Learn to Manage your Money - PT2 figuring out a Budget

By Username12 | UN12 money | 30 Mar 2021


BLUF – Regardless of where you are in your life, having a budget and sticking to it is a life skill, and the sooner you develop and implement it the better.  We're going to start building and implementing that life skill in this and subsequent sections.  So take a deep breath, grab all of your statements and bills and lets get into this.


If you missed Part 1, check it out here.  This is part of a series that I'm writing on the skills and lessons I've taught others so they can better manage their own money.  It's an "about me" so you understand where I'm coming from.  


**NOTE**  The following information are my opinions and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

 

I’ll be blunt.  It’s not easy sticking to a budget, even I sometimes still suck at it, and you’ll get angry from time to time saying “NO” to yourself.  .  For some this can be incredibly difficult, but a small delayed gratification today can have exponential growth in the future.  If you understand what the end goal is, saying “no” to yourself today is a little easier. The first thing we have to do is examine your expenses and your spending habits so we can figure out where your money is going. So as you start going through your bills bust out a highlighter and a pen and start figuring out what goes into which category.  Now's a good time to open up a spreadsheet software and start inputting raw values with an appropriate label to keep track of things.  You've got a few options here like Google Sheets, Open Office, or Microsoft Office 365 (free online).

 

Budgets are divided up into 4 categories and we’ll look at each one individually.

  • Income
  • Fixed Expenses
  • Variable Expenses
  • What’s left

 

Income - Get your paystubs

This is the easiest of the 4 categories to understand.  It’s how much money you make in exchange for your time/labor after all taxes and deductions are taken out.  It’ doesn’t matter if you make $10 an hour or $100 an hour, what matters is your income AFTER taxes and deductions.  Deductions include, but are not limited to, employer offered pre-tax programs such as medical/dental/vision insurance, Flex Spend Account (FSA), Dependent Care Flex Spend Account (DCFSA), Health Reimbursement Account (HRA), Health Savings Account (HSA), and 401k or 403b retirement accounts.  There can be some significant tax advantages you might be leaving on the table that we will investigate later.

If you’re an hourly employee you may not have access to these benefits.  If you’re unsure ask your HR representative and they'll be able to tell you.  For those of you who work part time, you’ll have to estimate your average total hours worked per week.  If anything, you should UNDER estimate these hours so you don’t have an unpleasant surprise later.  Anything extra you can throw at savings, paying down debts, or a reward for yourself every once and a while.

If you’re working a job where you’re considered an “independent contractor” (I.E. uber/lyft/rideshare drivers) you need to immediately slice off 30% of your earnings to set aside for when you file your taxes, because the government is going to come after you for all of what you owe as an individual as well as the “employer contribution” that you will also owe due to being an IC.  It's been a really crappy surprise for some people I know who have been doing that on the side for an bit of extra cash.  For the vast majority of people you'd seriously be better off picking up a night shift stocking shelves at a store once or twice a week, or doing "one off" work through fiver or something like that.  The ROI and risk vs reward ration for those services is craptastic for many.

 

Fixed Expenses - Grab your bills

The second easiest of the 4 categories to understand are your fixed expenses.  These are bills that are fairly consistent which include things such as, but not limited to: Rent/Mortgage payments, energy bills, home heating bills, water bill, sewer bill, home/renters/car/life insurance, loan payments, cellphone and internet bills, medications, cable/streaming services, etc.  You’ll notice some of these items under this category are necessities and some are luxury items.  It’s important to know what you spend your money on and do the hard look assessment to determine if you really need to keep incurring some of those luxury expenses.  Lifestyle changes are hard, and they sometimes really suck to make, but if you have an idea of what the end goal is then saying “I don’t need this expense” is much easier.

 

Variable Expenses - Assess your needs vs wants

Variable expenses are a bit tougher, but not impossible to plan for.  These include things such as food bills (eating out and cooking), any vices you have (alcohol/tobacco/caffeine/ETC purchases), vehicle fuel/maintenance costs, medical bills, etc.  Here Ideally you will need very closely examine what it is you're spending money on.  If pulling up old bills is too daunting or nerve racking carry a notebook with you and write down in it what you spend your money on for a month.  That's exactly what I did.  Then you can examine what is a need vs a want.  You don't NEED to drink energy drinks and buy froo-froo coffee, and I'll admit I was shocked at how much I spent on both of those things when I was buying them.  Same goes for eating out or buying pre-prepared foods rather than cooking.  Those 4 things alone slashed a ton of expenses out of my budget when I was younger. That $4 cup of coffee, or really any other regularly occurring small indulgence really adds up over time.  For example if you get a $4 cup of coffee 3 times a week that's $624 a year ($4 x 3 = $12 a week x 52 = $624 a year) you're spending on that habit.  You can apply that same math to eating out and spending $20 a meal per person once a week is $4160 a year for my family ON TOP of grocery costs.  As a result, we don't eat out unless we can avoid it, which is fine by me as we make home cooked meals together as a family from scratch for much much less and are teaching our kids more good life skills.  And the added benefit of better quality food too, improving our overall health and well being and decreasing our unexpected medical costs.  The easiest form of investing is to invest in your health and fitness which pays exponential life dividends.

Assessing needs vs wants is a hard one.  We all like to sometimes buy something we want.  But if it's 25% off and you pay for it with a credit card with 12% interest and carry that balance over into multiple billing periods you just effectively negated any and all "savings" you thought you had.  The short answer is, if you're not disciplined with your credit cards lock them up or cut them up and start using cash or debit cards for the time being.  If you're carrying a balance you're literally killing yourself in interest and the only thing "going to the moon" is your debt.  If you must carry a balance get rid of it as fast as possible.  This goes for any and all debts, loans included.  Once you become disciplined with your spending you can use credit cards and rewards programs to effectively decrease your living expenses....but that's a topic for a much later section.  First we have to get spending habits in line and a safety net/emergency fund build.  Which brings us to.....

 

What’s Left

We started with your income.  From that we subtract our fixed expenses as well as our variable expenses and we’re left with “what’s left.”  Now this category is completely personal and dependent on YOU and your goals.  If you're still figuring this stuff out start by giving yourself a little bit of cash each month to spend on whatever you want - guilt free.  In my household we give ourselves $50 a month to do with whatever we want be that spend, save, or invest.  It's not much but it's enough for us.  After that we slice whatever remains into savings/investments.  If you're just getting started I HIGHLY recommend that you make your immediate goal 3 months of living expenses saved in an emergency fund account that YOU WILL NOT TOUCH unless it’s an emergency.  Create a second account if you have to, and don't link it to anything else for overdraft protection.  I consider 3 months of expenses on hand as a short emergency to be a critical must have.  Some people want more.  I personally take a tiered approach as I don't like having a large sum money sitting in an account making virtually nothing in interest.  Here's how I break down my tiers.

  • Tier 1 - Small emergencies (unexpected repairs/bills) kept in savings/checking for immediate access
  • Tier 2 - Medium emergencies (need something now, cannot wait) invested in "safe" vehicle accessible in 30-60 days
  • Tier 3 - Big emergencies (loss of employment/income, medical bills, etc) invested into low to moderate risk mutual funds

You can define these tiers however you wish.  I tend to look at them as 2-3 months of expenses saved per tier.  Yes you'd have an emergency fund of up to 9 months of expenses.  The key here is it is only Tier 1 which must be in a checking/savings account.  I actually invest Tier 2 and Tier 3 so the money I "save" ends up growing as well.  When COVID hit we did a budget meeting and decided to readjust to have a total of 12 months of expenses allocated across the 3 tiers.  I also decided to add a Tier 4 - which included long term investments, retirement savings, etc and created an "Order of Merit" type of list for how I would begin drawing funds out to minimize penalties/taxes/fees.  So for me it breaks down as follows

  • Tier 1 - 3 months of expenses in checking immediately available. 
  • Tier 2 - 4 months of expenses staked stable coins with BlockFi getting 8.6% APY interest  
  • Tier 3 - 4 months of expenses in 20% small, 20% mid 60% large cap value funds that have had fairly consistent returns of 8% or higher for the last decade
  • Tier 4 - All other savings/investments

Keep in mind it took me close to 6 years to get to that point as our expenses changed as I went from being single to getting married, and two more times as our family grew.  This isn't something that's going to happen overnight.  It takes concerted and consistent effort, like all things in life, to get where I am today.  I delayed gratification, and sometimes went without, in order to set myself and my family up better for the future.  And let me tell you, there's some serious stress relief/piece of mind that if I were to become unemployed tomorrow we don't have to worry about a roof over our heads or food in our bellies for a year for up to a whole year.  Yes our diet would be bland, and yes we would have to change our habits, but I feel confident that in a year I or my spouse could find some form of employment which may not fully meet all of our expenses would help our emergency fund last even longer.  

 


***On Tier 2 and BlockFi***

BlockFi isn’t the only service offering staking of stablecoins with a good interest yield.  In fact, they’re not the best rate I’ve found.  The reason I chose to go with BlockFi are as follows.

  1. They are a US based company that takes care of the end of year tax documentation for me.  I haven't found a good work around for this on other platforms yet.
  2. There is no lockup period, I can trade and move around at my leisure.  
  3. As a US resident/citizen I can transfer my money in by bank ACH instantly up to $5K per day with no fees
  4. I can withdraw/transfer 1 crypto and 1 stablecoin per month for free.

Now as I like to say, “There’s no free lunch.”  This does come with a few strings attached.  I go into those strings in THIS POST I made previously.  There have been updates to BlockFi's service so I'm trying to keep it as up to date as possible.  

Referral Link

https://blockfi.com/?ref=312da5da


 

I'm not gonna lie.  The first time I did this and looked at the numbers I was really angry with myself.  I really had no idea where my money was going and it sucked to realize that my choices had brought me to this point.  So I decided to change my habits, which was rough, and changed my goals.  Yeah it was boring at first, but eventually it became kind of fun, and once it became routine my accounts started growing rapidly.  Eventually I got to the point where I met my goals, so I adjusted them and set my sights on a new goal.  Now I teach my kids these skills in hopes that they don't repeat the same mistakes I made, but if they do they'll have the skills to help get themselves out of it.  

In Part 3 we will talk about compound interest and how it can help or hurt you, they myth of "good debt" and debt payoff strategies.  

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Username12
Username12

Documenting my journey into the cryptocurrency world in hopes of making it more accessible to newcomers. I'll also be writing articles sharing some of my hobbies and experiences along with way.


UN12 money
UN12 money

A blog where I talk about how I have grown my wealth, and the tips/tricks I have provided to friends and coworkers to grow their own. I go over the stuff you SHOULD have learned in grade school about managing your own money, setting a budget, living within your means, and being smart with your money. **Note: Nothing in this blog is given as financial or legal advice.

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