess money into investing and saving category to beef that up as much as possible.
Those expenses listed above make the budget hit “zero”, meaning that each dollar is being utilized and not creating debt. And as you can see you can still have fun, you can utilize $500 to travel and go out. You can also invest & save nearly $1,00 a month – that is huge and will set up a nicely funded savings account and retirement plan.
Budgeting Tip: To make tracking your budget easier write it down on a piece of paper, create a fancy spreadsheet or download a user friendly budget app on your phone – you need to do this so your money is on your mind and not just being thrown out the window. Round up on your expenses (to be safe). After necessities make sure you pay yourself “first”.
Savings: You should try to save up enough money to cover 3-6 months expenses. That way if you lose your job or some other hardship comes up, you can cover the expenses while you get back on your feet. It is easier said than done I know, but cutting out frivolous expenses can save you $500 a month, and if you put that aside for 12 months you’ll have $6,000.
House/Down Payment: I firmly believe everyone should have a goal to own a home rather than rent. A home is a great asset that you can treat as a high-yield savings account that one day you can cash out if you so choose to ever sell your home.
Retirement: Start investing for retirement ASAP. If you put $500 a month into a ROTH IRA for 30 years (and just simply invest in the S&P500 10% average ARR), then you could have approximately $1,130,243. Nothing glamorous about it and no lottery ticket needed. Just consistent investing.
Fun Money: This is something everyone should have, fun money. But do not let your fun money get out of control. Try to limit it to 10-15% of your take home pay per month. Let’s say you make $60,000 a year and after taxes your take home pay is approximately $1,800 per bi-weekly paycheck or roughly $3,600 (2 being the normal pay periods per month). This means your fun money is $360!!! You can have a lot of fun with that amount of money, you can save or invest it, or you can put it into separate money account for a vacation or a bigger “fun” purchase.
- Know how much money you are making each month
- Know all of your expenses.
- Make sure your income is greater than your expenses
- Cut out frivolous spending habits (you don’t need Starbucks every day, make coffee at home).
- Save for that rainy day expense
- Get yourself a house
- Invest for retirement as soon as you have the means to do so.
- Once all of those bases are covered, remember to have some fun.
Thanks for stopping by,
Disclaimer: My posts are from my personal experiences and I do not provide tax, investment, or financial services. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.