I wish I could tell you that money doesn’t matter, but it does. While most people that know me wouldn’t say that I’m exactly ‘frugal’, I have made my own money since I was 12 years old and have never carried any debt I couldn’t pay off. I’ve always been able to make money and have followed a few basic frameworks to ensure that I always have enough cash on hand to live the life I want.
But I’m concerned that a lot of you didn’t grow up with parents that read tax books while on vacation or you didn’t get an undergrad & masters degree in accounting or marry a certified public accountant like I did (yeah, I’m a thoroughbred bean counter by nurture and a drunken sailor on a Saturday night by nature :). So, I’ve made a simple budget tool for you to use (with the help of my wife) and this post w/ tips and tricks to get your started. No more excuses! You start getting in control of your finances today!
So, let’s dive into Part 4 (the, almost final part) of this series!
(if you missed the first, second, or third parts of this series and want to start from the beginning, read Life Hacks, Part 1: Morning Routines, Part 2: Take Control of Your Health, Part 3: Using Communication to Generate Opportunity)
To start, download a FREE copy of my budgeting sheet here:
Go to File > Download > choose .xls or .pdf etc. Up to you!
How much money do you want to have on December 31, 2017?
- Let’s start with a goal.
This means a concrete, achievable, annual finance goal = cash on hand / in your bank account / ending balance on the last day of December. Think this through. Are you in a position to save a lot this year? Or, are you going to have to spend a lot this year on a move or having a new baby or paying off loans? Be honest with yourself and be ok with whatever the answer is. Good or bad, it won’t last forever. And best of all, you can change your circumstances over time, but it takes a plan!
I know this is uncomfortable, so let’s break it down, piece by piece.
Step 1: How much money will you reasonably make by the end of the year?
Again, you have to be honest. All of your goals have to be obtainable. So if you think you could make a bonus this year or pull some extra money in from working overtime or getting a second job, be conservative, but plan for it. If you’re a founder and you haven’t been paying yourself, you NEED to find a way to at least cover your basic expenses. Talk to your co-founders and investors and find a way, or else you’re going to be stuck in the perpetual poor loop forever. I’ve been in this position the last two years as we’ve worked to get my company, Brinc.io, off the ground, so I know what it’s like. But at a certain point, you have to make the decision to pay yourself and also figure out how to keep the lights on at the office.
Step 2: Subtract your ‘fixed’ expenses like rent, taxes, utilities, cell phone bill, car leases, and any other long-term contracts you’ve signed that require fixed / structured payments
These are expenses that you don’t have a choice to pay. For example, you can always eat ramen if you had to, but if you don’t pay your rent, you’ll get evicted… eventually. Same thing with taxes, you can avoid them as long as you’d like, but it’s nearly guaranteed to end badly (I really don’t suggest messing with the IRS, but I’ve had friends try). Same goes with for your basic utilities like water and electricity, though variable, you should just budget an amount every month (pick the highest month you have had in the last year to be extra conservative) and plan on paying that every month.
PRO TIP (from my wife Becky McLaughlin): The key is to realize these contracted payments AREN’T fixed, and pulling levers to save money on housing, electric, and taxes are HUGE contributors to long term savings. This is long term planning?—?e.g. a move isn’t easy, but a top thing to consider to build your savings / wealth!
Let’s talk about tax. We ALL hate the end of the year when we recognize just how ‘little’ we make. If you’re living in the Nordics, we know, you pay a hell of a lot more than we do in the states! So, the best way to ensure you have the money you want leftover at the end of the year, is to bring your taxes out from the April 15th grave and into your monthly budgeting!!! Ugh, I know. But it’s always better to be informed vs. surprised when you have a big fat ZERO in your account or worse DEBT at the end of the year.
TIP: Be CONSERVATIVE. If you’re in the 15% tax bracket, estimate 18%. If you’re in the 25% tax bracket, estimate 30%. You’re much more likely to end up with more money in the bank at the end of the year by being tight in your budgets vs liberal… because if you think you have it, you will likely spend it. AND, don’t forget that you pay both federal and local / state tax. You can bundle them together, but DON’T FORGET THEM!
Step 3 (Final Step!): Subtract your ‘frequent’ variable expenses like your food budget, transportation, entertainment, etc.
This is where you will be SHOCKED by how much money you spend on stupid crap. I know that I’m always surprised when I check back in on my spending. It’s so easy to get loose when you’re not checking and get that extra coffee each day or say yes to the dinner with friends and not pay for your part, but just split it up evenly. It all adds up.
TIP: No matter what system you use to budget, check in monthly and DON’T miss a check in. Plan it with your partner, parent, or a friend you trust and help each other get accountable NOW! This is the year… 2017. Make it happen.
Get a napkin or a piece of paper and simply walk through your day.
- What do you pay for breakfast?
- What do you pay for coffee / tea?
- What do you pay to get to work / school each day?
- What do pay for snacks during the day?
- What do you pay for lunch?
- What do you pay for dinner?
- Do you pay for the gym or classes or any extracurricular activities each week like yoga or rock climbing or a spin?
- What online services do you pay for like Amazon Prime, Hulu, Netflix, Spotify, Pandora, etc.?
Last check… is there anything else that you spend on daily / weekly / monthly that isn’t covered above?
My outcome was scary! I was spending ~$54 / day on food, drinks, my gym membership, etc. I’m so glad I checked on this because I know I can spend less, and I already am thanks to this framework.
TIP: Once you have all of these variable expenses, add them up and then multiply by 1.2X or add 20% more as a new line item ‘other’ for items you forgot or in case you splurge on getting a nicer lunch once or twice a week or get hit with surge pricing on Uber or Lyft on the way to work, etc.
Congratulations!! You now have a rough budget for 2017. The results may not be pretty, but that’s what the next section is for. You HAVE to have a view into your financial reality if you’re ever going to break free and be able to truly live the life you dream of.
Tips, Tricks, and Tools To Hit Your Savings Goals
Now that you know how important having a budget is for your future, here are a few tips to help you stick to it. Do the math, try these tools, and tell me how they work for you.
- Use tools to track your spending daily! Mint.com is perfect in the USA. If you’re overseas like me, use Fentury.com (it costs a little, but is multi-currency).
- Tell you close friends that you’re on a budget and want to find some creative ways to spend time together, but spend less money. If they’re true friends, they won’t need to spend $100 on dinner just to spend time with you. Cook meals at home together. Go on hikes. Watch movies. Buy a bottle of wine or case of beer and just sit outside and talk.
- Look for recurring expenses like your daily coffee. For me, this was a massive savings. If you’re in a Tier 1 city like SF, NYC, or Hong Kong, a cup of coffee is likely $3–$4 USD. I drink two a day, so that’s ~$7 USD a day or $2,555 USD / year! What?! I now make one of my coffees at home each day, cutting this expense by 50%.
- Look at your weekends. Commit to cooking one breakfast and home and one dinner at home. Voila! You just saved money on 33% of your weekend Food and Beverage bills. This racks up quickly, so it’s a nice savings over the year.
- If you want to get really serious, think about some of your fixed expenses. Can you live in a cheaper apartment? Can you spend less on your car payments or don’t own a car altogether? The total of Uber or Lyft rides won’t come close to paying for a car payment, insurance, gas, parking fees / tickets, and maintenance. There’s almost no way you could pay that much in public transit or ride sharing options. You may save money on an apartment with a parking spot too.
- For those of you that haven’t heard of Marie Kondo, change that! Her strategies for streamlining your home not only make for a more organized life, they also save you money!
I’d love to learn ALL of your financial savings/ budgeting tips and tricks too. Having a plan for your finances is the only way to ensure you can get control of your life. Being in debt or not having money when you need to pivot, make a bet, or search for a new pattern means you will remain stuck in your current pattern forever. I still make mistakes and break these rules from time to time, but am recommitting in 2017 to ensure that I am leading myself first. This is the fourth part of my behavioral changes for the new year. Follow me to ensure you get the more Life Hacks delivered to you next week!