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.
Sunday, November 23, 2008
Thursday, November 20, 2008
31 Days to Fix Your Finances - Day 8
Yesterday, we worked out exactly how the hours you spend at work break down into three areas: your living expenses, your debts, and your dreams. Since this was only a thumbnail sketch, today we’re going to look more carefully at the breakdown in living expenses.
Let’s get started. Take out a sheet of paper and start another list. This time, we’re listing every expense you have in a given year that do not directly relate to your employment. We’re not going to worry about amounts yet, just a list of all of the things that we spend money on in a given month. Here’s a sampling of the expenses that I listed when I did this exercise:
> Rent
> Electricity
> Telephone
> Cable
> Student loans - minimum payment
> Health Insurance
> Car Insurance
> Clothing
> Food
> Entertainment - Books
> Entertainment - Music
Spend some time thinking about this. What do you spend money on each year? House insurance? Christmas gifts? Household items? Car repair? Home decor? Toiletries? Just keep listing things as you think of them. It might be useful to leave this list out somewhere you can see it and add things as you think of them. Don’t worry about amounts yet; we’ll worry about those in a bit.
Now, let’s figure how much you spend on each item in a given year. For the amounts you know on a shorter timeframe, multiply them out. For amounts you don’t know, use some estimation over a shorter timeframe (and estimate on the high side) and multiply it out. The point is to get a rough thumbnail sketch of what you spend in a year on various things. Note that we’re not making any value judgements yet; we’re merely trying to see what’s there.
This will take some time, and during that time, think about each of these expenses a little. Do they bring you joy when you look at them now? Do they really feel essential to your life, or when you think about them, do you feel like you’d be better off if you spent money on the list of goals you created earlier this month?
When you’re done with this list, total up everything. Then calculate 10% of that and add it to the bottom, labeled “incidentals.” Add that into the total. That number is roughly what you spend on your living expenses in a given year. You can divide it by 12 to see how much it is a month, then divide it by 52 to see how much it is in a week.
Now, let’s see how many hours you work in a week just to meet these expenses. Take the weekly amount you just calculated and divide it by your true hourly wage. A typical American usually winds up with a rather large number here.
Spend some time meditating on this - you spend that many hours a week at work just for the expenses you listed. What does that mean? What could you do with your life - with your future - if you trimmed away some of the extra fat? Your debt could be gone - and you could be working towards a better and brighter future for yourself.
Let’s get started. Take out a sheet of paper and start another list. This time, we’re listing every expense you have in a given year that do not directly relate to your employment. We’re not going to worry about amounts yet, just a list of all of the things that we spend money on in a given month. Here’s a sampling of the expenses that I listed when I did this exercise:
> Rent
> Electricity
> Telephone
> Cable
> Student loans - minimum payment
> Health Insurance
> Car Insurance
> Clothing
> Food
> Entertainment - Books
> Entertainment - Music
Spend some time thinking about this. What do you spend money on each year? House insurance? Christmas gifts? Household items? Car repair? Home decor? Toiletries? Just keep listing things as you think of them. It might be useful to leave this list out somewhere you can see it and add things as you think of them. Don’t worry about amounts yet; we’ll worry about those in a bit.
Now, let’s figure how much you spend on each item in a given year. For the amounts you know on a shorter timeframe, multiply them out. For amounts you don’t know, use some estimation over a shorter timeframe (and estimate on the high side) and multiply it out. The point is to get a rough thumbnail sketch of what you spend in a year on various things. Note that we’re not making any value judgements yet; we’re merely trying to see what’s there.
This will take some time, and during that time, think about each of these expenses a little. Do they bring you joy when you look at them now? Do they really feel essential to your life, or when you think about them, do you feel like you’d be better off if you spent money on the list of goals you created earlier this month?
When you’re done with this list, total up everything. Then calculate 10% of that and add it to the bottom, labeled “incidentals.” Add that into the total. That number is roughly what you spend on your living expenses in a given year. You can divide it by 12 to see how much it is a month, then divide it by 52 to see how much it is in a week.
Now, let’s see how many hours you work in a week just to meet these expenses. Take the weekly amount you just calculated and divide it by your true hourly wage. A typical American usually winds up with a rather large number here.
Spend some time meditating on this - you spend that many hours a week at work just for the expenses you listed. What does that mean? What could you do with your life - with your future - if you trimmed away some of the extra fat? Your debt could be gone - and you could be working towards a better and brighter future for yourself.
Wednesday, November 19, 2008
31 Days to Fix Your Finances - Day 7
During this past week, we identified our primary values and used these to create clear goals and plans that derive from these values. Then, we spent some time discovering what our work time is actually worth. Today, we’re going to combine these two together.
If you’ve been following the plan, you’re probably working on the numbers for your plans right now. We won’t evaluate them yet (after all, you’ve got a few days to go before you have some real numbers), but you should realize that you’re going to have to save some money to meet these goals.
The big secret, though, is the realization that you can in fact work for your dreams instead of working just to get by. Yesterday, we calculated our true hourly wage, so you know how much you’re making for each hour you’re involved with work-related tasks. Let’s transform this hourly wage into something that has more meaning.
Take out a new sheet of paper and list your ten goals on it. Today, we’re going to make a framework that will enable you to go to work with renewed vigor, because you’ll see the connection directly between your time at work and your dreams.
Under these goals, make a list of each of your debts as well. Part of the journey to your dreams is paying off these debts, so we want to put them each on the list, too.
Under that, add one last item: living expenses. Obviously, even as you work towards your dreams, you’ll still need to cover your daily expenses, such as electricity, food, water, and whatever else is fundamentally important to you.
At the very bottom, write TOTAL and then over on the far right, write the total amount of hours you work in a week that you calculated the day before yesterday.
What we’re going to do is see how many hours we can spend at work each week on each of these items. Once we have this first draft written, you can use it as a life baseline until we refine it later on in the month.
So let’s get started! First thing, until you’re sure how your life will be rebalanced, include 60% of the total hours under the item “living expenses.” For example, let’s say your total hours for a week is 80. You should then include 48 hours next to the living expenses. This may need to be more; we’ll evaluate it more carefully in the next few days.
Now, let’s handle the debts. If you have debts, you should spend 25% of your hours on paying off the debts. For example, if you have 80 hours, you should figure that 20 of them should be used on paying off debts. Note that this is extra debt payments; your basic minimum debt payments are included in the living expenses. When (or if) you have no debts, all of the time going into your debts can go straight to your dreams.
The remaining 15% should be assigned in equal pieces to your dreams. I had 12 hours left, so I gave 1.2 hours to each of my dreams.
So, what’s the point? There are two points. First, if you multiply your hourly rate by the amount assigned to each element, that’s how much you can spend each week on that element. If you’re thinking that this is something like a budget, you’re right in a way, but rather than a list of month-to-month expenses that demand things of you, this is a “dream budget” - a device that lets you follow your goals to achieve your dreams.
Second, it lets you find real goals in your work. This is the truly powerful part of this. So often, we wake up in the morning and trudge into work wishing we were doing anything else. If you realize that some portion of your day is spent working specifically for your dream, it becomes easier. For me, the hardest part of a day is getting ready in the morning; I’d much rather sit down with a cup of joe and check my email than take a shower, get dressed, and take my son to daycare. So for me, the first hour of a given day is an hour I’m working towards one of my goals. While I’m showering or out in the truck on the way to daycare, I remind myself over and over that I’m working solely for the purpose of one of my dreams. I imagine that dream and somehow I feel better about it.
There are two vital lessons that this exercise teaches. First, the various aspects of your life are all connected: your work, your pay, your dreams, and your goals. They’re all tied together in one big picture. Many people often compartmentalize these things and fail to see how they all relate to one another.
Second, it reveals that you can directly connect the work you do every day to your dreams. This is the real power of the exercise, I think. Every single day you go into work, you can tie some of your least favorite tasks directly towards achieving a life goal. It can be the parts that you like the least, or it can be the commute. Just pick a portion of it and, while you’re doing it, remind yourself that you’re doing this action so that you can live in that beautiful house or so that you can travel to Italy with your wife.
Tomorrow, we’ll start breaking this picture down piece by piece, starting with the living expenses. The goal is to create a picture of your life, with the living expenses as merely the frame around a beautiful picture of your dreams.
If you’ve been following the plan, you’re probably working on the numbers for your plans right now. We won’t evaluate them yet (after all, you’ve got a few days to go before you have some real numbers), but you should realize that you’re going to have to save some money to meet these goals.
The big secret, though, is the realization that you can in fact work for your dreams instead of working just to get by. Yesterday, we calculated our true hourly wage, so you know how much you’re making for each hour you’re involved with work-related tasks. Let’s transform this hourly wage into something that has more meaning.
Take out a new sheet of paper and list your ten goals on it. Today, we’re going to make a framework that will enable you to go to work with renewed vigor, because you’ll see the connection directly between your time at work and your dreams.
Under these goals, make a list of each of your debts as well. Part of the journey to your dreams is paying off these debts, so we want to put them each on the list, too.
Under that, add one last item: living expenses. Obviously, even as you work towards your dreams, you’ll still need to cover your daily expenses, such as electricity, food, water, and whatever else is fundamentally important to you.
At the very bottom, write TOTAL and then over on the far right, write the total amount of hours you work in a week that you calculated the day before yesterday.
What we’re going to do is see how many hours we can spend at work each week on each of these items. Once we have this first draft written, you can use it as a life baseline until we refine it later on in the month.
So let’s get started! First thing, until you’re sure how your life will be rebalanced, include 60% of the total hours under the item “living expenses.” For example, let’s say your total hours for a week is 80. You should then include 48 hours next to the living expenses. This may need to be more; we’ll evaluate it more carefully in the next few days.
Now, let’s handle the debts. If you have debts, you should spend 25% of your hours on paying off the debts. For example, if you have 80 hours, you should figure that 20 of them should be used on paying off debts. Note that this is extra debt payments; your basic minimum debt payments are included in the living expenses. When (or if) you have no debts, all of the time going into your debts can go straight to your dreams.
The remaining 15% should be assigned in equal pieces to your dreams. I had 12 hours left, so I gave 1.2 hours to each of my dreams.
So, what’s the point? There are two points. First, if you multiply your hourly rate by the amount assigned to each element, that’s how much you can spend each week on that element. If you’re thinking that this is something like a budget, you’re right in a way, but rather than a list of month-to-month expenses that demand things of you, this is a “dream budget” - a device that lets you follow your goals to achieve your dreams.
Second, it lets you find real goals in your work. This is the truly powerful part of this. So often, we wake up in the morning and trudge into work wishing we were doing anything else. If you realize that some portion of your day is spent working specifically for your dream, it becomes easier. For me, the hardest part of a day is getting ready in the morning; I’d much rather sit down with a cup of joe and check my email than take a shower, get dressed, and take my son to daycare. So for me, the first hour of a given day is an hour I’m working towards one of my goals. While I’m showering or out in the truck on the way to daycare, I remind myself over and over that I’m working solely for the purpose of one of my dreams. I imagine that dream and somehow I feel better about it.
There are two vital lessons that this exercise teaches. First, the various aspects of your life are all connected: your work, your pay, your dreams, and your goals. They’re all tied together in one big picture. Many people often compartmentalize these things and fail to see how they all relate to one another.
Second, it reveals that you can directly connect the work you do every day to your dreams. This is the real power of the exercise, I think. Every single day you go into work, you can tie some of your least favorite tasks directly towards achieving a life goal. It can be the parts that you like the least, or it can be the commute. Just pick a portion of it and, while you’re doing it, remind yourself that you’re doing this action so that you can live in that beautiful house or so that you can travel to Italy with your wife.
Tomorrow, we’ll start breaking this picture down piece by piece, starting with the living expenses. The goal is to create a picture of your life, with the living expenses as merely the frame around a beautiful picture of your dreams.
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