I.
Understand where your money is currently going
a.
Keep all receipts – Use a filing cabinet, file
box, file folder, shoe box or any other appropriate means to file
receipts. Ask for a receipt of every
transaction, even if it is a cash transaction, and file all receipts for later
use. All receipts should be checked
against your bank/credit card records to ensure they have been recorded
correctly (yes, mistakes are still made in recording transactions, even in this
“electronic age”) and to also ensure that no unauthorized transactions are
occurring.
b.
Avoid using cash – This is one of the little
known ways to better track your spending and reduce unnecessary spending. Most people withdraw cash from a bank in
“chunks” of $20, $50, $100 or more and then spend it on miscellaneous items
with little or no tracking of what it is spent on. At the end of the day, week, month or
whatever all of their cash has been spent and they have virtually no idea what
it was spent on. Using a check or credit
card provides a written or electronic record of the expenditure that is much
easier to categorize and track. Minimizing the use of cash is the first
“secret” to good money management.
c.
Record everything you spend money on every day –
There are many software packages available as freeware, shareware or for
purchase online or in stores that can be used to record your purchases (e.g.
Microsoft Money). It is important to
record all purchases, even seemingly small or insignificant ones, to get a full
picture of where your money is currently going.
I use an online banking/brokerage account where all of my checks and
credit card transactions are recorded and I cross-check all transactions
against my receipts to track my spending and to ensure that no unauthorized
activity is occurring in my accounts. If
you don’t have software, or don’t want to avail yourself of it, you can always
use the “old fashioned” method of writing everything down in a notebook or
ledger book.
d.
Categorize your spending – Again, most software
for recording expenditures includes a feature for categorizing your
spending. If you are using a notebook or
ledger make each page a separate category by writing the category at the top of
the page and recording only the expenses for that category on that page. My online banking/brokerage account allows
categorization of expenditures and I use this feature to help understand what I
am spending my money on. It is important
that you develop sufficient categories that you have a place to record most of
your expenditures. Having just a few
categories can result in a large percentage of your spending going into the
“miscellaneous” category which gives you no useful information on where your
money went. Avoid using a
“miscellaneous” category. If you find
that many of your expenditures don’t fit easily into one of your existing
categories, create another category. Appendix A contains a list of the
categories I use for tracking my expenditures.
The more categories and subcategories you have the more likely it is
that you will be able to find a category for each expenditure. However, there is obviously an upper limit to
the number of categories to use because you don’t want every expenditure to be
its own category.
II.
Recognize areas where you can reduce or
eliminate spending (i.e. differentiate a “want” from a “need”)
a.
What is the minimum you need to function – At the most basic level there are
only four things that every human needs:
air, water, food, and shelter.
Obviously none of us live, or want to live, at that most basic level but
keeping that level in mind helps put other “needs” in perspective. For example, unless you live in a nudist
colony most of us “need” some form of clothing, but do we need the latest
designer clothing from the high end boutiques?
The answer to that question for most of us is definitely no. However, for those who design, market, model
or sell the high end clothing the answer may be yes. Each of us is an individual with different
circumstances so only you can determine what the minimum you need to function
is.
b.
What spending can you eliminate – The
second “secret” to good money management is to review your daily, monthly and
annual expenditures, as recorded and categorized in Sections I.c. and I.d.
above, with a critical eye to determine
which expenses can be reduced and which can be eliminated. It is important to repeat this critical
review of expenses regularly as excessive and/or unneeded expenses have a
tendency to creep back into your spending if you don’t constantly weed them
out. I categorize my expenses on a
weekly basis and review them for changes on a monthly basis. I recommend categorizing your expenses at
least monthly and reviewing them for changes at least annually.
c.
Allow for “needed” spending changes but avoid
“unneeded” spending changes – Throughout our lives there are many “needed”
spending changes that occur. For example
as a young adult educational expenses are generally an important “needed”
expense to set the person up for success in the future. Once the person finishes school their
educational expenses should decrease dramatically while other expenses like
relocating for a job, getting married, buying a house, etc. will increase. It is important to recognize that our
“needed” spending changes with time but keep a critical eye open for the
“unneeded” spending that always tends to creep in if we don’t continue to
monitor and control our spending.
d.
Set goals for achieving certain purchases
(deferred gratification) – The third,
and possibly the hardest to follow, “secret” to good money management is
deferred gratification. If you have
something you want, but you can’t currently afford it set it as a “prize” or a
“reward” to get for yourself at some future time when you have reached a
predetermined wealth, income or other target or goal. Don’t pay for things on credit that you can’t
afford. Credit expense (interest paid by
you to others) is a significant drag on wealth building and can derail the best
laid plans.
e.
Avoid impulse buying – Impulse buying is one of
the leading causes for “unneeded” spending.
To help avoid impulse buying I recommend that you write a shopping list
before you go shopping and purchase only what you have written on the
list. Avoid the marketing gimmicks and
sales/peer/child/significant-other/etc. pressure by sticking to a shopping
list. This discipline is one of the best
tricks to staying on a budget.
III.
Develop a budget
a.
Keep it simple – Developing and sticking to a
budget for many people are as difficult as developing and sticking to a
diet. Many people try but few
succeed. I don’t have a good answer for
the diet issue, but for the budget issue my answer is simple: “spend
less than you earn!” That is the fourth “secret” to good money
management. The secret for success
in every budget lies on the spending side.
Most of us can’t control how much we make, but we all can control how
much we spend. Throughout my life, no
matter how much my income has been, I have always lived on less than I have earned. My motto is “It isn’t how much you earn; it is how much you spend that determines
how much wealth you will have at the end of the day.” If you want a simple budget write something
like this: “This month I will not spend
more than 75% of my income.”
b.
Pay yourself first – Always put money away for you. Once you are spending less than you earn put
that extra money to use earning you money.
Open a brokerage account and start investing that money. Of course, part of paying yourself is also
setting aside money for those special “prizes” and “rewards” you have chosen
for hitting your financial milestones, targets and goals. Little rewards along the way will help you
mark progress and stay motivated to continue the journey.
c.
Adjust your budget to pay yourself more – As
your spending decreases and your income increases adjust your budget to say
something more like this: “This month I
will not spend more than 50% of my income”.
Make it a goal to decrease your spend to income ratio month over month
and year over year.
IV.
Open an online brokerage account
a.
There are several online brokerages available (e.g.
E*Trade, Scottrade, TradeKing). I have used
E*Trade (etrade.com) for many years now and I have been very pleased with their
low fees, ease of use and great customer service. Setting up an account is simple and can be
done almost completely online. One of
the many advantages of online brokerage accounts is their low brokerage
fees. For example with E*Trade you pay
$9.99 or less (some trades are free) for each purchase regardless of the size
of the purchase.
V.
Start investing
a.
Put your money to use – Take that money you are
paying yourself from Section III.b. above and start buying securities with it. The
fifth “secret” to good money management is to get started. The younger you are when you get started and
the more you invest consistently the more you will have at the end of the day. In Lesson 2 I will review the three main
investment vehicles and help you understand how each one can be used to help
you build wealth.
Appendix A
A sample list of expenditure categories
A sample list of expenditure categories
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Auto
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· Gasoline
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· Loan
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· Miscellaneous
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· Parking
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· Service
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Bank Fees
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· Overdraft Fee
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· Service Fee
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Becky's
Living Expense
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Cash
Withdrawal
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Charity
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· Trusts
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Childcare
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Clothing
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· Casual
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· Shoes
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· Work
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Crafts
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Credit
Card Pymt
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· Interest
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· Late Fees
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Delivery
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· Air
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· Ground
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· US Postal Service
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Education
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· Board
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· Books
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· Fees
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· Tuition
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Exchange
Fee
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Food
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· Dining Out
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· Groceries
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Gifts
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· Anniversary
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· Birthday
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· Holiday
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Healthcare
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HOA fees
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Home
Owners Insurance
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Home
security
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House
Purchase
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Household
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· Furnishings
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· Homeowner Fees
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· House Cleaning
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· Laundry Services
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· Maintenance
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· Yard Service
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Insurance
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· Auto
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· Health
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· Home/Rent
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· Life
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Investment
Expense
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James'
Living Expense
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Job
Expenses
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· Air
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· Auto/Taxi
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· Dining Out
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· Entertaining
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· Gifts
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· Lodging
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Leisure
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· Books/Mag/News
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· CDs
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· Club/Gym Fees
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· Cultural Events
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· Entertaining
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· Membership Fees
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· Miscellaneous
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· Movies
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· Sporting Goods
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· Subscriptions
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· Toys/Games
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· Video Rental
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LoanPymtsTaxed
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· Mortgage Interest
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· Student Loan Interest
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LoanPymtsUntaxed
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· Auto
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· Auto Interest
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· Late Fees
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· Miscellaneous
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· Mortgage
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· Student Loan
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Medical
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· Dental
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· Doctor
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· Eye care
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· Hospital Fees
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· Miscellaneous
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· Prescriptions
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Miscellaneous
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Misty's
Living Expense
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Office
Supplies
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Personal
Care
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· Barber
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· Spa/Salon
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· Toiletries
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Pet Care
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· Food
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· Grooming
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· Supplies
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· Veterinarian
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Rental
Vehicle
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Savings
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· Christmas
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· Education
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· Home
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· Miscellaneous
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School
Supplies
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Tax
Related
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· Child Support
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· Federal Income Tax
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· Federal Income Tax Prev Year
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· Home Improvement
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· Home Loan
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· IRA Contribution
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· Job Expense
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· Local Income
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· Medicare
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· Miscellaneous
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· Other
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· Property
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· Social Security
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· State Income Tax
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Transfers
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Travel
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Utilities
Electricity
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Utilities
Gas
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Utilities
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· Cable/DigitalTV
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· Cellular
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· Garbage/Recycle
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· Gas/Electricity
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· Internet Service
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· Miscellaneous
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· Public Transportation
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· Telephone
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· Water/Garbage
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Vacation
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· Air/Train/Bus
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· Auto/Taxi
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· Lodging
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