Today is something of a culmination of the first part of the “31 Days” program: it basically ties up all of the goal-setting and evaluation to date into a single document. This document isn’t a set of rules to live by, but a financial picture of who you are and where you can go. Sound exciting? Let’s get started.
Take out a blank sheet of paper, the “time budget” you prepared yesterday, and the approximate hourly wage you calculated earlier. We’re going to use these two pieces to assemble a true budget.
What do I mean by “true” budget? Most of the time when people prepare a budget, it has no connection to their life experiences and their goals. The truth of the matter is that every person is unique, thus every budget should be unique. People fail at following “traditional” budgets because they aren’t aligned to an individual’s lifestyle, goals, and dreams.
The budget you’re about to complete is a “true” budget: you’ve built it yourself, composing it out of your daily life, your hopes for the future, and your dreams for the rest of your life. Most “traditional” budgets expect you to change your life for it; a “true” budget asks only that you don’t forget to plan for your dreams while living your own life.
On the blank sheet of paper, make three columns: one for each budgeted item, one for hours, and one for a dollar amount. We’re going to prepare a monthly budget here, so take each item from the “time budget” prepared yesterday, then multiply that weekly hour number, multiply it by 52 (for the number of weeks in a year) and then divide that by 12 (for the number of months in a year). This is the number of hours of work time in an average month that you’ll devote to each element on your budget.
Now, for the final piece: multiply each hourly amount by your true hourly wage and enter it. This is exactly how much money you’re alloting to spend on each category during the month. For regular bills, this number should be very close to what your monthly bill is; for your extra debt payment and your goals, this is how much you’re going to be setting aside each month for these. The total should add up to a number that is less than your monthly take home salary (remember, you have some extra that you bring home that you use for job-related expenses).
When I first did this, I read through the items and actually shivered. Why? It was the most accurate picture of my financial life that I’d ever seen - and it made it clear to me where I was doing things right and doing things wrong. I had never felt such a connection between a sheet of paper and my life as a whole.
What will it mean for you? Spend some time reading over the sheet carefully and thinking about it. There are countless different conclusions you may draw: maybe you feel that this whole thing is spot-on and is putting you in a position to live your dreams. Maybe you realize how much of your life is spent in the “now” and how little you’re actually spending for the big things tomorrow. Maybe you believed you were planning well for the future, but you see some huge areas for improvement. It’s up to you to figure this out.
Tomorrow, we’ll discuss how to keep track of this budget each month, starting by ensuring that you’re meeting your goals.
Monday, November 24, 2008
Sunday, November 23, 2008
31 Days to Fix Your Finances - Day 11
Yesterday, we figured out exactly how much of your money - and your time - you spend with basic living expenses. From this, we determined what was left - the amount that we can use to pay off our debts and build our dreams.
A great rule of thumb applies here: you can reach your short term goals with debts, but you can’t reach your long term goals with debts. In other words, focus on your short term goals and for your long term ones, pay off your debts first.
Why do it this way? I call it the “dream” factor. Paying off debts isn’t romantic at all, but dreaming about the great things you can do in the future is romantic. Since you’ve defined five short term goals (and plans to execute them) that match your core values and also line up with your long term values, every step towards these short term goals is a step toward success - and living your dreams.
Sit down with a piece of paper and make a list of your five short term goals along with a list of all of your debts; you should already have these ready to go. Every step you take towards your short term goals should be matched with a step towards your long term goals, so you’re going to divide up your money and time investment equally between your goals and your debts.
Now, take the amount of hours you have “left over” after yesterday’s calculations and divide that in half. You’re going to spend half of them on debts and half of them on your short term goals.
It’s important to remember here that these debt payments are extra debt payments; in other words, you’re going to pay an extra amount each month to get the burden of debt off of your shoulders so you can walk freely and confidently into your future.
Why am I dealing with “hours” instead of dollars? For many people, dollars are an abstraction: they have a hard time directly associating money with the work that they do. Money comes in, money goes out, and that’s life. The truth of the matter is that every dollar we make is the result of some amount of time spent doing something for someone else. Time is something we all understand from our earliest days, and these hours are merely something much more tangible to hold onto.
How do I decide which debts to pay first? There is a lot of merit in the “debt snowball” concept, which advocates paying off the smallest debt first. For now, put the entire amount you have allocated for debts next to the smallest debt balance. We’ll worry about dollar amounts tomorrow.
What if I have no debts? If you’re lucky enough to be debt free, you can invest all of your extra money towards your goals. Take that half that you would have been using to pay off debts and apply them to your long-term goals as you see fit.
What about my short term goals? You can probably determine for yourself how to split things up among your short term goals. Look at your plans and decide which ones need more of your working time to make them come true, and which ones need less. Write them down.
Once you’ve figured this out, assemble a new “big picture“ using the one you created three days ago, along with the individual expenses (and the hours you spend on each of them) yesterday. Add in the hour expenditures you created today (including the ones with 0 hours assigned to them), and do a final check to make sure the hours add up to what you figured that you actually work each week.
Sit back and look at this sheet. In some ways, it’s a budget, but it’s something more than that: it’s actually a picture of you. This is what you work for each week, hour by hour. Maybe you work three hours a week so that you can keep your cable turned on, but you only work an hour a week towards a college education for your children. Do you feel comfortable or happy with this? Whether you do or don’t, there are so many things here to think about in terms of how you choose to spend your time.
Tomorrow, we’ll take this “time” budget and convert it all into real dollars - and begin the process of converting all this planning into some real action.
A great rule of thumb applies here: you can reach your short term goals with debts, but you can’t reach your long term goals with debts. In other words, focus on your short term goals and for your long term ones, pay off your debts first.
Why do it this way? I call it the “dream” factor. Paying off debts isn’t romantic at all, but dreaming about the great things you can do in the future is romantic. Since you’ve defined five short term goals (and plans to execute them) that match your core values and also line up with your long term values, every step towards these short term goals is a step toward success - and living your dreams.
Sit down with a piece of paper and make a list of your five short term goals along with a list of all of your debts; you should already have these ready to go. Every step you take towards your short term goals should be matched with a step towards your long term goals, so you’re going to divide up your money and time investment equally between your goals and your debts.
Now, take the amount of hours you have “left over” after yesterday’s calculations and divide that in half. You’re going to spend half of them on debts and half of them on your short term goals.
It’s important to remember here that these debt payments are extra debt payments; in other words, you’re going to pay an extra amount each month to get the burden of debt off of your shoulders so you can walk freely and confidently into your future.
Why am I dealing with “hours” instead of dollars? For many people, dollars are an abstraction: they have a hard time directly associating money with the work that they do. Money comes in, money goes out, and that’s life. The truth of the matter is that every dollar we make is the result of some amount of time spent doing something for someone else. Time is something we all understand from our earliest days, and these hours are merely something much more tangible to hold onto.
How do I decide which debts to pay first? There is a lot of merit in the “debt snowball” concept, which advocates paying off the smallest debt first. For now, put the entire amount you have allocated for debts next to the smallest debt balance. We’ll worry about dollar amounts tomorrow.
What if I have no debts? If you’re lucky enough to be debt free, you can invest all of your extra money towards your goals. Take that half that you would have been using to pay off debts and apply them to your long-term goals as you see fit.
What about my short term goals? You can probably determine for yourself how to split things up among your short term goals. Look at your plans and decide which ones need more of your working time to make them come true, and which ones need less. Write them down.
Once you’ve figured this out, assemble a new “big picture“ using the one you created three days ago, along with the individual expenses (and the hours you spend on each of them) yesterday. Add in the hour expenditures you created today (including the ones with 0 hours assigned to them), and do a final check to make sure the hours add up to what you figured that you actually work each week.
Sit back and look at this sheet. In some ways, it’s a budget, but it’s something more than that: it’s actually a picture of you. This is what you work for each week, hour by hour. Maybe you work three hours a week so that you can keep your cable turned on, but you only work an hour a week towards a college education for your children. Do you feel comfortable or happy with this? Whether you do or don’t, there are so many things here to think about in terms of how you choose to spend your time.
Tomorrow, we’ll take this “time” budget and convert it all into real dollars - and begin the process of converting all this planning into some real action.
31 Days to Fix Your Finances - Day 10
Yesterday, we took a look at our living expenses and tried to find places where we could easily make some reductions. The goal was not to make hard cuts, but to find ways to reduce spending that fit within our lifestyles.
Today, we want to see how this revised personal expense balance fits within our overall life plan. Pull out the overall plan you built a few days ago along with the estimates you calculated yesterday. You’ll notice that your older plan is calculated in terms of hours, which is a great way to see what your expenses are really costing you, so let’s do the same conversion for your expenses.
Take out a fresh sheet of paper and make three columns on it, with the left one taking up about half of the page and the two on the right taking up about a quarter of the page each. In the first column, write each expense down from your sheet from yesterday, then in the second column, write the amount per week that you calculated yesterday. If you skipped that part, just take your annual estimate for each item and divide it by 52.
Got that? Now, in the third column, divide each second column number by the true hourly wage that you calculated earlier. This is the number of hours that you spend working each week to pay for that expense.
For me, this exercise really opened my eyes. I found lots of places where I felt almost guilty for what I was doing - things such as working eleven hours a week just for my entertainment expenses. I was working a lot every week just for silly little things, when that time could be spent working for something bigger, something that reaffirms my life.
Once you’ve converted all of these dollar amounts to hours, total them up. Unless you have some major spending problems, this total should be less than your total hours you spend working in a given week (which you figured up earlier in the week). Ideally, it’s around 60% of the total hours in a week (mine is about 55% right now, but when I first did this, it was at about 92%), but you don’t really need to worry unless it’s pushing 95% or so. If it’s over 100%, you need to make some cuts in your spending or you will never get ahead, as your spending will grow as your income grows.
At this point, it might be useful to start a “real” balance sheet. Take the overall plan and recopy it with the same items as before, but don’t move the numbers over. Instead, just put in the total number of hours in a week and the total number of hours you spend on living expenses. The difference between the two is what you will use to begin building your future.
What if I’m left with only a 10% sliver? How can I “build my dreams” with that? First of all, even a small amount of money can get you started and, with the power of compound interest, can build up quite well over time. Second, this process of evaluation is not a one-time process. It’s useful to go through this on an annual basis, just to re-evaluate where you’re at and where you’re headed. Once you get started and watch things begin to build to fulfill your dreams, the feeling is often so powerful that you find new places to trim your spending - you pay off debts, cut down on your nonessential purchases, and so on.
Tomorrow, we’ll look at what to do with that remaining fraction.
Today, we want to see how this revised personal expense balance fits within our overall life plan. Pull out the overall plan you built a few days ago along with the estimates you calculated yesterday. You’ll notice that your older plan is calculated in terms of hours, which is a great way to see what your expenses are really costing you, so let’s do the same conversion for your expenses.
Take out a fresh sheet of paper and make three columns on it, with the left one taking up about half of the page and the two on the right taking up about a quarter of the page each. In the first column, write each expense down from your sheet from yesterday, then in the second column, write the amount per week that you calculated yesterday. If you skipped that part, just take your annual estimate for each item and divide it by 52.
Got that? Now, in the third column, divide each second column number by the true hourly wage that you calculated earlier. This is the number of hours that you spend working each week to pay for that expense.
For me, this exercise really opened my eyes. I found lots of places where I felt almost guilty for what I was doing - things such as working eleven hours a week just for my entertainment expenses. I was working a lot every week just for silly little things, when that time could be spent working for something bigger, something that reaffirms my life.
Once you’ve converted all of these dollar amounts to hours, total them up. Unless you have some major spending problems, this total should be less than your total hours you spend working in a given week (which you figured up earlier in the week). Ideally, it’s around 60% of the total hours in a week (mine is about 55% right now, but when I first did this, it was at about 92%), but you don’t really need to worry unless it’s pushing 95% or so. If it’s over 100%, you need to make some cuts in your spending or you will never get ahead, as your spending will grow as your income grows.
At this point, it might be useful to start a “real” balance sheet. Take the overall plan and recopy it with the same items as before, but don’t move the numbers over. Instead, just put in the total number of hours in a week and the total number of hours you spend on living expenses. The difference between the two is what you will use to begin building your future.
What if I’m left with only a 10% sliver? How can I “build my dreams” with that? First of all, even a small amount of money can get you started and, with the power of compound interest, can build up quite well over time. Second, this process of evaluation is not a one-time process. It’s useful to go through this on an annual basis, just to re-evaluate where you’re at and where you’re headed. Once you get started and watch things begin to build to fulfill your dreams, the feeling is often so powerful that you find new places to trim your spending - you pay off debts, cut down on your nonessential purchases, and so on.
Tomorrow, we’ll look at what to do with that remaining fraction.
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