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.
Sunday, November 23, 2008
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.
31 Days to Fix Your Finances - Day 9
Now that you’ve built a list of your non-work expenses, you’ve probably realized that you do spend a lot of money on frivolous things. Don’t worry, I’m not going to say “STOP BUYING FRIVOLOUS THINGS!” Everyone knows that frivolous expenses are the things that eat away at your long-term plans - and everyone keeps buying them anyway.
Instead, you should evaluate the areas where you feel comfortable cutting down. In some ways, it is like a diet: if you diet too strongly, it won’t be long before you’re laying prostrate on the couch, Sara Lee poundcake in one hand and a 20 ounce bottle of Mountain Dew in the other. Instead, dieting works when you make little choices throughout the day, like not super sizing a meal or choosing to take the stairs.
Let’s get started. Take out that list of expenses that you made yesterday along with a blank sheet of paper. What you’re going to do is go through the entire list and think about each item a little bit, then note how much you think you can save per week on that item.
Here’s what you do. Copy the first item to the new piece of paper, then close your eyes for one minute and think about that item. Do you spend too much on it? Is there a way you could easily cut down on that expense without really feeling the crunch? Could you eliminate or drastically reduce that expense without feeling too bad about it? Keep in mind why you’re doing this - you’re trying to find money with which you can chase your dreams.
Here are ten quick suggestions about how to cut various kinds of expenses with minimal impact; if you want more, spend some time hanging around The Simple Dollar and you’ll find plenty.
> Conserve energy by installing energy efficient items like CFLs, programmable thermostats, and intelligent power strips.
> Buy fewer books by spending more time at your local library. Whenever I have a bad desire to go to the bookstore, I just consciously go to the library instead almost all of the time.
> Buy less music by listening to music in your collection that you’ve never spent the time to appreciate. Instead of buying a new CD, find an older one that you only listened to once or twice and put away.
> Buy fewer clothes by selecting items that go well with much of the rest of your wardrobe. A modular wardrobe creates the appearance of a lot of clothes without the need for a large clothing bill.
> Eat out less by buying a good cookbook that starts out at a beginner’s level and stocking your kitchen well.
> Reduce insurance by calling your insurance carrier and looking at raising your deductible.
> Reduce your credit card payments by calling your credit card company and requesting a reduction in your interest rate.
> Reduce your bank fees by looking into no-fee or low-fee options at your bank - or at other banks.
> Reduce your cable bill by eliminating unwatched premium channels or looking at other basic package options - or even consider eliminating it altogether.
> Reduce your car payments by ending the leasing cycle and buying late model used cars instead.
For each item that you decide you can effectively reduce the cost of, estimate realistically how much you might save in a year doing this. Estimate your savings low; you’re always better off with flexibility.
Once you’ve done these estimates, rewrite your overall cost list with the spending reductions calculated in, then divide each element by 52 to see how much that is per week. You should see a decent reduction in your living expenses. What will that translate into? More money that you can spend on your dreams - and fewer years until you get there.
Tomorrow, we’ll see how much time we’ve saved - and what that means for the bigger picture.
Instead, you should evaluate the areas where you feel comfortable cutting down. In some ways, it is like a diet: if you diet too strongly, it won’t be long before you’re laying prostrate on the couch, Sara Lee poundcake in one hand and a 20 ounce bottle of Mountain Dew in the other. Instead, dieting works when you make little choices throughout the day, like not super sizing a meal or choosing to take the stairs.
Let’s get started. Take out that list of expenses that you made yesterday along with a blank sheet of paper. What you’re going to do is go through the entire list and think about each item a little bit, then note how much you think you can save per week on that item.
Here’s what you do. Copy the first item to the new piece of paper, then close your eyes for one minute and think about that item. Do you spend too much on it? Is there a way you could easily cut down on that expense without really feeling the crunch? Could you eliminate or drastically reduce that expense without feeling too bad about it? Keep in mind why you’re doing this - you’re trying to find money with which you can chase your dreams.
Here are ten quick suggestions about how to cut various kinds of expenses with minimal impact; if you want more, spend some time hanging around The Simple Dollar and you’ll find plenty.
> Conserve energy by installing energy efficient items like CFLs, programmable thermostats, and intelligent power strips.
> Buy fewer books by spending more time at your local library. Whenever I have a bad desire to go to the bookstore, I just consciously go to the library instead almost all of the time.
> Buy less music by listening to music in your collection that you’ve never spent the time to appreciate. Instead of buying a new CD, find an older one that you only listened to once or twice and put away.
> Buy fewer clothes by selecting items that go well with much of the rest of your wardrobe. A modular wardrobe creates the appearance of a lot of clothes without the need for a large clothing bill.
> Eat out less by buying a good cookbook that starts out at a beginner’s level and stocking your kitchen well.
> Reduce insurance by calling your insurance carrier and looking at raising your deductible.
> Reduce your credit card payments by calling your credit card company and requesting a reduction in your interest rate.
> Reduce your bank fees by looking into no-fee or low-fee options at your bank - or at other banks.
> Reduce your cable bill by eliminating unwatched premium channels or looking at other basic package options - or even consider eliminating it altogether.
> Reduce your car payments by ending the leasing cycle and buying late model used cars instead.
For each item that you decide you can effectively reduce the cost of, estimate realistically how much you might save in a year doing this. Estimate your savings low; you’re always better off with flexibility.
Once you’ve done these estimates, rewrite your overall cost list with the spending reductions calculated in, then divide each element by 52 to see how much that is per week. You should see a decent reduction in your living expenses. What will that translate into? More money that you can spend on your dreams - and fewer years until you get there.
Tomorrow, we’ll see how much time we’ve saved - and what that means for the bigger picture.
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