“If you don’t know where you are going, any road will take you there.”
I remember what I was a Freshman in college, walking post Cooper Hall on the USF campus and hearing a credit card vendor shouting at nearby students. “Dude, dude, come over here!” he waved, and I walked over.
“Want a free USF t-shirt bro?” he asked.
“Are you kidding? I am a broke college kid, sure.”
“Cool dude, just fill out this app. Guaranteed approval, $500 credit limit.”
At this point I hesitated. I had never had a credit card before, but I had heard people say they were good to have for emergencies, so why not, right? I signed up, got my credit card and free t-shirt, and went on my way.
Flash forward 2 nights. “Dude, we are out of pizza!!”
It didn’t take me too long as an undisciplined college guy who knew crap about money and budgeting to max out the credit card (mostly for food). After making minimum payments for quite a while, the balance was well over $1000.
Many of you are probably shaking your heads at the stupid college kid I am describing, because hopefully, you were much smarter than me at that point in your life. Some of you might relate to my boneheaded choices. The experience taught me that money was a very important game, and that in that particular round of the game, I was a loser in a big way.
Today, thankfully, is a different story. Amber and I are debt free except for our mortgage, we have 6 months of expenses socked away in the bank, and our relationship with credit cards is much, much different. Just recently, another one was dumb enough to send me one of those “Spend $3000 in the first 3 months and get $500 in gift cards FREE!” credit card offers. Remembering the “gotcha” in college, I took great pleasure in cancelling and mailing the pieces of their credit card back to them… after I had paid off the $3000 balance in full without paying a penny of interest and received my $500 in gift cards. This round, unlike the one in college, I beat the credit card companies at their own game. And all it took was a little budgeting and discipline.
More important than $500 worth of gift cards, or some weird feeling of triumph over the evil credit card companies that prey on idiot college kids like myself, is the feeling of hope. The feeling of having a hand in your destiny. The feeling of letting my head hit the pillow at night and thinking “I am in control to the degree that I can be in control” and then letting the rest go. It’s a much better place to be than the alternative, and it wasn’t that way until I decided to happen to my financial life before my financial life happened to me.
Most of us already know this, but just in case you don’t, an interesting fact about money is that it flows. It flows towards people who know what they are doing with it, and it flows away from people who don’t. A lifetime of money flow in one direction or another determines personal things for each of us: things like retirement or bankruptcy. Things like sending our kid to college or saddling them with student loan debt. Things like just writing a check to fix a broken water heater or putting it on the Mastercard.
Before it ever gets to that point, though, it all begins with teeny, daily habits.
Some of us know that the best place to start when you are trying to build good habits with money is with a budget. Some of us, like me, had no idea where to actually start. In fact, some of us, like me, deliberately didn’t want to start doing that because the thought of dealing with it seemed really stressful and confining.
A happy realization once you give it an honest go is that instead of being confining, its very liberating. Having self imposed limits and boundaries with money means 2 things:
1.) You have to stop spending when you hit your limit, but…
2.) You can spend guilt and worry free until you hit your limit.
Having all of your monthly bills on autodebit and never having to worry about an overdraft is something that Amber and I take for granted now, but I remember a time when I used to feel a sense of dread handing over my debit card and not knowing how much I actually had in the bank. Constant worry, stress, anxiety, denial… it was not fun. Having a budget is much easier than dealing with that.
So what’s the best way to start? I’ll outline how we make our budget and what tools we use to do it. Hopefully, you already have a system better than mine. If you don’t, feel free to steal it. I know mine works, and if it can help you, that will make my day.
Step 1: Make a Spreadsheet
Most of us know at least a little about Microsoft Excel or Apple Numbers. If not, no worries, I’ve included a copy of my own personal budget spreadsheet. This is what mine looks like before I add any numbers in.
It’s pretty easy. You make a new budget every month. Put your daily expenses in the “Daily expenses” section. This is stuff like “I want to spend $7 per day on fast food” or “I need to allocate $5 per day to gas”.
Put your monthly bills in the “Monthly Bills” section. This is stuff like “My auto insurance is $XXX.XX and is due on XX every month” or “I’m estimating my electric bill will be $XXX.XX this month”.
Put your income in the green income section. Enter the amount you bring in per paycheck, and what that looks like THIS month. If you get paid every 2 weeks, some months will have 2 paychecks. Some will have 3. Weekly? Some will have 4, some will have 5.
There are sections for investing and retirement, special spending, for unexpected income, and for a previous month deficit if you overspent last month. Once you enter all this stuff, the spreadsheet calculates everything for you and now you have a map: a clear picture of what your finances look like this month. From here, you can see where you are going.
Step 2: Sign up for Mint
I’ve played with a lot of online budgeting tools. Pocket Money, Personal Finance, MoneyWiz, YNAB… My favorite, by far, is Mint. It pulls all your transactions in automatically and categorizes them for you. Don’t like the categories it has as default? You can make your own. Did it mis-categorize a transaction? Easy peasy to change. Once you start playing with it and getting some data built up, you can start to see trends of where your money has come from and where its going… and more importantly, how much money you are keeping.
For example, here is what our monthly spending for May looks like.
But say I go “Whoa, we are spending a lot on food. What were we spending so much on?” I can just click that category and Mint will break it down into subcategories for me.
With this tool, it’s easy to see where your money is going and adjust your lifestyle accordingly. You can also break it down to see your income over time, as well as your net income (income vs spending) and see if you are trending towards a life of wealth (saving) or a life of debt (overspending).
Step 3: Use This Info to take Charge of your Finances and Decide Where You Want to Go
So after you pay off your debts and have money flowing towards you rather than away, what do you do then?
We all get one shot at this life, and I think we can all agree that money is a pretty important tool for getting to where you want to go. There are many people who are much better than I am when it comes to investing, and if you are one of them, feel free to disregard everything I say here because it’s your money, not mine. One person who I know for SURE knows more than me about this stuff is Warren Buffett. You might have heard of him. He has been called the “Oracle of Omaha” for his investing savvy. He is also known for his personal frugality. Most everyone agrees, he is a genius with money.
So what does Buffett suggest we invest our savings in? Hedge funds perhaps? Bonds? Some complicated blend of blue chip stocks and trading equities and HFT firms or something else that most of us have no idea what that even means?
Nope. Index funds.
Index funds are the most boring funds on the planet. Heard someone talking on the news about the S&P 500 Index? Or the Dow Jones Industrial Index?
Well, for example, an S&P index fund basically buys a little bit of every find in the S&P index, so when the index goes up, the fund goes up. When it goes down, the fund goes down.
The advantage to this, according to Buffett, is that not only are you diversifying your savings (so one company going belly up doesn’t bankrupt you… hello Enron and Lehman Brothers), but the expense ratio (what the guys who run these funds charge you for running these funds) are crazy low.
A lot of people in the financial industry got upset at Buffett for offering this advice. Many top hedge fund managers were particularly upset, and this lead to the somewhat famous Million Dollar Bet. New York asset manager Protégé Partners bet Buffett that the 10 year performance of 5 of their carefully picked hedge funds would wallop Buffett’s boring index fund, and the two bet a million dollars that their strategy would be the best choice. We are currently on year 6. Buffett’s index fund is up 43.8%. The hedge fund guys are up 12.5%.
Step 4: Save and Invest
I throw my money into the following places, in this order:
1.) My company 401k to take advantage of matching (with most thrown into index funds).
2.) My Roth IRA through Vanguard, mostly purchasing Vanguard’s :Total Stock Market Index Fund: (VTSMX).
3.) The rest get’s thrown at the mortgage (or down payment savings if you don’t own a home and want to buy one, or whatever you want).
Again, this is just what we’ve decided to do with our money. You have your own, and the choice is yours as to what to do with it.
The point of this post though is, whatever we decide to do with our money, it’s much, much better to do it on purpose than to float through life and hope everything turns out okay. If you really think about it, money is something we only get in exchange for our time. Our lives are made of time. How much? No one knows. But every dollar you get will cost you something you can never get back.
With that in mind, let’s do ourselves a favor and put some thought and planning into how we are going to spend our lives. Literally.