A Budget: The Key to Your Financial Success—Part 2

Preventing personal spending from spiraling out of control is the main reason why budgeting is necessary to begin with. If you’ve never created a formal written plan for earning, spending, saving and investing, the best way to begin is by tracking daily expenditures. Woody Allen once remarked that 80% of success is showing up. Well, if that’s true, then 80% of financial success is keeping track. No expenditure is too small to be accounted for. Once, a friend of mine flipped a quarter into a cascading fountain and noted the miniscule expenditure in her spending diary under the heading of “wishes.” Though many people assume that a huge paycheck or a staggering windfall of cash would bring a swift and permanent end to their financial woes, nothing could be further from the truth. And the facts bear this out. Often times, lottery winners blow their newly acquired fortunes (perhaps because they don’t feel worthy of them) only to end up flat broke. Sly Stone’s life story is a stirring testament to life’s shifting fortunes. Once a wealthy and famous singer, she’s now living in a camper van in Los Angeles recording music on a laptop. It’s mildly comforting to know that fiscal recklessness isn’t exclusively a U.S. phenomenon. It’s a quirk of the human condition that transcends cultural and national boundaries. Consider the story of Michael Carroll, a British sanitation worker who, after winning the lottery in 2002, blew $15.2 million on drugs, prostitutes, parties and extravagant gifts for friends and family. Of course, these and many other unreported stories play out across many peoples’ lives. Such outcomes are surprisingly common among the lucky few who, out of the blue, strike it rich. According to the National Endowment for Financial Education, 70% of those who come into a windfall squander it in just a few short years. Although six and seven figure incomes are hugely popular and aggressively pursued, stratospheric compensation levels offer an equally illusory sense of economic invincibility. Celebrities (Michael Jackson, Robin Leach and Ed McMahon are notable examples) and professional athletes (Mike Tyson) have achieved tremendous earning power throughout their storied careers only to outspend their lofty incomes and end up flat broke.

The bottom line: it doesn’t matter how much wealth you have or how much money you earn, how you manage money is what matters most in the long-run. If there’s a secret to nurturing a personal balance sheet and achieving economic security, it lies in focusing on your attitude toward and relationship with money. This is well worth dwelling on because it’s going to help or hurt you for the rest of your life. If you’re serious about money, and intend to have a lot more of it in the not-too-distant future, you’ve got to worship at the church of spending less and saving more. You see, nothing screams wealth like a well pinched penny. It helps to think of an income as a modest trickle of water dribbling from the nozzle of a financial garden hose, one that’s been mischievously pin-pricked with lots of tiny holes. Now, the many arcing rivulets of water that are spouting-off along the length of your garden hose represents non-discretionary spending. This is whatever money is left after essential living expenses like food and shelter are deducted and state and federal income taxes are paid. What’s left over is yours to do with as you please. Let’s call this notably diminished remainder your disposable income. Now, if you look around, you’ll notice that there’s a wealth bucket lying on the ground beside your bare wet grass speckled feet. You do want to fill your wealth bucket, don’t you? Certainly, good things come from doing so. Needless to say, most people want their wealth buckets to fill as quickly and efficiently as possible. Should you share this particular aspiration, you’ll need to inspect the condition of your wealth bucket very carefully. Is it too riddled with holes? If so, are they gapingly large? This is a million dollar question because, if the cash flow trickling out of your financial garden hose sloshes into your wealth bucket only to swish through a bunch of holes and hydrate the lawn then it may never fill. The holes in your wealth bucket represent discretionary spending: money spent on wants–not needs… Luckily, it doesn’t take an MBA or an overpriced Ivy League education to know that your wealth bucket won’t fill quickly unless you locate and patch those holes. Interestingly, although everyone has the metaphorical equivalent of a wealth bucket, few of them hold water. The systematic process of locating and patching the holes in your wealth bucket is what we’ll focus on next.

Isn’t it wonderful how technology has, for the most part, made our lives easier? Compared to the prohibitively time intensive and painstaking chore of tracking one’s income and expenditures the old-fashioned way (with pencil and paper), the advent of personal finance software represents revolutionary progress. Thanks to the awesome number crunching power of personal computers, the growing popularity of online banking, and the ease with which financial statements can be quickly and securely download, the hi-tech tools needed to systematically track and manage the smallest details of one’s financial life have never been more broadly accessible. No matter how complicated or fragmented your financial situation might be–and it really doesn’t matter if you’ve got one or multiple credit cards, different saving and checking accounts, and a smattering of brokerage and/or retirement accounts–you can easily consolidate information from all of these disparate sources onto one easy-to-reference place. Because, in theory, there’s a very rich and fulfilling life to be lived outside of tracking the tedious ebb-and-flow of your money in your life, it’s a good idea to make personal finance software the central hub through which the varied spokes of your financial life pass. Personally, I find Quicken’s Premier to be quite useful. Of course, it takes time and effort to install and familiarize yourself with the software and its handy features; but, once you have, with the push of a button and click of a mouse, you’ll be able to generate a comprehensive record of all financial activity on all of your accounts. A credit card charge from Chevron, for instance, will automatically appear in a spending report under “fuel costs,” an automobile expense subcategory. Similarly, restaurant charges can be easily found under “dining out” expenses. With this detailed information at your fingertips, you’ll know exactly (down to the penny) how much you’ve spent on everything from coffee and gasoline to electricity and groceries—and everything in between. What’s more, should your expenditures exceed preset limits, the software can alert you. With such a system, you’ll always be in the know about your money and can adjust your spending by the right amount to get back on track. To make the fire-hose torrent of data that personal finance software collects and dispenses easier to interpret and analyze, customizable reports can be exported to excel for further study. Haven’t got room in your wallet for high-end personal finance software? No problem; Yodlee Money Center and Mint are free (albeit less robust) alternatives. Bundle.com (a venture jointly sponsored by Microsoft, Morningstar and Citigroup) offer valuable perspective on other peoples’ spending patterns. For instance, it can show how your spending in a given area of your budget compares to averages in your neighborhood–by zip code. Click on “Everybody’s Money” and you’ll see how your expenditures on restaurants, groceries, transportation and clothing compare to others’ in your community.

Though personal finance software conveniently eliminates much of the mind numbing hassle of tracking and managing the intricate details of your financial life, its most glaring defect is that it can’t account for cash spending. Until the talented software engineers who create personal finance software products design an omniscient version, it can’t determine where your cash disappears to once it’s been withdrawn from a bank or ATM and spent. Lest you think otherwise, this functionality glitch is shared by all personal finance software products that are currently available for purchase. But don’t despair. If you suffer from obsessive compulsive disorder and simply won’t be able to sleep at night unless you know where every nickel goes, there’s a clever low-tech solution. When withdrawing cash from a bank or ATM, keep the receipt. This scrap of paper, which is often tossed in the trash, has the date and amount of each withdrawal printed on it. Stash this valuable piece of paper somewhere in your wallet’s bill fold and keep a pen handy at all times. This way, as you spend cash, you can note on the back of your ATM receipt how much you spent and what you bought. If you stay on top of this manual accounting system, you won’t have to wonder where your dollars went. You’ll have a complete record of all your cash spending. When you’re wallet eventually empties, you’ll have a detailed summary in the form of hand written notes. Keep your used ATM receipts in one place so that, at the end of each statement cycle, you can manually key in your cash spending along with downloaded transactions.

Do you find that money is frustratingly hard to come by? Luckily, there are many ways to make due with less. Keep a watchful eye out for that blue packet of coupons that’s delivered to most household mailboxes once a month. If you accidentally discarded it along with a fistful of junk mail, don’t worry, they can be viewed online at www.valpak.com. Simply enter your zip code, and, from the comfort and convenience of your own home, you can browse and print money saving coupons on everything from oil changes and dental cleanings to restaurants and lawn care. Still not satisfied? Other penny pinching sites (FatWallet.com, Active-Freebies.com, SlickDeals.net, CouponMom.com, MyGroceryDeals.com and CouponMountain.com) are a bargain hunter’s delight. When was the last time you shopped for a better deal on your automobile insurance? Even if you can’t negotiate a better price on your auto premium, you can save money by raising your deductible. This is the amount you must pay up-front before your insurer will cut a claim check. Are you tooling around in a beat up old clunker that looks like something tnhat belongs on the set of Sanford and Son? If your car’s replacement value is somewhere between nada and zilch, eliminate the portion of your auto policy that compensates you for damage to your vehicle if it’s damaged in an accident. This too will reduce your auto premium. Still wasting almost fifty cents in postage on every bill you pop in the mail? Sign up for online bill pay services. Over time, you’ll save a bundle on unnecessary postage, envelopes and check printing costs. Is the entertainment portion of your budget constantly kicked in the shins by video rental charges? Nowadays, public libraries carry more than books, newspapers and magazines. Many carry an assortment of movies on DVD that can be checked-out for free. Looking for cheap thrills in the big city? San Francisco’s Museum of Modern Art and the Academy of Science offer free admission to the public the first Tuesday of every month. Living richly doesn’t necessarily require great wealth you know; parks are lovely and wonderfully inexpensive places to spend time in the great outdoors with friends. The bay area has an abundance of scenic trails that quietly beckon and invite hours of leisurely exploration. Are you a college student? Do textbook prices send you into a state of catatonic shock? If so, you can save a bundle by not purchasing your textbooks at the campus bookstore. I won’t reveal the extremes I went to as a frugally minded college student to avoid being swindled by unreasonably high textbook prices, but you should look into sites like chegg.com, bookfinder.com and campusbookswap.com. These outfits specialize in textbook renting, selling and buying. The bottom line: if you want limited financial resources to stretch further, you’ve got to find creative ways to spend less.

Now that we’ve covered the financial output side of the budgetary equation, let’s direct our attention to the financial input side. Just as there are many ways to whittle away at expenses, there are just as many ways to boost an income. If you’re an entrepreneur at heart, now might be the perfect time to jumpstart that business venture that’s been collecting dust on your mental workbench. When it comes to transforming a viable business concept into a profitable money-making venture, the Small Business Administration (which offers one-on-one mentoring, financing and all manner of start-up support) can help. Entrepreneurship isn’t your bag? Fine, as Warren Buffet’s shrewd investing exploits have clearly demonstrated over a multi-decade span, you can build an enviable fortune over time simply by kicking your moolah off the couch and making it work as hard as you do. Investing a portion of your savings (money you won’t need in five-to-ten years) in appreciating and cash generating assets like stocks, bonds and real estate–or a sensibly diversified mix of all three–is an effective long-term wealth building strategy. Don’t scoff at the idea of owning real estate. Just because the median price of a goat-shack on the outskirts of the Bay Area is painfully out of reach doesn’t mean you can’t own income producing commercial property. Real Estate Investment Trusts, or REITs, are a perfectly respectable but not widely recognized asset class. Happily, the cost of REIT shares won’t land you in the poor house. Much like a stock, REITs offer investors partial ownership of commercial properties in a wide variety of industries. If none of this sounds appealing, consider going back to school to invest in your professional skills. Of course, these are all tried and true methods of boosting an income. But they often require patience and a considerable amount of time to pay off. If you’re looking for instant income gratification, paid surveys are a good option. Believe-it-or-not, corporations will pay large sums of money to gather thoughtful input from prospective consumers concerning the efficacy and/or desirability of their products and services. Luckily, your two-cents can fetch a lot more than one-fiftieth of a buck. Some companies will pay upwards of $50 for as little as an hour of your time. Google it.

Here’s another nugget of financial wisdom: when it comes to the ongoing struggle to gain financial yardage, it pays to multi-task. In other words, to build lasting wealth, you’ve got to think offensively and defensively at the same time. Can worthwhile money management insights be gleaned from the rough-and-tumble world of professional sports? Can fiscal wisdom be gained from the competitive athletic arenas of baseball, basketball and football? Yes, it can. The basic underlying principles that make for a successful sports franchise can, if rigorously applied to the your pocketbook, make you rich. After all, a football team with a stellar offensive and an inept defensive is sure to lose more games than it wins. High-caliber scoring power is certainly flashy and impressive. But, without an equally competent defense, the game winning potential of a stellar offense won’t be realized. In sports, winning requires a sensibly balanced approach to managing the offensive and defensive side of the ball. The same basic logic applies to creating and protecting wealth. Financial offense (managing what you make) and financial defense (reducing what you spend) are opposite but equally necessary sides of the same wealth building coin.

If income and expenses are the basic building blocks of the budgetary process, personal goals are the real driving force behind it. Unless you’ve got a fire-in the-belly passion for something you truly desire and are willing to sacrifice for, it will be difficult to muster the willpower and resolve to resist giving into countless spending temptations and other distractions that will prevent the budgetary process from bearing fruit. Of course, personal goals vary widely. This is understandable. After all, each of us is driven by a unique and complex combination of desires and circumstances. Moreover, your goals (whatever they may be) are likely to change over time, and they’re likely to do so in ways that will surprise you. That said, not all goals are financial in nature and, opinions to the contrary notwithstanding, money isn’t the measure of all worth. Nonetheless, I’m sure you’ll agree that achieving your life’s ambitions requires accumulating and maintaining a certain threshold of wealth.

To nudge your thinking in the right direction when it comes to assigning money its rightful place in the grand hierarchy of your life, you should know up-front that there’s another (though, to be sure, unfashionable) term for money: fiat currency. In other words (and you might want to sit down before reading further) those ornate pieces of government issued paper that people tirelessly obsess about and fuss over have little-to-no intrinsic value. Fact is, money’s value stems from everyone’s faith in it as a reliable store of value and a universally accepted medium of exchange. Now, if a dollar’s worth is defined strictly by the quantity of goods and services it can buy, its purchasing power is perhaps a good deal less stable than many people suspect. If this sounds absurd, and you’re convinced that the value of a nation’s currency can’t suddenly and violently fluctuate, you should crack a history book and read about how well Germany’s economy performed in the cold winter of 1923. The one-two whammy of a war torn economy and the need to pay hefty war-time reparations dealt a severe and destabilizing blow to Germany’s currency, the Deutsche Mark. A revealing story from this dark chapter of economic history illustrates fiat currency’s true value. Rumor has it that, during the height of Germany’s economic funk, an old woman trudged through the snow carrying a giant burlap sack full of rapidly depreciating Deutsche Marks. She was looking to swap her money for a day-old loaf of bread. On her way to the town bakery, she dropped the heavy sack on the ground to catch her breath. When she’d recovered and was ready to continue on her journey, she saw a pile of loose bills heaped before her. Somehow, a thief had slyly made-off with her burlap sack, leaving her money untouched and piled high on the snow. This story is a stirring testament to the instability of paper—I mean fiat—currency. But I digress; the takeaway point is that the value of the almighty buck (and other forms of government issued money) is supported by two things: 1) peoples’ faith in its dual function as a semi-stable store of wealth and an easy to use medium of exchange, and; 2) our government’s willingness to, if necessary, print oodles more. To be clear, I don’t mean to undermine fiat currency’s perceived value, but rather, to argue that the dogged pursuit of money for its own sake is a hollow endeavor. Which is why it pays to think first and foremost of your life and to make the betterment of that the focus of your lifelong fiscal efforts.

Start by creating three separate lists; each consisting of short-term, intermediate and long-term goals. Remember, when brain storming and cataloging your life’s changing ambitions, it pays to be as specific as possible. Remember, realistic expectations foster achievable results. Examples of short-term goals might include things that, with a modest amount of saving and sacrifice, can be obtained in a relatively short period of time; say, one-to-three months. Achieving intermediate term goals, however, requires a lot more patience and resolve. This list should include items that can be had in six to eighteen months. Realizing longer-term goals is a loftier challenge, but achieving them is also infinitely more rewarding. Examples of long-term goals might include saving for college, funding a ritzy retirement, buying a home or bankrolling the vacation of a lifetime. Once you’ve created a list of attainable goals that you feel passionately about, design a budget and assign it a realistic timeline for success. It’s helpful to write down and post your goals in a place where you’ll see them everyday. This is a subtle yet effective form of reinforcement and a reminder of your true priorities. Budgeting is an imperfect ongoing process, don’t be afraid to make mistakes along the way. The bottom line: it’s your life, it’s your list, and it’s your budget; perhaps it’s time you gave serious consideration to all three.

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