Budget or perish

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This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Step 2: Make a Frugal Budget

If you set a high value on liberty, you must set a low value on everything else.

– Seneca

            Hopefully you have been persuaded to avoid taking on any more debt, and you are now ready to ‘dig up’ instead of just ‘stop digging’.  It’s almost time to make some real progress towards your financial freedom by saving and paying off any existing debts.

            But you might still be wondering, how do financially secure people manage to live without credit, even if their income is similar to, or lower than, your own?  How are they able to get to the end of each month with no debt, and even with some savings to add to the pile?  Is there some trick to this that I need to know?

There is a trick to doing this, and you do need to know it.

The strategy is a brilliant, highly classified piece of financial wizardry.  It is like the most awesome kung fu move you ever saw, where Bruce Lee flicks a giant, scary, boulder of a man with his little finger, sends him flying across the room, knocking over dozens of other villains, before finally crashing into a cabinet full of delicate glassware. 

This secret of wealth and comfort was found hidden in ancient scrolls that had been stowed in a remote cave near the shores of the Dead Sea.  Normally you’d have to attend an expensive, week-long workshop in order to access this profound knowledge, but today I’m offering it to you for no more than the cover price of this book.

Ready?

This ancient, mystical wisdom is . . .

Spend less than you earn.

Just as eating more calories than you burn makes you fat, and eating less than you burn makes you skinny, the same happens with money.  Here is the formula:

Spending  >  Income  =  Debt

Spending  <  Income  =  Savings

            It continues to astonish me how many people fail to grasp this basic mathematical truth.

To paraphrase the famous Charles Dickens quote, happiness is an annual income of $30,000 and annual expenses of $29,999.  Misery is an annual income of $30,000 and expenses of $30,001.

https://www.gsb.stanford.edu/sites/gsb/files/styles/1630x_variable/public/resources/L9KpMCK.jpg?itok=SVPTzMYy
Shoulda made a budget, kid.

There are three ways to approach this formula.  You can increase your income, decrease your spending, or both.  This chapter will focus on the spending side of the equation, and Step 5 will focus on income.

The greater the gap between your income and spending (in the right direction), the more your financial freedom will increase.  To expand the gap, you’ll need to figure out exactly where your money is going and look for areas to adjust.  You need to make the invisible hole, visible. 

You need to make a budget.

Only about a third of Americans have a household budget,[i] and this figure is likely similar in the other Anglophone countries.  Those with higher than average salaries are most likely to budget.  However, everyone needs to make a budget, however simple, in order to manage expenses and start nearing financial freedom.

There are two ways of starting a budget.  The first is simply to record everything you spend for a month while remembering to factor in less frequent expenses such as car registration and Christmas shopping.  You might do this by hand, or set up your own spreadsheet.  Keep your receipts and check your bank statements to help you do this.

The second, easier method is to use a budgeting app to do much the same thing in more detail and with some built-in charts and calculators.  There are many, many of these apps, and a lot of them are excellent.  You can keep your phone with you and note down each transaction as you make it.

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Two common and useful ones worth mentioning are Mint[ii] and YNAB.[iii]  There are so many available that I could not possibly research them all – have a look around and find the one that best suits your needs.  Some are purely budget apps, while others also help you to keep track of debts, investments, savings and so on – decide whether you want a simple one or a really detailed one.  A simple one is fine for now but later on, when we’re looking at how to manage your investments, you might want to upgrade to a fancier one.

Writing down every single expense is a hassle so I highly recommend you use an app to save time, and also for the automatic statistics it can generate to quickly figure out where all your money is disappearing to.  Why not?  We live in the future!

Most of these apps have a free and a paid version.  Try the free version first, and if the program suits you, consider shelling out.  This would be a perfectly sound investment of your money.

Crazy as it may seem, the trick to getting value from these apps is to actually use them.  You can download as many as you like, but unless you’re actually recording each transaction as you make it, you will get no benefit from it whatsoever.  It would be like buying a home gym and then letting it gather cobwebs, wondering the whole while why your arms still look like noodles and your potbelly is unchanged.  While apps have many advantages over pen and paper versions, or your own spreadsheet, there’s no point having any of them unless you’re going to regularly record your spending.

If you do use a budget app or equivalent diligently, after a few months you will have generated some powerful, potentially life-changing data.


[i] https://www.debt.com/statistics/

[ii] www.mint.com

[iii] www.youneedabudget.com

Also available on many other platforms.

8 comments

  1. TechieDude · December 3

    Make sure to look at who owns the app before you dive in. Mint, for instance is an Intuit company, which has shown some wokeness in the past. Why is this an issue?

    Because Mint, as well as one or two others I looked into insist on getting their grubby fingers on your bank account credentials. No one, but no one gets those from me. I like this one: http://www.mhriley.com/spendingtracker/manual.html

    It’s worth it for me to manually configure my tracking app, and keep it separate from my accounting.

    Then again, I have a CPA wife, who does the budgeting. We worked out what to spend each month for what category – food, house, dogs. I plug those into the app which feeds her data.

    I was going to quip about budgeting with a wife. But maybe I need to buy the book and read it first.

    Liked by 1 person

    • Nikolai Vladivostok · December 4

      I use a very simple one called Expense Manager that does not require bank details.
      Thanks for the tip. I’ll look into it for the second edition.

      Like

  2. Pingback: Friday: talking about the taxman. – Dark Brightness
  3. dickycone · December 4

    Good advice again. I worry about money, but articles and blog posts like the excerpts from your book you’ve posted remind me that, as much as I’d like my finances to be better, I’m still way better off than most Americans. I do have a budget, and the only debts I have are a US mortgage at a very low rate (less than 2.5%), a car payment, and a mortgage on a property in my wife’s country at a much higher rate. The latter is an investment I should have never agreed to and the main reason my finances aren’t in the shape I’d like them to be. Well, that and having kids and a wife who’s a stay-at-home mom, but that part is worth it to me. I also have about six months savings, which is not ideal but way better than most people.

    So, as someone with above average finances and at least some financial awareness I’d add:

    1) A corollary to the mystical “spend less than you earn” formula is: when your income goes up, don’t also increase your spending, or at least don’t increase it as much or more than the increase in income. A lot of people make this mistake (it’s tempting for me every time I get a raise).

    2) Don’t invest in third world countries. Or at least, if you do, don’t be as naive as I was and keep in mind that they are third world because they are low trust societies where most people are looking to make a buck quickly today without thinking long term about things like establishing a reputation for trustworthiness and ethical business practices. For example, if you’re quoted a price on a property you’re going to have built, that price is likely based on the shoddiest materials with considerable and numerous local taxes and fees left out, and when you’re already into the process you’re likely to run into a lot of situations where the builder and other third worlders involved tell you things like “Oh, you wanted a roof on it? Well, that’s going to be extra,” all strategically timed so that by the time you realize what’s going on, it’s difficult to back out of the deal.

    3) I forgot #3 while feeling bitter as I typed out #2. Seriously, be careful about investing in the third world. There’s a reason these countries are poor.

    Liked by 2 people

    • Nikolai Vladivostok · December 5

      At the place I’m staying the landlord is getting a new building installed. The shenanigans. The stupidity.
      The thing about Third World corruption is, it’s everywhere, not just at the top. Contracts are broken, wages are unpaid, things not nailed down get pinched. Goods and services are below par. Gets exhausting.
      Though I know a guy who got a decent house built for <$10,000 so there's that.

      Liked by 1 person

  4. Wolf · December 5

    Lol, it takes at least 5 years before WEIRDs internalize the absolute dishonesty of non-WEIRDs.

    4) Don’t invest in first world countries cause they’re rapidly turning into third world countries.

    Liked by 1 person

  5. free_oscillator · December 5

    I use a simple two-sheet spreadsheet template and update it manually for this, which is less work than it sounds like (just about 15-30 minutes per month). If any readers of this comment are interested, you can see the template here and make a copy of it for yourself if you’d like: https://docs.google.com/spreadsheets/d/1Qdfzt4Cx-za5q9H4oQCB-otxTJXG75h7L31qr0qYXqI/edit?usp=sharing

    I also find it helpful to do a bigger yearly review in December by going through the 12 spreadsheets from the year and looking at larger patterns. That might be an uncomfortable amount of spreadsheet wrangling for some, but again, it doesn’t take that much time, considering the benefits that come from it.

    Liked by 1 person

  6. Kentucky Gent · December 13

    I spontaneously started budgeting in grad school and have been doing so ever since. I have a detailed, written budget for every month, on Microsoft Excel. Cannot recommend it strongly enough!

    Like

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