[Editor’s Note: This is an independent post written by Jack. This post may contain affiliate links. Please read our disclosure for more info.]
The majority of Americans are in debt… roughly 80% according to several reports. WOAH! Kudos if you’re in the minority; however, can you say the same about all of your coworkers, family, and friends? Chances are that even if you aren’t treading water that you are surrounded by people drowning in debt.
IT DOES NOT MATTER HOW MUCH MONEY YOU MAKE!
This will be a hard pill to swallow for some, but there are several studies and books out there providing data to support such a claim. One of the more notable books, The Millionaire Next Door, dives into the incomes of most millionaires. SPOILER ALERT: They don’t make anywhere near a million dollars a year.
INCOME ≠ WEALTH
The sooner you come to terms with that fact the sooner you can actually start building wealth. We live in a world of consumerism. We get wrapped up in our image, often times defining ourselves by the clothes we wear, the car we drive, and the home we buy. It may surprise you to take a step back and truly look at how many celebreties go broke, “high-earners” file bankruptcy, and people work until social security age or beyond. Guys, it doesn’t matter how much money you make if you spend it all. Building wealth is about SAVING money now to access it later (and hopefully “work for you” in the meantime via compounding interest/growth).
Where to Start
To start building wealth you need track your spending to some degree. This will look different for each person, but before you can start making your hard-earned dollars work for you to build wealth, you first need to figure out where those dollars are going. I started really tracking my spending when I landed my first teaching gig back in 2012. Good thing, too, because if you read my first blog post, you know I was pretty strapped – I bought a new car in 2011 and way too much house in 2013. I used google sheets (excel) from that time until early last year to track every purchase I made. Before I threw any of my receipts away I would input the amount into one of the categories found in the spreadsheet below:
Keep in mind there are MUCH better spreadsheets out there that are downloadable and free with a quick google search. My goal in using mine was to track major expense categories that were important to me. I know people who have a line for every category imaginable. Use a template to start, but then modify it to your own needs. Here are some actionable tips to get started:
- WRITE IT DOWN (paper, spreadsheets, whatever).
- Estimate/determine your monthly income.
- I had a very predictable income as a teacher (~4k/month gross)
- Subtract the non-negotiable items.
- For me that was federal/state tax witholdings, 5% mandated pension contributions, rent, phone bill, student loan interest, insurance, etc.)
- “Pay yourself first”.
- Things like IRAs, 401k/403b/457b, HSAs, etc.
- Control and mitigate what expenses you can. Examples:
- Renting gets a bad rap. You’ll notice I didn’t have an electricity, water, or internet bill in 2017, because I negotiated those expenses as part of my rental agreement). I also didn’t have to worry about landscaping, appliances failing, etc.
- Don’t upgrade your phone every chance you can (and put a case and screen protector on it).
- Not having a car payment is nice! Try to keep it that way.
Low Maintenance, FREE Budget Software
The reason I didn’t have a full 2018 excel sheet for budgeting was because I finally stumbled across mint.com. I’ll admit I was a little late to the game, but boy did it change my life… no more inputting receipts one at a time! Not only is it free, but once you link all of your accounts/assets/liabilities it automatically does the following:
- Tracks all of your transactions, organizing them by category.
- You can customize the categories.
- Updates your account balances everytime you log on.
- Calculates your net worth.
- Customizable alerts:
- Large deposits/purchases
- Approaching/exceeding budget limits (set by you).
Mint’s software is user-friendly for a wide range of platforms (computer, tablet, mobile phone, etc.). Believe it or not, we are NOT sponsored by mint.com. I just love their software that much and truly believe most people would benefit from the use of it or similar software.
Victoria and I use mint.com to track our categorical spending habits and inform our future decisions/goals, but we do NOT keep a strict budget anymore. Our budget at this point is more or less a priority list for spending:
- Non-negotiable bills (taxes, rent, utilities, insurance, phone).
- We both drive cars that are 6+ years old and intend to keep those cars for a long time.
- Pay ourselves first (max out ALL retirement vehicles available to us including IRAs, TSP/401k, 457b, HSA, & Pension).
- Eat out no more than once a week (including lunch).
- Stick to whole-food items and avoid processed foods where possible/feasible.
- Meal-prep lunches for the week.
- When cooking dinner, always prepare 2-3+ nights worth of servings.
- Buy in bulk when possible.
- Spend money on things that really matter to us (mostly experiences/traveling and not material goods).
- Save the rest and invest it according to our Written Financial Plan and [Asset Allocation].
So, can you afford to not budget?
I would argue you can’t. I guess that depends on your definition of “afford”, though. Keep in mind that social security, pension programs, and minimal retirement contributions are NOT designed to provide you the same lifestyle you have now in retirement. You’ll either need to make adjustments now or later. Doing so now at least provides you with the opportunity to capitlize on the compound interest/growth that time in the market allows. Don’t be part of the 80% of people in debt. MAKE YOUR MONEY WORK FOR YOU!
How do you track your spending? What actionable tips do you have to save money? Reflecting on spending, what are some recent purchases you’ve made that really matter to you or enhanced your life?