Archive for the 'BYM Mindset' Category

Below Your Means Basics: Track Spending and Build a Budget

At Below Your Means we are passionate about building personal freedom through spending less, saving money, and understanding what we value.   The first step to living below your means is tracking your spending and building a budget.  Sure, you can cut down on your spending, even significantly, without knowing where your spending is going.  But finance is, at it’s most basic, an exercise in math.  If you bring in more money than you spend, you’re living below your means.

Simply cutting your spending isn’t going to lead you to happiness though.  In fact, your budget plan may fail simply because you don’t have the tolerance for living within the plan you’ve laid out.  But, if the way your life is set up now requires you to spend more money than you make, then at a certain point you’re going to need to make some changes.  What changes, exactly, have everything to do with what you value and your sense of what things in your life are worth.

To help you build a budget that you can thrive on, we’ve assembled a few articles on tracking your spending and building a budget the Below Your Means way.

Consider this a getting started guide to budgeting basics:

Getting a monthly and/or annual budget in place will show you once and for all that you CAN make decisions that lead to long term happiness and security.  And you don’t need a huge income to make it happen.  You do need to understand what is important to you, and plan for that.

 

This is the single step with which your journey starts.  Sure, you can cut down on your spending, even significantly, without knowing where your spending is going.  But finance is, at it’s most basic, an exercise in math.  If you bring in more money than you spend, you’re living below your means.  If you don’t, you’re not.  Tracking your spending isn’t everything when it comes to living below your means, but it’s hard to be successful without it unless you institute an all-cash system.  Fortunately, there is a whole industry building computer software to help make it simple, and some of it is free.

Below Your Means Zen: A Bottle of Rocks

And now for a Below Your Means moment of Zen:

Recently my son performed in a school play.  The teachers who organized the play had the great idea of having a ‘cast party’ for the kids in the playground behind the school.  We parents ate snacks, chatted, and watched our kids.   Their favorite party toy – taking an empty water bottle and filling it with rocks.  It was a maraca, a weapon, a simulated waterfall, a physics experiment, and who knows what else.  To me it was a great lesson that kids value experimentation and great experiences over stuff.  They’re on to something.

Below Your Means Basics: 10 Common Budgeting Pitfalls (and What to Do Instead)

Don't Let Your Budget Become a Train WreckWrapping up our “Back to Basics” this week, here are some common pitfalls that can sabotage your budget.

Pitfall #1: Building a Budget with No Purpose

If you start to build a budget and don’t have any clear goals, you’ll just feel like you climbed into a straightjacket for no reason.  Even if you manage to stick to the budget for 3 or 6 months, you’ll find that you aren’t really any closer to where you wanted to be.  Remember your budget is all about understanding your values and helping you know if a purchase is worth it to you.

Instead: Set clear goals. These can be tied to paying off credit cards, paying off your house or car, retiring by a certain age, taking a vacation, etc.  If you’re just getting your hands around your finances, go with the envelope method or use cash.

Pitfall #2:  Using Credit Cards to “Bust the Budget”

If you use credit cards on a regular basis, it is very easy to overspend.  In fact, credit card processors will tell their customers that they should accept credit cards because the average buyer will spend more if they are buying with a credit card than if they are buying with cash.  Cash helps remind you to make a value determination.

Instead:  Pay cash or track religiously. If you’re going to keep using your card, you need to update the balance in your processing system (we highly recommend something like Mint.com or an Intuit product like Quicken) frequently.  Probably every other day, or every third day.  Weekly is as far as I’d push it, but if you’re new to tracking your spending, I think you’ll be surprised how much your can run up in one week

Pitfall #3:  Budgeting Alone

If you don’t share your goals and values with your spouse, family, or close friends, you probably won’t get the support you need to stick with it.  It’s hard to be the only one trying to cut back or make changes.   “Let’s all go out to eat” can easily blow your budget if you don’t add “hmmm… that place is pretty pricey, I’d like to keep it under $20.  How about we go to this place instead?”

Instead:  Enlist the support of family & friends. I am always on a budget and never ashamed to say so.  It’s smart to live deliberately.  Be proud of it.  When you’re making decisions in a group it helps to set your boundaries.  Expect some teasing, hold your head high, and move on.

Pitfall #4:  Leaving No Room For Error

Stuff happens.  The dishwasher breaks, the furnace goes out, you get a chance to score some tickets to an awesome show, you start dating someone wonderful, you forgot your anniversary, your child sprains an ankle, whatever. You can’t budget down to the penny, so make sure there is room for the unexpected.

Instead:  Leave a percentage of your budget for the unexpected.  Exactly what percentage depends on your circumstances, but 5%-10% isn’t a bad place to start.  One way to get to the bottom of this number is to look at your credit card statements and see what surprises went on your cards every month.

Pitfall #5:  Budgeting Against Future Earnings

You may finish your budget and find out that you’re short.  It’s tempting to say to yourself that more money is coming — whether you are picking up extra shifts at work, counting on a bonus, counting on business picking up, or planning to take on a room-mate or odd jobs.  You can’t count on that kind of money until you are consistently earning it, and you don’t want to wind up in debt because you were counting on that money and it didn’t show up (or showed up much later than you expected it to).

Instead:  Budget based on your current income (or less). You can always revisit the budget if your income rises to a higher consistent level.  One bonus or one good sales quarter does not make a consistent increase, by the way.  Use those one-time or infrequent bumps in income to accelerate your savings or debt reduction goals.

Pitfall #6:  Getting Too Detailed

A budget that is too detailed is flawed in a few ways.  One, it’s too hard to keep it up.  If you are scrutinizing every receipt to split it into dozens of inter-related categories, or tracking a 50 cent purchase of bubble gum, you’re probably not going to have enough time to track your spending and compare it to your budget.  Two, it probably doesn’t help you make any decisions.  Does it really matter that you went over your “Groceries” budget by $50 and were under on your “Toiletries” budget by $30, or is it equally informative to know you were over on “Groceries & Toiletries” by $20?  Either way, you still need to get $20 more of value out of your current spending, or realize that the things you bought weren’t worth it, and cut back.

Instead:  Consolidate categories by how you make spending decisions. If you typically make all of your grocery and toiletry purchasing decisions over the same couple of stores, lump them all into one category.  If you go over, you’ll be able to scan the receipts and see why without needing to keep track of each category independently.  Corollary – if you consistently go over in a single category even after analyzing it, you may want to split it up into multiple categories to get a better view of what is happening.

Pitfall #7:  Confusing Your ‘Wants’ and Your ‘Needs’

I need my coffee or I’ll never get through the day!  I need my massage after dealing with the kids / my job!  I need my movie time or I’ll go crazy!  I need my housekeeper or the place will never be clean!  I need my BMW if I’m going to work at this job!  It’s very easy to rationalize your additional spending. And these don’t have to be big purchases, either.  You can easily spend an additional $30-$50 at the grocery store each visit because of things you ‘need’ or ‘deserve’.  Don’t make the luxuries of the past the necessities of today.  And don’t confuse the values of others with your own values.  If your job really requires you to spend money on things that aren’t worth their cost to you, then you may be in the wrong job.

Instead: Stop yourself and re-assess your goals and values. If you build your budget with a business mindset – looking at what you want to accomplish and what you need to do to get there – then you should be able to figure out where you can let go and what you truly need.  The motivation to stick with it will come from working towards achieving your passions.  All your habits that help you make it through the day at a crummy job will pale in comparison to watching your progress at saving up for a career change.  And many couples have, after a dispassionate review of the math, realized that their 2-income life was no more profitable than a 1-income life after all their job expenses were taken into account.  Now, if you’re working two careers that you love, that could be a good decision.  But if one of you hates your job, you’re wasting your time.

Pitfall #8:  Failing to Review

The budget doesn’t DO anything.  It doesn’t change your spending habits.  It doesn’t track itself (although good software certainly helps).  It doesn’t make you care about your goals.  It should give you the information you need to see how you are performing and what progress you are making against your short, medium and long term goals.  If you think that you can spend a weekend getting a budget in place and everything after will be magically wonderful, you are on your way to disappointment.  And, if you don’t include in your planning setting aside the time to review your work, you’re planning to fail.

Instead:  Set aside regular time to track your spending and review your progress. Depending on whether or not you are using the envelope system or credit cards and an electronic system, this can be as far apart as once a week and as often as every two to three days.  You need to get it on your calendar and stick with it.

Pitfall #9:  Failing to Cut Your Spending

So, you’ve decided that you only have $75 in spending money for the month.  The second rolls around, and you hit a coffee shop in the morning and go through $5.  Lunch is $8 because you didn’t bother to pack it.  Dinnertime rolls around and you stay late at the office (unavoidable) and wind up hitting the drive through on the way home, going through another $8.   Once home, you buy 4 songs on iTunes at 99 cents apiece because your day was so lousy and you want new music to listen to at work.  You’ve now spent 1/3rd of your $75, and you’re only 1/30th of the way through the month.

InsteadRealize where you are going to need to change your behavior, and start immediately. There are lots of sites out there (ours included) with ideas to help you through your problem areas.  In this case, cooking a big meal on Sunday and storing the leftovers (to cover dinner when there was no time to cook), making coffee at home, and packing a lunch in the morning (which could also be frozen leftovers) could have lowered that $21 in spending down to near zero.  And since you were happy with your budget progress, the iTunes purchase might have been more deliberate…. meaning either you spent the $4 because you really thought it was worth it, or you didn’t buy the songs (or bought less).

Pitfall #10 (For Couples):  Trying to Agree on Everything

Remember, your budget is an expression of where you think it’s valuable to spend your resources, and it’s pretty unlikely you will agree on everything. Don’t lose the whole budget because you can’t agree on all of it.

Instead: Make sure there is money that each of you can use independently, and set thresholds for group decisions. Your independent money is yours to use however you see fit.  And, if you’re within budget, you should be able to make small decisions alone.  Many couples use the $100 mark for joint discussions.

Pitfall #11 (Use Carefully!):  Leaving No Room For Fun

If you are building a budget expressly because you are in a valley of despair over the state of your debt, it can be easy to tell yourself “I’m not doing anything else fun until I have this crap paid off!”  But you’ll break that promise to yourself soon enough, whether it’s at the bar, in line at Starbuck’s, during lunchtime at the office, or with the kids at the toy store. HOWEVER, this is not a free pass to blow your budget or do whatever you want whenever you want to.  Your “room for fun” needs to come in the form of a budgeted amount that is realistic and within your means.  It does NOT mean that it’s OK to run up credit card debt or skip out on your savings goals (or worse, monthly bills) just because.  Remember this is ALL for “yourself”… the reward is not the latte next week, it is a lifetime of debt free living.

Instead:  Make sure you have some money for fun. Again, how much is really dependent on your personal circumstances and your goals.  If you’re not sure how to start, pick 3 or 4 things you do for fun on a regular basis, and make sure you have enough money to do them once or twice a month.  You may have to drop some expensive habits (have your friends over and make drinks there instead of heading to the bar, or have family movie nights on a rental with homemade popcorn instead of at the theater). 

Thumbnail Photo: Blocks 1 by Crissy Alright

Story Photo via Wikipedia


What principles do you follow when budgeting?  What problems have undone your efforts, and how have you gotten past them?

Below Your Means Basics

This month we will be presenting a series of Below Your Means (BYM) Basics articles to help those of you who are new to living below your means, and serve as a refresher for those of us who have (or strive to) live the BYM way.

When you live below your means, you shed a huge source of pressure and strain in your life.  Spending beyond your means, in other words – going into debt – means you are trading your future to get something now.  You are agreeing that in the future you will be willing and able to have a certain amount of money.  But none of us can predict the future.  There are lots of ways people get into trouble with debt.  Accidents and health problems lead to massive medical bills and lost wages.  Your ability to earn can be impacted by layoffs, swings in the economy, your own health, and the health of your loved ones.  Those common tragedies are only one reason to worry about spending more than you have.  In fact, bankruptcy laws are in place to protect people specifically from those kinds of ‘unexpected’ crises.

Money CastleThere is a much more insidious price to pay for living beyond your means.  Doing so assumes that you know now what you will want and need in the future.  In reality, most of us aren’t entirely sure what we want and need today, much less the kinds of opportunities and challenges we’ll face tomorrow.  When you take on debt and fail to save, you narrow the possibilities of what the future could hold.  Want to move to a new town?  You’ll need a job with an income sufficient to pay for your debt, and you’ll need to sell your house before you can buy a new one.  Tired of your car?  You can’t sell it because you owe more money on it than it’s worth.  Have a great opportunity to travel to a place you’ve always wanted to visit?  You can’t take the time off, and you don’t have the money saved up to go.  Hate your job, or worse, discover that your career is unsatisfying?  You’re stuck because your monthly payments are too high to switch to something new.

Saving, on the flip side, acknowledges not only that you need to be prepared for the problems of the future, but that you want to have resources at your disposal to seize the opportunities that come your way.  Want to move to a new town?  Sell the stuff you don’t need, get a few leads on some work if you need them, and get going.  Tired of your car?  Sell it and get something else (or go without).  Have a great opportunity to travel?  Plan a leave of absence and head out!  Hate your job, or worse, your career?  Feel free to get started on the next chapter in your life.

In short, money is a tool that you can use to achieve happiness.  It certainly isn’t the only tool, but it’s an important one.  Using it wisely requires that you know yourself and what makes you happy, and you understand that as you grow and change, your wants and needs will grow and change.  While our site isn’t designed to help you live a deliberate, centered life, there are a few resources we recommend to do so.  Franklin Covey’s The 7 Habits of Highly Effective People, while centered a bit too much on an upper-middle class suburban existence, has a great process to follow to think through what is important to you and how to get there.  And David Allen’s Getting Things Done: The Art of Stress-Free Productivity is such a great way to organize your life that he has spawned what Wired magazine referred to as a cult of hyper-efficiency.  Covey’s book especially can take you to additional resources on how to live a successful, meaningful life, but honestly — whatever helps you discover more about yourself, and how to make good choices, go for it.

This month we’ll explore:

  • The Basics of Tracking Your Spending and Building a Budget: This is the single step with which your journey starts.  Sure, you can cut down on your spending, even significantly, without knowing where your spending is going.  But finance is, at it’s most basic, an exercise in math.  If you bring in more money than you spend, you’re living below your means.  If you don’t, you’re not.  Tracking your spending isn’t everything when it comes to living below your means, but it’s hard to be successful without it unless you institute an all-cash system.  Fortunately, there is a whole industry building computer software to help make it simple, and some of it is free.
  • The Basics of Debt and Savings: Debt means giving up opportunities in the future for a lifestyle today.  It is a very dangerous gamble.  You will also see how to use debt as means to manage your cash flow and take risks to increase your wealth.  If you have consumer debt now, you’ll need to first and foremost – stop digging the hole deeper!  Next, you’ll need to pay that debt off as soon as possible and free your future from the tyranny of your past decisions.  Savings, on the other hand, gives you freedom.  It means you have protection from the unexpected and resources that you can use to seize opportunities.
  • The Basics of Spending Wisely: Tips and tricks for spending the least amount possible on things that aren’t critical for happiness and health.
  • The Basics of Living Richly: Spend your money on things that bring you true satisfaction and happiness.  Spending as little as possible for everything else.  Knowing the difference isn’t always easy, and we focus on tools and techniques to help you get there.  To start, realize that most millionaires are ordinary people who live modestly.  And, as this study shows, money doesn’t necessarily bring happiness beyond a certain income.
  • The Basics of the Investing Smartly: Keep tabs on the economy and investing opportunities.  While we aren’t a strict investing site, nor are we financial advisers, we do report on happenings in the economy so you can make educated decisions about where to put your hard-earned savings.  We also believe that, like personal debt, government debt is very risky and the government’s inflationary and spending policies are significant risks to personal well-being and to our country’s future.
  • Common Pitfalls: Identify common pitfalls on your way to financial independence, and share the stories of people who share your commitment to living well by living below their means.

 

Thumbnail Photo: Blocks 1 by Crissy Alright

Story Photo: Frits Ahlefeldt-Laurvig