I have received special Permission from the author of a survival guide available from the Secret Information site to reprint excerpts for the Michigan Survival Guide. These include ways which Michiganders can help themselves, their families and their friends realize a more comfortable lifestyle and continued prosperity, even in the toughest of economies.
Today’s installment addresses controlling of your expenses.
“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.” – Charles Dickens
Being cheap is not a good solution to money problems. Finding the best price for things is smart, but eating Ramen noodles is bad for your health. Denying yourself the things you need is bad for your attitude. Never paying for a lunch is bad for your friendships. And leaving a fifty-cent tip is just plain bad karma.
But making more money isn’t the answer either. Millionaires sometimes go bankrupt after all. And virtually everyone who makes twice what you make still worries about money just as much as you do. So where is the middle ground?
It is found in control. Develop good habits so you can find every opportunity to make more money (if you need to), while controlling your expenditures. This approach will help prepare you for almost anything that comes your way, but it isn’t just about survival. In fact, most millionaires built their assets following a simple conservative idea:
Spend less than you make and invest the difference.
In the long run then, you can have what you want without the stress of buying it on credit cards – before you can truly afford it. Just keep your expenditures to no more that 75% of what you make. Then use the other 25% to fund your “unexpected events account,” your savings account, and your investments for the future.
If 75% of what you take home doesn’t seem like enough to pay the bills and cover the other things you want in life, there are two solutions. First, you can make more money. Second, you can cut what you currently spend. That’s what the rest of this section is about.
Track Your Expenditures
You might think you know where your money goes. But if you were write a list of every expenditure you remember from the last thirty days, and then compare the total to what was actually spent, I’ll bet there would be a couple hundred dollars missing from your list. Where did it go?
A simple exercise will show you where it goes. All it requires is a piece of paper and a pen. For a month or two record everything you spend money on, with the exact amount spent on each item. You may be surprised at how much goes to some areas. For example, a friend of mine did the math and realized that his twice-weekly pizza delivery amounted to almost $2,000 per year.
The idea isn’t to make yourself feel bad. If having pizza delivered to your house every week is worth thousands per year to you, and you can afford it, why not continue? The idea is to see what things really cost you, so you can make that decision honestly and openly. You might realize for example, that you would rather spend $2,000 on a trip overseas, or to start a business.
The longer you do the exercise the better the data. A month is a minimum, because you will have paid most of your regular expenses during that time. Also, as you do this, you may find that you spend less as you go along. The process of writing down every penny spent makes you very aware of the money going out, and many people find that because they want to see smaller numbers on that paper, they start to adjust their spending habits.
Categories are a good idea too, although you can do this after the information is gathered. How much do you spend on eating out, for
example? How much on groceries? How much at the bar, or on movie rentals? Again, this isn’t about making yourself feel guilty, but about bringing it all out in the open, so you can make the choices that make sense for you.
Make Changes
So the first thing you can do with this information is to cut out some things that really aren’t worth what they cost. This may free up enough money to fund your savings goals (more on that in later installments).
The second thing to do with the information is to consider each item on your tracking form carefully, so you can find ways to spend less on almost everything. Start with the big items, like housing costs and car expenses. There are usually more ways to save more money on bigger expenditures.
Look at each item and/or category and ask, “How can I get what I need here for less?” A programmable thermostat that turns the heat down while you are at work and up again just before you arrive home might save you $10 per month. Cheaper car insurance might save you another $15 per month.
Most people when surveyed think 20% more income would solve alleviate their financial concerns. Of course, almost everyone knows people making 20% less than themselves who think the same thing. It is clear that the problem isn’t just one of income, but of control. Why not start taking control of your financial affairs?
Have A Zero-Expenditure Week
Set aside a week and try to spend absolutely nothing for those seven days. Of course, if a bill is going to be late, pay it. But avoid all habits and routines that involve spending money. Eat up the extra food in the cupboards so you won’t have to go shopping. Find something interesting to do at home instead of going out. Take the bicycle to work if possible, or walk. Bring a lunch.
This exercise might save you a little bit, but it isn’t meant to develop a new “cheapskate routine.” Spending less is not a goal onto itself. The idea here is to see what you miss the most, and what you really don’t miss. It gives you an idea about your true priorities and options. Maybe you have been spending $60 per week on lunches out, and you discover that you enjoy a packed lunch in the park near work just as much. That can save you over $2,000 per year.
You might find that having friends over to play cards or watch movies is as satisfying as going out to the bar or to other events. Maybe taking a walk while listening to your favorite music or audio books on your MP3 player is more fun than going to the mall. This exercise in alternatives is a way to see where you can spend less while possibly getting more.
—- More in Part II – Tomorrow ———
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