Part Two of the ‘Fix Your Money Problems Forever' series.
If you've joined the ranks of midlife men, I'm guessing you've done a budget before. Like me, you may have gone to town on the damn thing with graphs, coloured groupings and pie charts. And then you gave up on it.
Why? Budgets suck; that's why. They're restrictive, usually depressing and frequently smothered with unrealistic optimism. In truth, they rarely work.
The reason they rarely work is because they fail to address the fundamental disconnect between the money you spend and your values and long-term objectives. In other words, they're not driven by anything in particular; other than a desire to reduce overall spending.
Because of this, you slip back into the same old patterns; spending money on things that create more of the same pain.
Instead of doing a budget, try this 3-step process.
1. Document what you're spending and where.
You can do this one of two ways. The best way I believe is to make all your purchases with a credit or debit card (depending on your level of discipline) for at least a month then pull down a report of all your transactions from your Internet banking into a spreadsheet; grouping them by type. Otherwise, you can keep a journal of every dollar spent – either with pen and paper or via a simple app on your phone. Check the iTunes store or Google Play for something suitable.
Once you have a month's worth of transactions, determine all your remaining expenses like insurances, school fees, association/club memberships, subscriptions, vehicle registrations and so on. Calculate the monthly value of these and add them to your one month's worth of other expenses.
Once you've grouped everything into appropriate categories (dining out, daily lunches, phone, Internet, TV, loans, fuel, groceries, entertainment, alcohol, etc.), you can easily see exactly where your money goes.
Armed with the total monthly spend in each category, you can go to work on step two.
2. Go through every category and ask yourself some key questions.
- Is this something I can't live without or is it a burden I can eliminate?
- Does this spending bring me closer to freedom or push it further away?
- Can I get this cheaper elsewhere?
- Can I substitute this for something that's equally effective (or pleasurable) but less costly?
- Why am I buying this?
- Does the benefit I get from this justify the expense?
- What would this expense amount to if I invested it at 7% p.a., compounded for ten years? As an example, $500 a month, compounded monthly at 7% over 10 years is $86, 500! Try this calculator yourself.
3. Cull, Substitute or Reduce
Decide what you can cull, what you can substitute and what you can reduce to arrive at a total amount you're prepared to set aside in a ‘freedom fund' each pay day. Then open a separate account that cannot be syphoned online and set up an automatic direct debit from your main account – the one that receives your income – into the new one for that same amount every time you're paid.
Once you've accumulated enough to invest, I recommend opening something like a Vanguard Index Fund account and transferring the balance across. In Australia, the minimum is $5,000. From then on, send your automatic direct debit to this investment account. I use the Vanguard Index products as an example because their fees are very low, their transactions volumes are low (fewer capital gains tax implications) and their history is solid. If they're good enough for Warren Buffet to recommend, they're good enough for you, too.
The Hardest Part is Over
Now you can start thinking about the bigger picture – when to ease back on work, other interests you want to pursue, what sort of retirement you want and so on.
A lot of people will tell you to start with the end in mind (the big picture) but I find it's much easier to have those thoughts and to make those plans after you've proven to yourself that you can take the first few steps and you can see the outcome of those actions.
As soon as you complete this 3-step process, I promise you'll feel a lot better about your financial future. You'll also have a lot more confidence in your ability to shape and direct your life in ways that, till now, may have seemed out of reach.
Do it today. It's simple, it's effective and it's empowering.
This post is part two of a series called ‘Fix Your Money Problems Forever'. Check out the others in this series.
1. Know WHY you’re Spending
2. Don’t do a Budget
3.Good Debt, Bad Debt and Ugly Debt
4. Trapped by debt? Go on a killing spree!
5. Pleasure-seeking may cost you your freedom.
6. Eliminate Crap from your Life
7. To Save Money, buy Premium
8. Create a Business From What you Know
9. Invest Well and Sleep at Night!
Thanks for stopping by and I hope we get to hang out more in the future. And in the meantime, please feel free to share your own experiences. You can also email me directly at email@example.com. I respond to all emails.
Disclaimer: I'm not a psychologist and I'm not a financial advisor's elbow. This material doesn't constitute financial advice but it is a collection of my personal opinions, based on my own experiences.
Also published on Medium.