Budgeting

I post a lot about women on this blog. The main reason I do this is because it is one of the areas of my life I am focusing most on right now. I am involved in the pick up community, I am going to a counselor on a regular basis to learn how to better compromise in relationships and I am reading everything I can soak up on human sexuality. I am in my mid 30s and eventually want to be married and have a family before I am too old. So I am putting a lot of effort into this area of my life.

That being said, I have a lot of other interests and focuses. One of the biggest, especially in the past, has been finances and investing. I now have this area of my life well under control but had to learn some lessons along the way. I will share a few of them now.

First off, before you can really know your discretionary income, you need to determine your spending habits. As humans with lots of financial distractions in life, there is only one real way to know what you actually spend in a given month. To do that, you need to analyze your income vs. spending.

Several years ago, for three months out of my life, I tracked my every expenditure. I carried a small notebook and pen around with me and trained myself to track my expenses. If I bought a soda for 50 cents, I wrote it down. If I paid a bill, I wrote it down. If I blew $100 on a date, I wrote it down. If I wasted $1 on a lottery ticket, I wrote it down. If I bought a beer for a buddy, I wrote it down.

I tracked my every expense for 3 months to capture an average trend. I then created a spreadsheet where I broke my finances down into categories (utilities, rent, gas, insurance, groceries, restaurants, car, rent, cable, electric, phone, etc.). I had my bi-weekly income at the top of the spreadsheet and then I subtracted categories of expenses from my income in two columns (to match each bi-weekly pay day).

(This was in the days before quicken, quick books or any of the other financial management tools were popular. These probably do a much better job at tracking budget than spreadsheets but once I created my spreadsheet and tweaked it to how I wanted it, I have stayed with it)

What I quickly realized is that I wasted a bunch of money on junk like cable channels I never watched, eating out at restaurants, miscellaneous stuff I bought when I was at the store and on leisure spending like going to the bars. In fact, I realized I was spending more than I made which suddenly brought to light why I had credit card debt.

Now that I knew my spending habits, I created a budget. Consider a budget nothing more than a plan of how to spend your money.

I decided to rework my finances. I refinanced my vehicle for a cheaper loan, dropped my cable, created limits on what I would spend each month at restaurants/bars and cut out a lot of nice-to-haves. It was pretty obvious what I had to do to get my finances in check once I saw my spending habits staring me in the face. I did what I had to do to get my earnings to debt as a positive ratio.

From there, I used my positive cash flow to pay off my credit cards and student loans, focusing on the highest percentage interest rates first. As I paid off a debt, I took the money I was paying towards that debt and rollled it into the next debt. As I got raises, I used the extra money to pay off loans.

Within a year, I was completely debt free and had money to pay myself in the form of a 401K and investments.

Jump forward several years.... I am now a high earner with a lot of discretionary income. Even though I don't live paycheck to paycheck anymore, I still use that same spreadsheet to track my budget and discretionary spending. I update the spreadsheet on a regular basis to capture my current expenses.

This has allowed me to keep my "stupid" expenses to a minimum and given me the insight into what I can save and spend each month.

To benchmark myself against the average person, I found some budget guidelines that "they" put together. I try to live by or beat these guidelines each month.

The guidelines that "they" established are:

Housing = No more than 28% of income
Savings = 12%
Car = 8%
Insurance = 5%
Total Debt = 36%

There are more guidelines established related to schooling, kids, etc. but these are the ones that related to me. You can easily use Google to find guidelines that relate to your life situation.

Bottom line is track your expenses, compare them to what you earn, adjust your expenses so that you are making more than you spend and pay off your debt. And don't forget to pay yourself in the form of 401K, a savings account, bonds or IRAs.

In future posts, I will talk more about potential sources of income, investing and being an entrepreneur.