Sunday, December 6, 2009

Spending Less Than You Earn

Not very much in a nutshell - as I originally titled this post when publishing it on about 2 years ago.

We've all heard about getting rich slowly techniques. The key point in trying to do so is spending less then you earn. Once you have achieved that, you can start eliminating debt, growing your savings; start investing and possibly some day get rich.

At the time I initially wrote this post, without delving into my personal story, before generalizing my spread sheets, I thought it might be proper to lay out in a simple way what it is we do to spend less than we earn - and thus meet our goals and live richly.

Before you plan and implement what I suggest here, imagine spending a couple of days a month living like the poorest man in your neighborhood. Imagine you have no money for the next couple of days and you need to spend the last 100$ you have in your pocket to stock up for basic things you and your family can survive on. For us, this means always having piles of the cheapest rice and pasta. If we don't have enough money to buy a thing, we can still cook some white rice. Like the title says, I'm fiscally concerned.

Now start asking yourself some questions about what you earn, and how it is spent:

  1. Write down all of the expected annual income your family makes, and divide it by 12 regardless of the month to month fluctuations due to number of working days or other variables. This sum should include the amounts you get after tax deductions.
  2. Write down all of the recurring expenses you cannot control. Including monthly-quarterly-yearly bills. This includes home (mortgage or rent),cars' license plate renewals, average cash withdraws from ATM, loan payments, existing credit debt payments (above minimum - enough to pay off someday). This does not including any items for which you go to a store for, or which you can choose to skip for months. Again, reach a yearly sum and divide it by 12.
  3. Subtracting the monthly recurring expenses from the average monthly expected income - the remainder should be considered the living expenses you still have some control over. This is the sum where we will exercise our flexibility. I will refer to this sum as "available flexible living sum", or "the living sum".

I'll pause here and stress something out, you have to be honest with yourself and write real numbers. If the sum you reach at item 3 is less than 900$ then I think you should consider ways to reduce your "uncontrollable expenses". This is your food and gasoline money and you have to be able to pay for it. Cancel some home services, relocate to a cheaper place, get another job or a raise - because whatever you do, you need to have enough to get by - and that money must be earned, not borrowed.

Only from here can we start cutting the income pie:

  1. Dedicate a fixed amount into your deferred goals. Take some percentage off the living sum and put it into some savings. I'll leave the discussion of such saving to some other time... for us, it goes into a high yielding money market - and we spend a fixed amount of it annually to vacate. We also allocate it for other goals... again, I'll discuss this elsewhere. On our long term plan we plan on increasing this amount and have detailed why such an increase will happen (raise, stop some fixed payment, buckle down).
  2. Split the remainder into 3 sums, and allocate those sums to 3 parts of the month, typically 10 days each, except the last third of the month which could be longer. Be strict with yourself, you can buy or spend that third of the flexible living sum however way you want, but when that 10 days budget is used up enforce virtual abstinence and don't buy a thing.
  3. We use a single credit card we pay in full each month. Every purchase me or my wife makes we record on an online excel sheet, and compare it to the card's online records so we can't really miss out and lie to ourselves.

What?! Wait - what did I just say? Well, that's the point - you need to think of your money like cell-phone minutes, you can carry them over, but over usage should be considered very punishing.

You need to prepare yourself as a family to a situation where there could be 3 to 7 days where you "virtually" don't have any money - even if the bank statement says you do. Use canned food - store bulk products and live like a cheap bastard. For only a short number of days, it can definitely be done.

And that's the "secret". We do and buy whatever we want. It's not a question of "if", it is a question of when. We don't buy when we can't, but only a few days away we assure ourselves that we can.

Notice I didn't budget for expense types. It doesn't matter if we go to a theatre and dine out every night, if we can - it's our privilege to enjoy what we earn. If we want to buy a sewing machine, we can - but if it takes away from the 10 days budget - we have to limit our selves after the purchase and wait until our self placed budgetary restrictions are met. No money means no money, even if the bank says otherwise.


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