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Entries for label: budgeting

Found 14 entries.

Financial Balance and Doing What Makes You Happy

Many articles I have read over the years talk about Financial Balance. Many give you various percentages which you could (should?) follow and others break it down even further. For example, one thought is to break your net income into the following areas:

• up to 50% on NEEDS
• up to 30% on WANTS
• the rest (20%) on SAVINGS

Breaking these down further can lead to more complex solutions and that is something you should decide, but before even trying to break it down, consider why you should do this.

Being Happy

Most of this blog, as well as others I read, is about being happy. It’s not just about personal finance, saving money or being thrifty, it’s about doing what makes you happy. When you realise that having the freedom to do what you want because of financial independence that is a powerful thing. And whilst you might not be in that situation now, but heading towards it over the next few year, means that whatever you do, will make you happy.

Making homemade jam, wooden toys from the ends of spare planks in the garage, pizza dough freshly made in the kitchen, a crayon pocket for the kids and a sock puppet from old worn out socks are all very enjoyable and also cheap and easy to make. The thought that a homemade toy says rather than a plastic thing from the shop is very satisfying.

So where does all this fit in with the percentages above. Well, making all these things at home is way cheaper than buying them from the shop, so firstly they help with actually saving money. That goes towards your 20% savings.

Secondly, doing all of these activities is fun! Either by yourself, with the kids or for other people, they all give lasting satisfaction which means you feel good. It also helps fill in your time instead of watching TV, doing retail therapy or just generally being lazy.

Finally, you can fill your time with wants which are fun and cheap, rather than wanting expensive DVDs, chocolate or expensive hobbies. Of course, there is nothing wrong with all of these things if they are in balance with the rest of your life and your way of life. Better to be happy and healthy, than rich or broke. Finding that balance can help keep you on track to financial independence as well as on track to enjoying your life.

Labels: budgeting, giving, working

Inserted: 2009-12-30 03:06 (7 months ago)

Paying Bills per Month Rather than per Year

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There are two trails of thought in my head these days. Firstly, the idea that I will retire at 40 once I am financially independent.

The second is that of simplifying and downsizing my life and my needs.

The funny thing is, sometimes these ideas aren't quite orthogonal and one influences the other, sometimes to it's detriment.

Paying Bills per Month

Recently, I changed banks. I did it for a few reasons, one of which was that I could do more of my banking online or over the phone. I rarely - if ever - need to go to the bank now and in fact they don't even have premises since they are physically inside Post Shops.

This bank switch has made my life simpler and easier and I like it.

Whilst I was switching though I also decided to change a couple of other things too. The main one being that where possible, I decided to change from paying some bills quarterly or yearly to paying them monthly.

The reasons for doing this I will come on to in a second but firstly, let's see why this is now a disadvantage.

Going Against My First Plan

Becoming Financially Independent means being careful and clever with your money. Yet paying for things monthly may go against the being clever bit.

For example I have to pay my rates quarterly. They are due at the start of the 3rd month of each quarter, therefore the money for the first two months sit in my account earning money for me. But by changing it to monthly payments means that I no longer get that advantage.

Also for other bills that are paid yearly, I may have to pay everything up front but usually you earn a slight discount for doing it that way.

Therefore in both of these cases, switching to a monthly payment plan is probably not the best thing to do financially speaking.

Going With my Second Plan

Overall however, paying these bills monthly makes things a lot easier and therefore makes my life simpler.

That is, instead of putting money aside into a Freedom Fund and having to calculate how much to put in it each month and then paying it at the beginning of each year I instead have a Bills Account which receives the correct amount every single month.

I know that a Freedom Fund isn't the hardest thing to do and I still have one for those bills I can't pay monthly but I also like the idea that I'm paying for something as I need it.

In Conclusion

Whilst paying for some bills quarterly or yearly may have a financial advantage, the ease and simpleness of paying them monthly outweighs pure monetary gain.

This may or may not work best for you but how do you do it and why?

Labels: budgeting, banking, spending

Inserted: 2009-05-12 21:18 (1 year, 2 months ago)

Frugal or Cheap

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There seems to be some debate in the PF world at the moment about what the terms 'Frugal' and 'Cheap' mean. I think there are some interesting points but in all honesty I really think that it is in the eye of the beholder.

Personally I think I prefer the term Frugal rather than Cheap due to the same reason DebtDiva mentions ... that cheap has negative connotations, but mostly it doesn't matter to me.

I have known a number of people over the years who have said things to me like "I'm too cheap to buy [this] or [that]". They obviously don't care about any negative feelings towards being 'cheap'.

To Me, It Doesn't Matter

In reality, it all amounts to the same thing anyway, that these people who call themselves frugal or cheap look after their money a bit more than those who don't. Possibly by not spending as frivolously, saving well and looking at the long term needs rather than the short term wants.

The One Thing I Remember

There is however one phrase that I try to remember when I am purchasing something. Generally I don't go for the cheapest stuff but at the same time I don't go for the most expensive either. I've always been a middle-of-the-road guy when it comes to such things (of course, it is very dependent on what it is you're buying).

As it turns out, this particular phrase has stood me in good stead over the years and I somehow manage to make my purchases last years longer than what some other people would. By not buying the cheapest thing, my possessions usually last as long or longer than I need or want them to. Adhere to this phrase and you'll probably be able to do the same too:

Only the rich can afford to buy cheap!

It's one of those phrases I heard once and never forgot. The friend who told that was well on the way to retirement at an early age (probably mid-forties and he could stop work - not that he will) and I've thought about it all the time since.

How do you see the words 'frugal' and 'cheap'? How about 'thrifty'? Does it really matter?

Labels: planning, budgeting, shopping

Inserted: 2009-02-22 15:56 (1 year, 5 months ago)

Credit Cards are another Tool in your Financial Toolbox

Firstly, welcome to all the Master Your Card readers wandering over here to take a look round. And to all my readers, go and take a look at Jonathan and Kristy's blog, it's a great read.

Today, as a lovely Christmas present I suspect, I've been featured as a guest blogger over there with a post entitled 10 Tips on Using your Credit Card Wisely so have a read of that article there before coming back here.

As a follow up post, I'd like to just take a few words to discuss a topic I alluded to in my guest post over there, a topic I fear is usually put into the "that's bad" basket without much further thought than that.

All Credit Card Usage is Evil (or is it)?

I asked in my guest post whether I was a bad person for using a credit card. In fact, what I really said was:

I’ll admit it. I’m a credit card user. I use it a lot, not everyday, but a lot. Am I wrong? Am I a bad person? Should I be slapped with a wet haddock for my sins?

There has been some discussion as to whether credit cards are evil or just dangerous and there are definitely people sitting on the fence too. But I'd like to make an argument that your credit card is actually a valid piece of equipment in your financial life and something which has quite specific and advantageous uses.

Another Tool in your Financial Toolbox

In reality, credit cards are just another tool in your financial toolbox. They can be used just as much or as little as you like and like any tool, must be used with care and precision. When was the last time you just blindly hit a hammer against a piece of wood to knock a nail in? That's right, you never did! Instead, you position the nail carefully with one hand and precisely strike it with a blow from the hammer in the other hand. It's all lined up, you know exactly what you're doing and you know the consequences of hitting the nail with the hammer.

And that's how a credit card should be used. You should know exactly how much you're spending, what you're spending it on, when that interest-free period stops and the date by which you need to pay your balance.

By using this particular tool in the right way and knowing exactly how it should be used, then you can actually maximise many of the advantages of using a credit card.

Using the Right Tool for the Job

Sometimes you need to do something for which you don't actually have the right tool. In woodwork, this is prevalent and in a lot of cases the job can be improvised by using other tools. In your financial toolbox, you also have other options if you don't have or won't have a credit card.

However I believe that there are certain benefits you can gain by using a credit card which you can't get from any other tool in your financial toolbox. For example, that interest free period on your spending is something you don't get elsewhere, nor do you find 1% cash-back offers from your debit purchases. (P.S. I don't use interest free periods when buying large items, instead I save up for them and pay it off in full right there and then.)

You really do have to weigh up the pros and cons of getting and using a credit card and like all decisions in your (financial) life, your own investigation into this area is extremely important.

And Finally ... It's Not For Everyone

Friends of mine point-blank refuse to own - let alone use - a credit card. That's okay with me since I think it is everyone's own personal choice. I also know of friends who have used credit cards before, gotten into debt and now never touch the damn things! Again, that's fine since obviously it wasn't for them.

From my own personal experience, I have had times in the dim and distant past when I carried a balance on my credit card for almost a year! Up to £4,000 in some cases. Pretty crazy stuff when I think about it now.

However, the advantages I gain by using a credit card nowadays far outweigh the risk that I would again carry a balance for so long (if at all). I have learned from my mistakes and now use the card to my advantage and in a sensible and very restricted and restrained way. I know exactly what is going on the card and I know exactly when it needs to be paid. It is completely and utterly 100% under my control.

So for me, I'd never do without my trusty credit card and in fact my life, and my personal finance life, is better for it too.

What's your take on the matter? Do you or do you not use a credit card?

Labels: budgeting, repaying, spending

Inserted: 2008-12-25 23:20 (1 year, 7 months ago)

The Little Things that Change Your Life Really Quickly

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Every now and again, you see something and you say to yourself "That's a good idea". Sometimes it's the big things, like a different bank with a lower mortgage rate interest, a fuel efficient car, a type of insulation or even a kind of lawnmower. You just know if you were to switch to any of these it would somehow improve your life since they are such an integral part of it.

But other times, you see something really small and you think "Wow, if only I'd switched to this before." Well, this is my story of something really small, something I bought yesterday and already I know it has changed my life and changed it for the better.

Prior to My Purchase

A few weeks ago I was chatting to some friends of friends. People I had met a few times before and already knew I liked them both. They were telling me of their habit of switching every single electrical appliance off at the plug when not in use. The only thing that stays on in the house when they go out is the fridge (actually, they said everything but I presume the fridge stays on).

This includes the likes of the TV, DVD player, stereo, speakers, microwave and all those other things with the shiny clocks, the bright displays or the standby LED lights. We know these are a constant drain on power (and therefore money) so why not switch them off? I knew, but I didn't really practice it.

I'm Not That Good

There are some things I do but switching things off by the plug isn't one of my strong points, which is weird, because I always used to do it. I guess I just got out of the habit. I have always switched off the microwave but my main problem (and mainly because I'm a geek) is that my router and my computer stay switched on. I will have to change this at a future time but now I decided to concentrate on something else.

As we were talking, I curiously asked one little question which eventually brought about my purchase yesterday. I asked "What about your alarm clock?"

"Mine isn't plugged into the mains, it's on batteries, just a small travel alarm."

"Ah", I said, "That's pretty cool."

Not sure I had that 'Wow!' moment yet but it got me thinking, enough to actually go out and get myself a cheap (real cheap) battery operated alarm clock yesterday. My old one, a plugged-in one, with a bright and energy zapping red LED display was having trouble tuning in to certain radio stations anyway and the non-radio alarm was a horrible dull noise which sounded more like a jet engine trying to start but not actually going anywhere. So in reality, it was about time I got a new one anyway.

Added to the fact that I had a new reason for getting one too.

My New Alarm Clock

When I bought it in the shop, I realised that the alarm clock also had a temperature gauge on it. Cool, that's pretty neat. Still no wow factor but nice nonetheless. Then I got it home.

I duly opened up the very small packaging and pulled out a square of about 2.5"x2.5"x1". My old alarm clock was at least 6"x2"x4" so already I had made a lot more space on my side table. Seeing as I'm in the middle of decluttering my house, I started thinking out that this new alarm clock was a winner.

But that's not all. The old alarm had it's power cable running forwards of the bedside cabinet since there are no plugs behind it(it's an old house). With that taken away and the long aerial gone too, the area to the side of my bed is no longer a strewn and busy place but more a tranquil, quiet and warm place.

I started liking the alarm clock even more.

My Two Weather Stations

I bought an electronic weather station a few years ago and have been hauling it around to each place I moved. Alas, the only thing I ever looked at it for was the inside temperature since all the other readings just didn't bother me. Also, my Mum (for all her love and kindness) actually bought me a similarly duplicate weather station for Christmas last year and I've never had the heart to sell it or give it away. (We all know what I think about Christmas presents anyway.)

But enough is enough.

I decided that with my new temperature sensor in my new tiny alarm clock, I could actually get rid of both of these unnecessary weather stations. Wahoo! Another quick win for me, my house and my new simple life and another win for the small, cheap and somewhat-versatile alarm clock.

The Drawbacks

Not everything in life goes as swimmingly well as had been going thus far and I soon figured out the one minor and the one major drawbacks of the new alarm clock.

Firstly, there are only two buttons to the whole clock. This means that having to set the time, or more likely the alarm, is a complete pain. It doesn't even allow you to keep the button depressed to increment the numbers faster. Ah well, this is minor and I can live with it since I rarely change it anyway and usually just switch it off at the weekends.

The other drawback however is when I realised that this clock doesn't even have a snooze button. You know, the one you press in the morning just so you can get another nine minutes sleep. Then because that wasn't enough, you press it again for another non-satisfactory nine more minutes. This, as far as I was concerned, a terrible mark against the almost perfect new purchase.

Taking What You Want From Life

Over the course of the day though, I figured that both of these minor disadvantages could be made to work for me rather than against me. On the point of the inefficient button pressing, I have decided to set the alarm for 7:30 in the morning and to leave it at 7:30 in the morning, for every single day of the week including weekends. I am not going to bother trying to change it at the weekends or any other time unless I have special reason to.

This will make sure I get up at the same time every single day and maybe one day my body willget used to it and not actually need the alarm anymore.

But the best thing I think I figured out with this alarm clock is that, without having a snooze button, once the alarm clock went off, I would have to force myself out of bed, no matter what! As soon as I figured this out, I knew that this was now a 'Wow!' purchase, not through any fault of it's own but due to the way I shall be adapting to my new beeping friend.

The Full Story

I didn't realise originally how much or how quickly such a small purchase could provide but I'd like to recap these new advantages just in case you missed them:

• I don't have to listen to crap and over-advertised radio in the morning
• it doesn't burn through grid power all the time I'm not using it
• it takes rechargeable batteries
• it has uncluttered my bedside table
• it had removed hazardous cables stretching to the plug away from my bed
• I have removed two other unnecessary gadgets from my life
• it will set me a regular (and reasonably early) time to get up at the weekend
• it will force me out of bed at a particular time instead of snoozing around all day

... and of course, the reason why I wanted to get it in the first place, is so that it lowers my electricity bill ever so slightly. However, the thought of not having another appliance switched on all the time led me to turning off most of those other appliances too. This is where each individual gains adds up.

Take From this Story What You Will

You might think that this whole alarm clock story is silly, small and insignificant. That's fine, take from this story what you will but I'm willing to bet that there is something small you have bought, or changed in your life, from which you got enormous satisfaction. It may even have had further repercussions further down the track and you never know how much the addition of all those small but incremental changes finally make to your life.

This is also a story about how negative or disadvantageous things can be turned to your advantage. I mean, having more time in my day is something I am already looking forward to...

...all because of one small, energy efficient, compact, temperature reading, non-snoozing, hard to use, little beeping alarm clock which is now sitting happily on my bedside table next to my lamp, my notebook, a pen and nothing else.

Ah, happy days.

Let me know of any other things which at first seemed small to you but later took on a whole different meaning.

Labels: budgeting, living, consuming

Inserted: 2008-12-14 22:26 (1 year, 7 months ago)

Turning Lifestyle Inflation into Lifestyle Deflation

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In my earlier article on Managing your Lifestyle Inflation, I mentioned something which Karen Datko at Smart Spending seemed to click with. She said:

Andrew suggests that you look at expenditures you started making after your pay went up. "If you didn't have these things before, then you can probably still do without them now," he writes.

That was just a small part of my previous post but it is an interesting one. Essentially by sticking to your same budget, even after you get a pay-rise, then you are recognising this extra income for yourself and actually paying yourself first before adding to your lifestyle expenses. By swiping the extra into your savings account and not spending any more than before then you are managing your lifestyle inflation.

Lifestyle Deflation

More importantly though, you also need to look at downsizing your lifestyle too. There's no point just starting from now and saying "When I get future pay-increases, I won't spend that", it actually needs to start before then. After all, maybe your lifestyle expenses are already too inflated ... usually this is the point at which you're spending everything you earn or even worse and spending more than you earn.

Instead, you should review your life as it is now. Look for the simple things you can remove and also go over your regular expenses to see which you can cut down or at least cut back on. I mean things like whether you increased your cable subscription to include more channels the last time you got a pay-rise. Do you even watch them? I bet not.

Expanding your Savings Range

This year I managed to get a pay-rise but instead of spending more, I actually started removing a number of (unnecessary) things from my life. The latest item I removed was my car seeing as I hardly ever used it. In total, I think I'll actually be up around $200 every single month now that all those car expenses are gone.

Both my pay-rise and my ability to cut out unnecessary things are actually expanding my savings range. I'm spending less of what I earn and therefore saving more. I'm also earning more than before and my savings increase there too. It's funny since I don't miss anything I cut out and instead I have replaced them with other more frugal activites.

When the Economy Improves

Karen also suggests something which should also be added to this list of things to do. Firstly, we're not succumbing to lifestyle inflation, in fact we're actively managing lifestyle deflation and to add another thing into the equation, especially for the current environment, Karen says:

We suggest that if you're cutting back in anticipation of the worst, you consider carrying that new budget forward when the economy improves (and it will).

With an improved economy, you may think that we are out of the woods and home-free but in reality it's still a long way to go to reach your prosperous and financially independent future-self. So instead of madly spending like others will when the economy is looking brighter, just quietly go about your usual still frugal way of life. And instead of reveling in the spend-happy new environment just take a moment to revel in the new and improved ways the new economy will help you save even more money and further reduce your lifestyle expenses.

P.S. After writing this article, I found that The Tao of Making Money previously mentioned Lifestyle Deflation in an article back in Feb 2008, though I can't find any other references to link to.

Any others articles about 'Lifestyle Deflation' you know about? What are you doing to actively manage your lifestyle expenses?

Labels: budgeting, earning, saving, consuming

Inserted: 2008-12-06 18:36 (1 year, 7 months ago)

Non-Cash Based Envelope System - The Bead System

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Earlier in the week I talked about the Envelope System and how it can save you money. I also mentioned in that post that I am not a cash type of person. My transactions are almost exclusively on plastic, whether that is debit or credit, or completely electronic when banking online.

In fact, the only cash transactions I seem to do at the moment are at the Sunday Market for my fruit and veg every Sunday morning. I realised that last Sunday I still had the $8 change in my wallet that I'd received the previous Sunday. No cash entered or left my wallet for a week.

The Envelope System Without Money

Instead, I have come up with an envelope system that you can use without money. It's not as accurate or as flexible but it'll do for my needs. It goes something like this.

Collect yourself a set of jars, containers or some other smallish holders. You need as many jars as you would envelopes i.e. as many jars as you have categories for your spending. I have a number of old empty spice jars which I am going to use.

The Bead System

Then get a number of counters, be it beads, tiddly-winks or any other kind of small item which you can use for counting. Each of these represents $1 each and it is these you will use instead of cash.

At the start of the month, if you're going to spend $250 on groceries each month, then you would count out $250 beads into that particular jar. Maybe you'll also count out $50 into the Entertainment jar. Trust me, this doesn't take as long as you think and it's only a once a month job. After a while, you'll probably get to know how far up the jar 250 beads go (or maybe if you had good scales, you could use them - yes, I jest).

Then, when you're entering your expenses into your accounting program at the end of the day, you can just take out the number of beads per dollars spent from the appropriate jars and put them in a special spent jar. Since you're keeping good track of your expenses, this is not much more overhead than having to remember envelopes each time you go out and buy something. It is also easier for those transactions which have expenses in two or more categories.

Rounding

When using this system, you should consider that those beads represent full dollars and that you can't actually split a bead up any more than it's whole. In which case, if you have an expense which ends in a fraction of a dollar, just round it up to the next dollar and shift those out to the spent jar. The reason to round up is so that you don't actually go over your budget.

Even though the system isn't wholly accurate, it doesn't matter. Hopefully you track all of your spending in an accounts package so this system is just for a general idea rather than for exact detail.

Advantages of Using the Bead System

The bead system is a very visual one, especially so if you have bright blue glass beads in clear jars. It also doesn't require you to either count cash or load up your accounts on the computer just as you're heading out to the shops.

Just a quick glance can tell you approximately how much you have left in any jar. It's very easy to mentally take note of what's left in your most important jars and after a while you'll know approximately how many beads it takes to quarter, half or fully fill each jar. Knowing at a glance when you go to the supermarket how much you have left in your groceries budget is very powerful.

I'm sure that there will be times when you completely forget how much is left in any jar but in reality, most of your spending wouldn't be big enough to go over by a huge amount, unless you were doing it on purpose. If you were going for your weekly shop at the end of the month, you'd be pretty likely to find out how much you have left in the grocery jar before you left, ie. only when it's important. If you ended up getting milk on the way home from work, then I suspect that's not big enough to worry about even if you did go over.

Finally, the last advantage of the bead system is that it works without actually having to store all your cash in envelopes for the most part of each month. Instead, that money would be sitting pretty in one of your accounts earning interest instead of just sitting there not working at all.

December is Trial Month

I shall be trialling this system in December and I'll let you know how it goes. I should be able to find any deficiencies in it and then change it to make it work better. Let me know if you spot any problems or have any suggestions.

Are you going to try the Bead System? Please share your experience with our readers by leaving a comment below.

Labels: planning, budgeting, spending

Inserted: 2008-11-26 21:03 (1 year, 8 months ago)

How the Envelope System can Help Save you Money

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The envelope system is a well known and much practiced system in personal finance to help stick to your budget. It's a simple system and is especially suited to those people who wish to primarily deal with cash (rather than plastic debit or credit cards).

I feel that it is falling out of favour since many transactions are now electronic but I'll present a modified version in a future article which I shall be trying out in December. This will hopefully help for people like me who hardly ever take out or spend cash.

Funnily enough, even in some high tech countries, cash is still king for normal everyday purchases so it's interesting to note that this is a very common technique in Japan, even to the extent that almost everybody does it (and not just those who are careful budgeters).

The Envelope System

The first thing you need is a budget. Without it, the system won't work. Then once you have that, you need to figure out which items on your list (whether they are broad or narrow) are those ones for which you can going to use cash. This wouldn't include things like automatic rent deductions or paying your utility bills online.

As an example, let's say you have 4 categories (a very much simplified month) for which you are going to budget cash for this particular month:

• food - groceries and tops-ups like milk and bread
• household requirements - detergent, soap, shampoo, bin-bags
• clothes - socks, shoes, jeans, skirts, dresses and tops
• entertainment - cinema, CDs, eating out with friends, hobbies
• gifts and charity - presents and donations

Take yourself 4 envelopes and on the front of each, write that particular categories' name. When I tried this system, I also wrote on the front how much I had allocated to it too. e.g:

Entertainment - $75

At the start of every month (or the start of every pay-month), you take out your total alloted money for all these categories from the hole-in-the-wall and divide it into your envelopes as specified. Each and every time you want to spend money on a particular category, you should take that envelope (or a part of it) out with you when shopping. You can do this since you've planned your purchases - right?

If you didn't plan your purchase or you had to buy something then you should re-arrange the envelopes at the earliest opportunity. If you had $20 in your wallet from the Food envelope but you had to buy a pairs of socks, then shift the correct amount of money over from the Clothing envelope to the one that was compensating it.

Easy Peasy

The great thing with this system is that it is very simple to do and fantastically easy to see exactly how much you have spent and more importantly, exactly how much you have left in each of those categories at a single glance.

There would be no need to log on to your internet banking and no reason to wonder whether you're within budget for the month since you have all the information you need right there.

It is also simple because once that particular budget is gone, it's gone and there's nothing left in there to spend. If you really desired that new top you saw in the shop today but later found out that there is nothing left in the Clothing envelope for that month, then you're completely out of luck.

Re-Budget

If you find yourself in this situation, try not to siphon some cash out from any of your other envelopes since then you'd just be cheating. In the case whereby your clothing budget is dry for the rest of the month, I'd say live with it.

However, if you are consistently running dry out of your food budget then you may wish to re-budget what you think you need for that category. This might involve spending less, changing your eating habits or it would be quite normal to increase the budget you had previously considered ok (you may well have under-budgeted by accident). So don't be ashamed if you have to increase your Food budget and of course, be more weary if you want to increase your Clothing or Entertainment budgets. Remember the differences between wants and needs.

Snowflake what's Left

Another great advantage of using the envelope system is that when you arrive at the end of the month, or the time you need to replenish your envelopes, you can use it to save a little extra money. Since you have budgeted to spend a particular amount, yet you didn't spend it all, then pretend it did all disappear and snowflake off what's left into your Emergency Fund, Freedom Fund, savings or retirement scheme.

By doing this, you wipe the slate clean every month and this helps you not accumulate extra money in your envelopes which you'll probably eventually spend anyway. If that's the case, then you're doing a disservice to the time you spent putting your budget together.

The non-Cash Based System

I have briefly played with the envelope system but I almost knew before I started that it wouldn't be for me - though please note that this is a personal preference. This system is being happily used by many people to keep their spending in check.

Firstly, I am not really a cash person though I guess I could be if I wanted to be. Secondly, I wasn't that great rebalancing the envelopes if I had spent money from one envelope on something from another. I found this strange, since I'm very particular about entering every single transaction into my double entry accounting software.

In December however, I shall be experimenting with a new system I have brewing in my head. It doesn't use cash and it amounts to much the same as the envelope system. I shall write a further post detailing this system in the near future.

I have chosen December as the start date for this trial since by that time I will have my budget in place. As I described on my budget post, I have been keeping a record of all of my expenses and by that time it will have been three months. I have noticed that my knowledge of where my money goes is increasing and therefore I'll have a greater idea of what I need to budget for and how much.

It's going to be interesting whatever happens and I'm looking forward to it already.

Do you use the envelope system? Leave me a comment noting any tips and tricks you use.

Labels: planning, budgeting, saving, spending

Inserted: 2008-11-21 23:23 (1 year, 8 months ago)

Are you Managing Your Lifestyle Inflation?

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Have you ever heard the one about the graduate student who ate beans on toast for 4 years whilst completing his degree, accepted a top-class job with high prospective pay increases but even after 10 or 15 years of working never seems to have any more money in the bank than he did when he was studying as a poor lowly student?

Okay, I made this person up but the reality is that most of us know one or two people who are exactly like this. They are earning lots of money, in some cases more than you, but they never seem to actually have any. Yes, they have great cars or a big fantastic house but they always complain about owing so much on maxed out credit cards.

This could also happen to you if you're not careful. You see, these people are victims of Lifestyle Inflation.

What is it?

Lifestyle Inflation is something that happens to all of us at one time or other. It happens when we start working, it happens when we get a pay-rise and it can happen at almost any other time of our lives too if left unchecked. It's that function of our income which makes us say "Hey, I can afford that because of my new pay-rise" so you go out and spend the extra money on that new 'thing'. Because ... you know ... you're worth it!

It also has another phrase, one that is probably more well known than Lifestyle Inflation. It is also know as:

The more you earn, the more you spend.

You've definitely heard of that one.

Now, I want you to sit back, relax and have a think about what you did the last time you got a pay rise. I'll wait right here until you come back. Think of a few things. To help you out, you might want to consider whether you:

• treated yourself to a nice meal out
• splurged on new clothes, make-up or shoes
• subscribed to another magazine
• raised your cable subscription to the next level up
• increased the amount you set aside for socialising
• went out and bought a new car

If you can tick a few of these or maybe you have some of your own, then you are inflating your lifestyle.

So what? I deserve it

Of course you deserve it, you work hard for that money. That increase didn't come without having put those extra hours in, being good at what you do and finding a good position within your company. All that extra work you put in for that pay rise was worth it in the end and therefore you feel you deserve to spend it on whatever you like.

By all means treat yourself but do something low-key as a one off rather than expensive and continuous. That way, at least it is somewhat contained (and also, you need to treat yourself every now and again, otherwise you'd probably go a bit mad).

The Paradox

But here's the crunch. Yes, you put all that extra work in, your skills have increased and you're worth much more in your field of expertise but how does that benefit you if you spend all of that extra? Especially all that extra on something you have to pay every month for a very long time.

Think about it. Your employer is paying you more as recognition that you have improved both yourself and the company. But you're not recognising yourself. If you go out and spend that extra money in your paypacket every month, then you're not actually giving yourself a pay-rise.

Those extra car payments per month might come from your pay-rise but it's basically wiping that pay-rise out. What you end up with in your pocket is the same - or possibly less - than what you were getting before!

This doesn't make any sense. It means you're more valuable, you're earning more and you're being recognised but the end result is that you come out the same at the end of the month.

That doesn't make sense to me (and yes, I've been guilty of doing this in the past).

How to Stop It

Essentially you need to stop it by not allowing yourself to spend that increased pay-packet. Much like the old phrase PF bloggers like - Spend Less than You Earn - another one can be added to that list:

Don't Increase your Spending at the Same Rate as your Pay

There may be one or two things you want to spend extra on, possibly those things you've been holding out for for years but be careful not to spend every single extra penny you take home. If your expenses increase at a lower rate than your pay-rises, then you'll be doing well.

Of course, if your expenses don't increase at all when your pay increases, then you're doing even better. This is easily done by not altering any of your expenses budget but instead adding that pay-rise straight onto your savings budget.

Lifestyle Deflation

Recently, I have been a victim of a lifestyle change but happily for me, it is in the other direction. I have no idea if there is such as thing as Lifestyle Deflation but I think this is what I have been doing recently.

I recently chose to stop, cut out or cut down a number of my expenses and hence, even though I didn't get a pay-rise at the time, it sure has felt like one. It was a random time to do it but after almost three months I am already feeling the benefit of it.

To finish off, you might also want to consider what areas of your life you can downsize, cut out, do without, sacrifice or even just spend less on. You'll be surprised at how just a few things here and there add up to a fair amount of saving each month.

Oh, and by the way, the first places to look are those things you recognised earlier as contributions to your Lifestyle Inflation. If you didn't have these things before then you can probably still do without them now.

What is on your 'Lifestyle Inflation' list? What can you cut out to help with 'Lifestyle Deflation'?

Labels: planning, budgeting, earning, saving, spending

Inserted: 2008-11-19 22:57 (1 year, 8 months ago)

3 Simple Schemes to Split up Your Paycheck

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How much should you use to pay off debt? How much should you save? What other categories should you consider?

As with everything related to Personal Finance, there are many ways of doing it and many much more complicated than any of these three. We're going for simple maths here, simple life, simple savings. And the best thing is, they're all likely to work for you, you just need to decide how complicated you want to get.

In my previous article I mentioned that you should Pay Yourself First. I'm currently putting away 10% of my paycheck into my Emergency Fund. Luckily for me, I have no other debt other than my mortgage so my plan is to increase this 10% over the coming years to 20% or more ... and that's exactly what this first scheme is.

The Simplest of Them All

Put 20% of your take-home pay in Savings

That's it, it's pretty simple. Savings in this case, means anything from an Emergency Fund, your retirement fund, maybe stocks or even an added payment on your house. Of course, if you have any debt (other than your mortgage) you should put this against your debt first. Savings can come later once those high interest debts are gone.

The Next Level

Spend 50% on Needs, 30% on Wants and put 20% into Savings

Not much different to the one above is it? It's just splitting up the rest of your pay a little bit. Of course, everyone's circumstances differ so it would just be a case of fine-tuning the percentage amount for each category until you find the one that's right for you. I personally think that 30% Wants is a bit too high but again, it's all dependent on your other categories.

The Final Simple Scheme

60% Needs, 10% Retirement, 10% Irregular Expenses, 10% Savings, 10% Fun

Yet again, we're splitting up the categories but if you look closely, you're not too far off either of the previous two anyway. For example 10% Retirement + 10% Savings is almost equivalent to the 20% from the first scheme. Currently I'm putting 5% into my Freedom Fund (Irregular Expenses) but I hope to increase that. I will also soon start socking away more cash into my house too. I hope that in 2 months time when I make my first real budget that my Needs are lower than 60%.

Which One is Right for Me?

All of them are right and they'll all do the job to one degree or another. Doing your sums makes all the difference and luckily the maths are fairly straightforward here. I'd say if your savings scheme is remotely like any of these then you're doing okay.

On the other hand, if your savings scheme is a lot less than these, or is even non-existent, then you'll have to start seriously looking at paying yourself first and starting those savings.

Anyone have any other schemes they are using? Any that they are planning to try?

Labels: budgeting, saving

Inserted: 2008-10-13 23:25 (1 year, 9 months ago)

The Freedom Fund - How it Can Work for You

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Do you know what a Freedom Fund is? Have you heard of it before? Any ideas what it might be?

No.

Well, you're not alone. I hadn't heard of one either until the other day. After a bit of poking around, I present a short article on what a Freedom Fund is and how you can use one.

Covering your Backside

Every month you get paid (maybe every two weeks, but just go with me for a while). Every month you have regular expenses. Your mortgage/rent, your electricity, your phone and maybe you pay your insurance and a few other things monthly too.

Then you have some of those irregular expenses. Maybe your car tax is a once or twice a year thing. How about other insurance which is once a year. What about a magazine subscription or even an on-line service you use which is due this month.

These irregular payments are a complete pain in the backside. I know this. You know this. Everybody knows this but not everybody knows how to deal with them.

This technique enables you to deal with these expenses effortlessly and hopefully in the future, you won't think twice about an extra large outlay in any particular month.

Fund your Freedom

What you need is a Freedom Fund and it's no more complicated than just another bank account. I used to have a bills account but in all honesty, I don't have a need for it now since I know (roughly) what goes out of my main account each month. It's those payments that are irregular which hurt me, usually more than I expect.

All you need to do is stash away a certain amount of money each month so that when those irregular payments come in, you already have the money to pay them. Immediate access to enough dosh to get them paid and not worry about it. No searching for extra money in any of your other accounts, no shifting money around to make it happen, just immediate knowledge that you're already covered.

Worrying stops. Mental freedom starts here.

How Much is Enough?

Only you can tell. You have a good idea of what comes in every so often so you need to decide how much to move aside. It's worth over-estimating so that if your car needs extra repairs this year, your Freedom Fund covers it. I suspect you should roughly tot up the totals you expect to come in over the whole year, divide by 12 months and maybe add 20-25%.

For example, and these are very rough figures (off the top of my head), I have:

• car registration - 1/yr @ ~$200
• car insurance - 1/yr @ ~$350
• car Warrant of Fitness - 2/yr @ ~$50 (not including repairs)
• council rates - 4/yr @ ~$350
• on-line subscription fees (Flickr etc) - 1/yr @ ~$40
• ... and others

So my initial stab at the cherry says I'll be taking out about $250 per month to cover all of these irregular items (I'm sure I've missed some off the list though) and give me a bit of leeway into the bargain. Of course, after a short while, you should review where you're at and see how much you are under or over the amount you expected.

Again, the best way to build this up is exactly the same as for your Emergency Fund and yank this money straight out of your account on the day you get paid.

What about my Emergency Fund, isn't that for stuff like this?

Yes and No.

Generally you don't want to touch your Emergency Fund but every now and again it makes sense. You noticed in my list above that I ignored the fact that I might have to make repairs to my car after it had been for inspection. In that case, it would be considered an expense that I wasn't expecting ... whereas all of the other things I've mentioned are expenses that are expected but just happen to be irregular.

In general then, leave your Emergency Fund alone and just plan that little bit ahead with your new and fresh Freedom Fund. Dip into it if you have to but at least think twice about doing it.

The Leftover Stash

Once you've been putting into your Freedom Fund for a while, you'll be able to determine if your original monthly amount was about right. If you're lucky that you have been doing double-entry accounting for years then you already have good figures to base this fund on. The rest of us however, will have to guestimate what we expect and re-adjust when necessary.

If you're really lucky, you overestimated and your Freedom Fund is now growing a surplus. If I were you, I wouldn't be too worried - just keep topping it up each month - after all, it's in a high interest savings account. Isn't it?

What are your thoughts on a Freedom Fund?

Labels: budgeting, saving

Inserted: 2008-10-09 21:47 (1 year, 9 months ago)

One Technique on How to Start Saving

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The hardest part of any road, is starting it. Do you think to yourself that you're not the saving type of person? If I told you I'd be retired in just a matter of years, would you think it was impossible?

Then I challenge you to challenge yourself.

If you took some time out to re-assess an area of your life then you will find something which you can change to help in the art of saving. There's no point saying "I can't do it" and not doing anything about it - that's obviously not going to work. But if you say "I can do something" and actually do it, I'm sure you'll find subsequent changes much easier.

The Type of People We Are

I've always said that I'm not a morning person. I tend to stay up late. I sleep in. Does that mean I'm not a morning person? No, of course not. It just means I'm someone who stays up later and therefore gets up later. My day is shifted, I just prefer staying up later at night.

But I'm going to change that. I want to get up earlier. So how do I change? Easy. I simply go to bed earlier. There's no magical process to change from an evening person to a morning person, you just change one simple part of your life. How hard can it possibly be?

That's exactly how it is for saving money too. By just changing one small part of your life, you can start along that Long, Slow Road to Financial Independence.

The Little Things

I have spoken before about 10 Little Sacrifices which make a Big Difference and also in that post, I floated the idea of Zero Dollar Days. These are days when you literally spend no money. No cash purchases, no debit card use and no credit card use. Of course, you might have an automatic bill payment coming out that day, but you'd already planned for that!

It might take a while to get to the point where you can have one, two or many consecutive days in which you don't spend any money but you need to start somewhere and day 1 is always the best place to start.

Once you've done one day, the next becomes easier, then you'll have a few together and once that starts happening, you'll notice a huge drop in your monthly expenses.

One Technique on How to Start Saving

You've tried before to start saving but failed. You've tried again, stuck at it for a while but then completely lost interest. Well, here's a really easy and small way to start you off saving again but actually keep you saving.

1) Identify Something to Give Up

We've seen before that giving up your daily takeaway coffee can make a big difference, but it's not just coffee. Cigarettes and alcohol are also on this list. How about chewing gum, snacks or a daily scratch card.

Everyone has something in their life that they don't need. Sometimes it is also something they don't want but can't give it up. Either way, you need to do something about it and I hope this process will help stop you from buying it but also start you on the road to saving.

2) Budget for it

Let's take the old favourite, that daily takeaway coffee. Let's also say it costs NZ$4. For weekdays, that's $20 a week and over $1000 a year. That'd be nice if it was in your savings account earning 8% interest.

The only way to get it into your savings account, is to budget for it. Give yourself a budget of $4 per weekday (or every day to make things even better) of $4 for that takeaway coffee. Whether you spend it or not is irrelevant at the moment. At the end of the day, you have either spent it or you haven't. Just make sure you can remember! Note it down. Get into the habit of knowing where your money is going.

3) Snowflake the Difference

At the end of the day, log on to your online banking. Here, you do one of two things. Either (i) you spent the coffee budget on your unnecessary coffee, or (ii) you didn't spend it and saved yourself $4. If you spent it, do nothing, it's gone. If you're in the latter category though, transfer your allotted budget of $4 from your current account into your savings account.

If you don't log on every day, keep 7 fridge magnets in a column and each day move one into either the 'Spent' or 'Saved' group. At the end of the week, transfer the 'Saved' x $4 from your current account into your savings account.

By doing this, you've budgeted for a $4 coffee every single day. On the days you didn't buy one, you've essentially still spent it but instead of going into someone else's pocket you put it into another one of yours.

I feel that with this system by the time you've noticed how much you're saving, you won't want that non-essential item again. It not only helps you give it up but helps you on the road to saving too. Best of all, it's quite painless.

4) Never Decrease the Snowflake

Now that's you've budgeted for that coffee, keep it that way. Yes, you might have to odd one here or there but you'll probably be snowflaking well over 90% of your coffee budget. One trick though is to never decrease this budget and keep on going.

If you could survive by spending it before you can certainly survive by saving it now.

5) Repeat all Steps Again for Something Else

Of course, not everyone drinks coffee. And some people drink coffee, chew gum, smoke something, drink alcohol, buy magazines, snack on chocolate, get takeaways and a myriad of other things designed to take your money away from you. If that's the case, start on one and then move onto the next non-essential item.

After a short while, you'll be amazed at how quickly your savings are building up. All from money you used to spend you now save. Yes, you're allowed to buy some bits and bobs infrequently since you don't want to cut everything out of your life but soon you'll prefer saving it to spending it which will keep you on the straight and narrow.

Finally

Now that your savings have started you'll also start to notice something else too. That particular account will start growing of it's own accord and you don't even have to lift a finger. Once that interest starts coming in, you'll then start to realise that the money itself is making money for you too! It's like a double bonus.

What other tips do you have for other people who want to start saving but can't?

Labels: budgeting, saving

Inserted: 2008-10-08 10:54 (1 year, 9 months ago)

Why You Should Tell the People Around You

One of the best ways of sticking to your goal is to tell the people around you what you are doing. In my case, my goal is to Retire at 40. In your case, you might want to be Frugal, blog away debt or get money smart.

There are a myriad of reasons why telling people about your goal helps. For now though, I'm going to talk about just three.

1. Encouragement

Most of the time you tell people about something you're doing, they are generally encouraging. Many times they probably think you're a bit weird but wish you happy thoughts anyway. Sometimes you will be berated, knocked and told you're completely mad. Luckily, this last set of people is pretty rare though it does happen. As Peter Jones (the highly successful entrepreneur) says in 'Tycoon':

Find people who are passionate about your idea. If your idea is in the musical-instrument market, go and speak to people who are passionate about playing the guitar. [snip]

And the same goes for you and your goal, whatever it is. Find other people who are also passionate about what you are doing, that way, you can lean on each other and help each other out. I've already spoken to a number of people who seem very enthralled to my idea of retiring at 40 and from those people I have already had good luck wishes and smiles.

2. Having a Similar Situation

I had two examples today of where this either helps or it doesn't. In the first case where I hadn't told my friends what my goal was, I ended up buying lunch when in fact, I already had stuff for lunch at home. The suggestion was made to go out for food but for some reason I figured it was easier to say yes than to start the whole explanation of why my lunch at home will help me reach my goal.

In the second example, my friend asked if I would like to join them at a nice restaurant for food in the evening. I replied "I've already got my tea at home" (Teriyaki Chicken, and very nice it was too). He knows my goals the aim to mainly eat at home (especially if it's already planned) and he asked no questions of it. It was both easier and it saved me money - even though I would have loved to have gone.

So hanging around with people who have similar goals and ideas to yours means you probably end up getting long better and saving money in the process. I reckon that works very well indeed.

3. Sharing Ideas

Again, after telling people of my new goal, the first or second thing people would say is something along the lines of "You should try my recipe" or "You can re-use to do " or "You can save money when buying by doing it ".

Almost immediately, you have a number of new tips you can work on or just store for future reference. And again, that person may be a source for new information at any time. Of course, it's reciprocal whereby you can tell your tips to your network of family and friends and that way, everyone gets something out of it.

Just Try It and Tell People

You never know, you might unearth a stronger relationship, a bucketload of money saving tips or even just the odd "Keep Going" comments every now and again. Remember, it's like running a marathon, you need as much encouragement as you can get since you're in it for the long haul. Even better if you're in it with someone else too.

Labels: planning, budgeting

Inserted: 2008-09-28 00:28 (1 year, 10 months ago)

Budgeting

Over the past few years, I've been taking more and more steps to spending less money, though I realise now I can do a lot more. It all started when I bought the house, I guess my spending naturally declined on certain things. Having to pay my mortgage, rates and all the other expenses that go along with that made me think about what I'd been spending my money on.

Whilst I stopped spending on some things, I didn't actually take a step back and take stock of my entire spending habit. As I said earlier, buying the house made me think a lot more even though I didn't action it as much as I could. My plan back then was to pay the house off by the time I was 40 which I now see as step 1 on the road to financial independence.

My ideas have changed somewhat recently in that I've decided that I actually want to both pay the house off by the time I'm 40 and not have to work either. I've recently made this harder on myself by going down to a four day work week instead of the usual five (a story for another time). The funny thing is, it is this decision that has finally made me start to really do something about my spending. Don't get me wrong, my spending isn't out of control ... I am currently debt-free (apart from the obvious mortgage) ... but I'd just like to spend less.

The more I read various Personal Finance blogs, it seems more likely that you can become financially independent by literally spending less. Let's put it this way, it is many times more likely to happen that way than it is to invent a new product, win the lottery or create a massively successful business. And therefore, the most important thing to spending less is to create a budget.

Currently however, I'm not in the position to create a budget since you can't make one if you don't know what your expenses are. Recently I started to use GnuCash to track my expenses. I had spoken to a few people about this and have even played with it in the past. As Stephen says "Gnucash is a very sophisticated double-entry accounting package" which is perfect for this exact cause. The best thing about GnuCash though is that it's free and there's nothing better than free. Not only do I track all my accounts but I also track my cash expenses too however small they are. (Luckily in NZ I rarely have to carry cash.)

That's the expenses sorted so what about the budget? Well, I'm going to give myself about three months before I actually make myself a budget so that I have something to compare it to. I'll then be able to figure out which expenses should be decreased or even cut. By then I'll have at least a little history to make and back up my decisions.

I'd just like to note that already something weird has started to happen. Even though I don't have that budget yet I've already noticed my spending has gone down. I think the act of carefully recording every expense has meant two things: (1) that I think more about it and whether I actually need it, and (2) the more I spend, the more admin I have to do inside GnuCash each evening. I know you can automate some things but the act of balancing the books is quite a relaxing and happy one. Thanks to Donovan for suggesting that one to me.

Note: in my first few posts I'm going to be giving background on why I'm doing all this. In future posts I shall be giving information on how I'm doing it. I'm sure my tactics will change over the years after learning more things about PF and about how other people do it but that's no different to all areas of life.

To help me along (and other reading this blog), tell me in the comments some good PF blogs that you read and that we can all learn from.

Labels: budgeting, spending

Inserted: 2008-09-13 11:02 (1 year, 10 months ago)