This is the first piece in a 8 part series on getting your financial house in order. Here are the rest of the posts. Please read them sequentially and hopefully it will help you on your path to financial independence.
- Setting up a budget/expense report: Ever wonder what should be included in a budget? We cover what you may want to consider. You can also sign up for our email list and download our free Budget crushing tool!
- Determining net worth: Do you know how to calculate your net worth? We discuss how to do it and if things like your home or cars should be included? Check it out to see what I do.
- Get you some insurance: Here we discuss what insurance you need for your family? Is an umbrella policy really necessary?
- Setting up a will or living trust and What to place in a living trust: How do you protect your family with a living trust? Why would you want one and how much will this cost? How do you do it? Check out these posts to figure it out.
- Max out the 401K, 403b, 457, or Government TSP: Ever wonder what these different accounts are? How much can you put into one versus the other? Is a Traditional or Roth plan right for you?
- Start an IRA: What is an IRA? Should you have one? How do you do a backdoor Roth?
- Pay down debt: As Dave Ramsey says, debt is bad. Still which debt should you pay down first and when can you consider paying down debt versus investing.
- Start tax advantaged accounts: Once you have done the above, what is the next thing to do with your money?
I am not good with a budget in the traditional sense. I do not have the self-control to dictate how much I spend on coffee a week versus groceries. So allocating $50 for coffee, $600 for groceries, $30 for movies, etc. does not work for me.
I am, however, okay with determining how much I can spend on these things in total. I do that and try to stick to it (though not always successfully).
Still in the world of credit cards, spending is too easy. Without thinking of it, I fire away a purchase knowing I can make the payment later. This is how I have lived for most of my adult life except for the 1-year we lived on a budget. The year we lived in the land of wine, tango, and meat!
We moved to Argentina during my fellowship and during that year we lived on a very fixed income while trying to save for our wedding. We started by defining our costs. Things like the apartment, utilities, student loans, and the wedding. We then had what was left as our discretionary spending, which came out to about $800 a month.
As I liked to spend without thought, we had to come up with a way we could save some cash and not go broke. We decided the best way to do this was the good old cash reserve way. Cash is king after all and that is what they mainly took in Argentina (consider it forced cash use!).
Cash is king
Every week I would go and pull out $200 from the ATM. That cold hard cash would go into a drawer. We would use it as needed and when the cash stash was running low, we slowed down the spending. This worked well and allowed us to “pay ourselves first”. We saved before we spent anything. Surprise, we actually could stick to a budget. It was pretty awesome to see we could do it, but not fun.
We moved back to the States and my old habits came hard and fast. I was using credit cards. Being thoughtful about what I spent, but I did not stick to a budget. I had to come up with a better way to keep myself accountable. Behold the expense report!
What is an expense report? Is it a boring accounting method? Is it an itemized receipt at the end of the month? No…well kind of no. Basically what I did for a few years is track what came in (income) and what went out (expenditures). I categorized all the purchases into groceries, utilities, health, restaurants, alcohol, automobiles including gas, maintenance, and insurance, etc. My wife and I would then have a chat.
I did this for 3 years to truly understand where we were spending and how to cut out unnecessary expenses. It allowed us to make smarter decisions. We were training our spending muscles. Making them learn and learn so that eventually our actions were habits (think high reps, low weight at the gym). We got pretty good at it. No we don’t even watch our expense report and instead just watch the money .
Tools that can help
So how can you set up an expense report. There are many ways to do so.
1) Mint.com – I have used Mint in the past and did so for 3 years. I found it helpful but frustrating. I imported all of my bank accounts, credit cards, etc. At the end of the month I would click on the categories of spending and it would let me know that I spent X on groceries and X on restaurants, etc. This was useful. The frustrating part was that I constantly had to go in and fix categories. This became tedious and so I left.
2) Personal Capital– I am thinking about signing up for this service but from what I hear it is better at tracking Net Worth. You can check it out here.
3) Clarity Money– New to the market and I am trying it now. This is for iOS (Apple products) only without a computer interface that I can see. So far I like it. The app is clean and easy to use. It tracks spending and lets me know if I am spending more than I am bringing in. It also categorizes items for easy review.
4) Excel sheet- I have been doing this for the last 6 months. I will go through all of my accounts and calculate how much I spent on my various categories.
Here is a link to a Google doc with a sample expense sheet. It may be more detailed then you need but feel free to download it and edit it for your own needs.
Any of the ways you try, it is a good idea to get a hold on your budget/expenses as a first step to understanding finances. We have improved some but still have room to do better.
Also published on Medium.