In my last post, I talked about how terrible I can be when it comes to dropping by the drive through line on my way home. It can spell disaster for our budget. One night isn’t any big deal at all, but when we’re doing it night after night, it turns into a big problem.
Luckily, we’ve been doing so much better in this area, and it’s saved us so much money.
This is a big win for us.
You want to focus on your big wins because when you can identify the things that make a huge difference for your budget, you can get the most amount of progress for the work you’re putting into your finances.
The equation is simple: Income-Outgo=$0
You absolutely should focus on your income since it is half of that equation.
If you missed that article, you should check it out here, because I talk about how moving at a faster rate in your career will equate to thousands of dollars a year extra that will boost your budget.
I also talked about how everyone should consider starting a side hustle. You can absolutely take something that you enjoy doing and start being creative on the side to get a little more money each month.
If you were able to build it up to $1000 a month extra, what could that mean for your finances?
Spending
Now we need to talk about the other half of that equation.
It truly doesn’t matter how much you are earning each year, you do have the ability to spend all of it. You can not approach this solely on the idea that earning more will solve all of your problems, because unless you change your behavior, you will come up with new problems to spend all of your money on.
But when it comes to your money, what are the biggest areas of improvement that you can make progress on?
Save and Invest, Spend the Rest
If you aren’t tracking your spending yet through a budgeting program or using a system like cash envelopes, do not pass go.
If you don’t really know where all of your money went, you’re going to have to find that out first.
I suggest YNAB, it stands for You Need A Budget. I’ve tried lots of different techniques for budgeting out there, and it is by far my favorite.
To understand where you should cut, try budgeting the money that you currently have and tracking where it’s all going. Then, you have an idea of where you should start.
Let’s look at the biggest pieces of the pie.
First, you should start by saving money from each paycheck towards your retirement right now. If you have a very intentional reason for not doing that, because you’re paying off your debt by following Dave Ramsey’s Baby Steps for example, that’s fine, you just need to get that debt paid off and back to saving for retirement as quickly as possible.
You need to be shooting to save 15% of your paycheck annually into your retirement accounts.
Don’t get super legalistic here. The more you can save for your retirement, and the earlier you can do it, the better.
This is a huge big win for your financial life.
There’s a lot of factors that come into play when determining which funds you will invest in, and I do think that most people need to be investing in index funds.
However, the big win here is that you invest.
The sooner the better.
If you’re just starting out in your career, take 15% of your money right now, and automatically invest it so that you don’t ever miss it.
Once you know that your long term savings goals are taken care of, you can rest easy knowing that it doesn’t matter where you’re spending the rest of your money because you’ve taken care of the most important thing.
Biggest Spending Categories
Now that we’ve prioritized saving for retirement, we need to look at our spending every month.
When you’re budgeting and tracking where your money goes, you’re able to really see what you’re doing.
To focus on the big wins, you need to take a look at your biggest expenses each month. If you can spend more time looking at your biggest expenses, you’re going to get a bigger bang for your buck.
Housing
For many people, your housing is going to be your biggest expense. It’s really important that you don’t over do it here.
My wife Katie and I got the chance of a lifetime when we built our house in a new neighborhood. We got to pick out all of the finishes and watch the house from the ground up as it was constructed. Very cool experience.
But now that I’ve gone through that process, I have developed some new views on home ownership.
The first, is that there is no such thing as a dream house.
Stop trying to save up for your dream house, or stretching yourself too thin for your dream house.
Because we really love our house, and we really still do after being in it 6 years. But here’s the thing: there’s lots of other houses that I’d also love. Our house has some design elements that I love, but then I see a house that takes a different approach that I would like as well.
The big take away here is that you will probably love your house, but I don’t think that there’s a house that exists that’s just completely perfect that will be totally ideal for you forever.
That’s why it’s so important to not overdo it on your housing. You don’t want to be spending more than 25% of your take home pay on your house payment.
Cars and Toys
Guys, you know what feels great?
Not having a car payment. And let me tell you, I’m not driving a nice vehicle right now. I have a 2004 highlander that I’m driving with 250,000 miles on it. It’s still a great car, but it is by no means in good shape anymore. But it totally does the trick and I’m so thankful to not have a car payment.
Do you have a car payment? Do you have two? Do you have two car payments and a big payment for some other toy you have?
Those are huge big ticket items in your budget.
I want you to imagine if you didn’t have any payments on those at all.
Remember, what we’re after in our budget is margin. It’s that breathing room that allows you to get significantly ahead. If you’ve got huge payments, it’s choking you.
You feel like you can’t get ahead because you have those huge payments.
Spending
After taking a look at your housing and your car payments, it’s time to take a look at big spending items in your budget.
For us, since we have two kids in daycare right now, that’s one of our biggest expenses. It’s costing so much money, and everyone that has kids in daycare like that feels like it’s killing them.
For us, we’re really happy with where our kids go to daycare, so we won’t be changing that aspect of our expenses right now.
Everything in your budget needs to be looked at and you need to decide whether or not it’s something you want to continue doing or if it needs to be cut.
For us, something that we’ve worked really hard on is our food budget. Like I said, I am terrible when it comes to eating out, but if I’m not careful then that gets really expensive and turns into a huge expense in our budget. When you’re burning money like that, you’re taking all of this money that could be going to other uses and you’re blowing it.
And it’s not just eating out, your grocery budget can get out of hand too. Go to the grocery store with a meal plan and lots of ideas for meals that are cheap and that are great for leftovers. If you’re not careful, it can cost you just as much to get groceries. So you can do it, but it takes just a little more work on the front end to have a plan.
Lastly, look for other items in your budget that are taking up more space than you think they should.
Now it’s time to cancel the cable, get on a better electricity plan, and cancel subscriptions that are no longer worth it to you.
Spend less than you make
The ultimate goal is to spend less than you make.
Remember, Income-(Saving & Spending)=$0
No matter where you are with your income, spend less than you make each month.
It doesn’t really matter how much you’re spending on any certain category. You get to decide what’s important to you. But generally, this is going to be the order of importance for where your dollars need to go:
- Saving in a retirement account. Try to work up to 15% of your paycheck.
- Giving as much as you want. If giving is a priority for you, make sure that you are giving as much as you want here, before looking at spending. But it’s more important to be taking care of yourself and your household first by taking care of your retirement before giving.
- Housing. Make sure that your payment isn’t bigger than 25% of your take home pay. If it is, just look to see if you’re contributing enough to saving and giving before doing anything rash. If you feel like things are too tight, push yourself to spend less first. After many nights of sleeping on it, if you think a change is in order, go ahead.
- Monthly and irregular needs. This is where all of the things that you’ve already committed to or that are a need fall. This is where your monthly expenses and saving ahead for things like Christmas fall. If you aren’t making sure that you set aside money that you will need, you will run into an “emergency.” The only way to really know what’s in these categories is to budget consistently every month. After learning how to budget, you’re going to get better and better at knowing where these items lie.
- Saving for future wants. Make sure that you are saving for trips, new cars, new toys, and anything else here. Experiences, traveling, and things that bring us joy are really important, and you need to make saving a priority before you let the spending of the month get away from you.
- Lastly, you can spend everything that you have left. If you’re married, it’s important that you both get your own spending category where you can spend without having to consult each other. This is also where you’ll have household wants spending, dining out, and monthly entertainment. Everything on this list above item number 6 is more important than your monthly spending, but this is the category that gets us in trouble the most.
Where should debt fall on this list?
I recommend getting out of debt as soon as possible. I would put debt ahead of your housing, but after giving. Get rid of all debt except your house payment as soon as possible, that includes your terrible student loan debt. How much can you squeeze out of your budget to get rid of that toxic part of your budget? Get. Rid. Of. It.
Now, I did say to put your debt payment after saving for retirement and giving. What if you’re a Dave Ramsey fan? Dave tells you to stop retirement savings while getting out of debt. I am a huge Dave Ramsey fan. Huge. But if you’re going to stop your retirement savings, you need to be on the same page as your spouse and you guys have to decide that you’re going to go crazy on getting rid of this debt. You need to knock it out. If you aren’t saving for retirement, you don’t need to be going on big expensive vacations, or eating out all the time. So, yes, stop saving and knock that debt out. But please, get. it. done. And then get back to saving as soon as possible.
When budgeting, start at the top of this list and work your way down. Look for the biggest items in your budget each month. The bigger the expense, the more you have to gain by cutting it. Don’t worry about how much you’re spending or saving in any category as long as your money is in order on that list.
Are you having trouble making it to the bottom of the list with any money?
Remember, you only have two options. Cut more spending, or make more. I suggest you do both.
Leave a Reply