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.
Sunday, November 23, 2008
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.
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.
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