The following is an excerpt from "I Will Teach You To Be Rich
Once you’ve done what you can to design and implement a Conscious Spending Plan that you’re comfortable with, give yourself some time to settle into a rhythm with it. Sure, eventually you can spend your time on strategic money decisions—“Should I be contributing 10 percent or 12 percent to my monthly savings goals?”—but first, you’ve got to get the basics down. As you go along from month to month with this new system, you’ll discover some surprises you hadn’t anticipated.
You’ll always have unexpected cash expenses like cabs or an umbrella when you forgot yours. And don’t flip out if you miss tracking a few dollars here or there—the minute your system becomes too oppressive for you to use is the minute you stop using it. I try to make as many purchases on my credit card as possible, so my software can automatically download my transactions. For cash spending, try to get the receipts and enter them into your system within seven days. After that, I tend to lose receipts or let them build up so much that I forget what some of the receipts were for. Make tracking your spending a weekly priority. For example, set aside thirty minutes every Sunday afternoon.
HOW TO HANDLE UNEXPECTED AND IRREGULAR EXPENSES
It can be frustrating to have a spending plan that keeps getting disrupted by surprise expenses like wedding gifts, car repairs, and late fees. So another key to having a plan you’ll use is to account for the unexpected and build in a bit of flexibility.
Known irregular events (vehicle registration fees, Christmas gifts, vacations). There’s an easy way to account for this type of irregular event. In fact, this is already built into your spending plan: Under Savings Goals, you allocate money toward goals where you have a general idea of how much it will cost. It doesn’t have to be exact, but try to get a rough ballpark figure and then save every month toward that goal. For example, if you know you’ll have to spend about $500 on Christmas gifts, start saving $42/month (that’s $500 divided by twelve months) in January.
By the time December rolls around, you won’t have to take a huge hit on your spending.
Unknown irregular events (surprise medical expenses, late fees for your library card, or $100 flowers to make up to your girlfriend for something stupid you did last night). These types of surprises fall under your Monthly Fixed Expenses because no matter how hard you try to avoid them, there will always be unexpected expenses. Earlier, I suggested that you add about 15 percent to your estimate of your fixed costs to accommodate these surprises. In addition, I recommend starting by allocating $50/month for unexpected expenses. You’ll soon realize that this cartoonishly low figure is not enough. But with some time, you’ll have a better idea of what the figure should actually be and can change the amount accordingly.
Fortunately, with each month that goes by, you’ll get a more accurate picture of your spending. After about a year or two (remember, think long term), you’ll have a very accurate understanding of how to project. The beginning is the hard part, but it only gets easier.
THE “PROBLEM” OF EXTRA INCOME
Just as there are surprise expenses, there is also surprise income. It’s tempting to take a windfall and blow it all on something fun, but I urge you not to follow that instinct. Instead, work within your Conscious Spending Plan.
Unexpected onetime income. Sometimes money unexpectedly falls in your lap, like a birthday gift or from selling something on eBay. Believe it or not, I don’t encourage you to save all this money. Instead, whenever I make money I didn’t expect, I use 50 percent of it for fun—usually buying something I’ve been eyeing for a long time. Always! This way, I keep motivating myself to pursue weird, offbeat ideas that may result in some kind of reward. The other half goes to my investing account. Compare this with not having a plan and letting your money “just sort of” get spent.
Raises. A raise is different from onetime income because you’ll get it consistently, and it’s therefore much more important to do the right thing financially. There’s one important thing to remember when you get a raise:
Maintain your current standard of living. Too many people get a raise at work and say, “Great! I’ll go on that vacation!” Sure, you can do that. Then, “I’ll buy that new sofa I’ve been wanting!” Uh oh. And then, “I think I need those new shoes. What? I’ve been working hard!” And then you want to kill yourself because you’re swirling into a downward spiral of spending.
If you get a raise, be realistic: You earned it, and you should enjoy the results of your hard work. Buy yourself something nice that you’ve been wanting for a long time, and make it something you’ll remember. After that, however, I strongly encourage you to save and invest as much of it as possible, because once you start getting accustomed to a certain lifestyle, you can never go back. After buying a Mercedes, can you ever drive a Toyota Corolla again?
The best part about setting up a strategic budget is that it guides your decisions, letting you say no much more easily—“Sorry, it’s not in my plan this month”—and freeing you up to enjoy what you do spend on. This is guilt- free spending at its best. Sure, there will be tough decisions. Deciding to change the way you spend is the most difficult part of this book. It involves making choices and saying no to certain things. Your system, however, makes this much less painful. If a friend asks you out to dinner and you don’t have enough spending money left, it will be easier to politely pass. After all, it’s not personal—it’s just your system. Remember that most people are, by definition, ordinary. They go through their twenties and thirties feeling a gnawing sense that they “should” do something about their money— tomorrow. They don’t think about saving until their mid-forties. And yet, you are now extraordinary, because you see that setting up a simple system will let you make the tough decisions up front and spend your money guilt-free.
Working retail for five years I made a goal out of saving up 10K to be able to invest in the stock market. I decided everything I saved before the age of twenty-eight was available for me to fiddle with stocks; everything after twenty-eight was to be put in a blend of investment funds safe from my amateur investing styles. I was able to accomplish saving up 10K on a meager retail wage by putting half of every raise into my 401(k) plan. Every 4 percent raise was a 2 percent raise to my retirement plan.
—Jason Henry, 33
Week Four Action Steps
1. Get your paycheck, determine what you’ve been spending, and figure out what your Conscious Spending plan should look like (thirty minutes). Do this now and don’t overthink it. Just break your take-home income into chunks of fixed costs (50–60 percent), long-term investments (10 percent), savings goals (5–10 percent), and guilt-free spending money (20–35 percent). How does it fit?
2. Optimize your spending (two hours). Dig in deeper to your savings goals and monthly fixed costs. Try the À La Carte Method. How much does your insurance actually cost—can you improve on that? How much will you spend for Christmas gifts and vacation this year? Break these expenses down into monthly chunks, then recalculate your plan.
3. Pick your big wins (five hours). Open an account at Mint or Quicken Online. Assuming you want to cut your spending by $200/month, what one or two big wins will you target? Start using the envelope system.
4. Maintain your Conscious Spending plan (one hour per week). Enter any cash receipts into your system each week. Tweak the percentages you send to each part of your spending plan (we’ll cover this in detail in the next chapter). And most important, make sure your system is realistic enough that you’ll stick with it for the long term.
All right, deep breath. You did it. You made it through the most difficult part of the book! Now you’ve got a strategic spending plan. You no longer have to constantly worry about how much money you’re spending. Phrases like “Can I afford this?” and “I know I’m going to worry about this later, but for now . . .” will be erased from your vocabulary. Now we’re going to automate this system so each new dollar that comes into your system gets instantly sent to the right area, whether it’s investments, savings, fixed costs, or guilt-free spending.
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My thoughts:
1. I usually enter my info into Quicken with a couple weeks (I put receipts in a central place during that time), but any longer than that and records (and memories) can get hazy and lost.
2. 100% agree with his thoughts on not raising your standard of living (at least fully -- you can a bit) when you get a raise. Sure, spend a bit on something you want, but don't automatically spend all of your increase. Otherwise, you're not going to make much (or even any) progress at growing your net worth.
3. Overall, I'm a big fan of having a budget and using it as a tool to guide your spending decisions. You don't have to be a slave to it, but you certainly need a plan for your money -- which is what a budget (or spending plan if you like) is.
4. Once you get a handle on your money, you may not need a budget. But this is 10 or 15 years down the road for those just starting out IMO.
I always try to treat my raise as an untouchable "bonus" that gets saved automatically. If you don't acknowledge the increase, you won't miss it. I haven't bought this book yet, but I've seen it mentioned on several sites. It looks like it contains some good advice.
Posted by: Corporate Barbarian | March 25, 2009 at 01:26 PM