Empowerment Journey Step 8

At this point we’ve seen the benefits of getting the power of compound interest working for us (investing) as well as the pitfalls of having it as our enemy (debt). The determining factor as to which journey we take – wealth creation or debt slavery lies at the crossroads: can we live on less money than we make? If the answer is “yes”, we take the first step toward wealth. If the answer is “no”, we’ve got work to do. The most straightforward way to answer this question is by doing a personal budget, which you can think of as taking your financial pulse.

A budget is simply the act of matching up your sources of income with your expenses. It’s often done in monthly increments as that’s the timing of most regular bills, but you can customize it to whatever cadence works best in your situation.

I understand the word “budgeting” can turn people off. You might find the idea restrictive, boring, even scary. I can relate; I avoided making a personal budget for years after I started earning money – to my detriment.

If It Seems Hopeless, Try It Anyway

When I first started earning money as a young adult, I was let’s say “free-spirited” with money. I lived at home and ate many meals there, and my parents bought me my first car. So my out-of-pocket expenses were few. When I moved out and had to put bills in my name, I started to see that “winging it” wasn’t the best strategy. But I still resisted doing a personal budget for a long time because I found it depressing. I couldn’t afford my lifestyle at this point in my life. I was failing the key principle of financial empowerment: I wasn’t living within my means. I took a left-turn at the crossroads, and headed in the wrong direction.

In my early 20s I worked at a sports bar/restaurant, and didn’t make a ton of money. My rent at the time was around 1/2 or more of my monthly take-home pay, which I knew was not sustainable. A good rule of thumb is to keep rent/mortgage around 1/3 or less of monthly expenses. After paying rent (which was usually late), and putting some gas in my car, I had little left for groceries, forget clothes or any of the “extras” in life. I remember spending $100 at the grocery store one time and thinking, “well, now I’m broke for the rest of the month” (my grocery trips often involved the 10 for $10 frozen Banquet meals in the freezer section).

I would make some meals to-go during each shift I worked so I didn’t have to buy as much food outside of work. Sometimes the bartenders would serve me beers for free which I appreciated! I borrowed money from my parents frequently and had zero savings, zero “cushion”. My family would encourage me to save money and run my finances better, which just made me hate the notion of budgeting even more. All of this eventually motivated me to finish school, find a career, and increase my earning power. But for a while I found budgeting depressing, so I want to be careful about how we introduce the topic here.

Budgeting Provides Confidence

Listen, if you hate the idea of budgeting, or it just sounds like something that you can’t do, are afraid to do, or won’t make a difference because your finances aren’t where you’d like them to be – that’s completely ok. Remember, this is a journey, and we all have to start somewhere. Don’t stress too much as you get started tracking your finances. The picture probably won’t look the way you’d like at first, but trust me there is value in the process. 

As I got my career going and started making a little more money (entry level salary, holler!) I started to see the benefits of tracking my income vs. expenses. Knowing what I could spend gave me confidence and allowed me to make plans with friends, purchase things I needed (maybe not everything I wanted), and keep the lights on. My stress level was lower.

Getting Started

The process doesn’t need to be painful or take a lot of time to be effective. Sit down and write out your monthly income. Many people get paid the same amount every couple weeks (or monthly), so this part is easy. But if you have side hustles – babysitting, dog walking, whatever – write those down also. Here’s the format, just as an example to get you started:

• Job – monthly $ amount you make
• Side hustle – monthly $ amount you make
• (keep going for as many income sources as you have and total them up into one number)

Now do the same thing for your expenses.

• Mortgage/Rent – monthly $ amount spent
• Food (groceries, restaurants) – monthly $ amount spent
• Transportation (gas, car payment, insurance etc.) – monthly $ amount spent
• Utilities (electricity, water, phone, etc.) – monthly $ amount spent
• Clothing – monthly $ amount spent
• (keep going until all the things you regularly pay for are listed, and total these up)

Compare the totals. Subtract your total expenses from your total income (Total Income – Total Expenses). Is there anything left?

Below is a generic template you can use to get started. It starts with income at the top and works through expenses from most important at the top, to more discretionary as you move down the page. The major categories are pretty universal but whatever you regularly spend money on, make sure it’s in there. Feel free to copy/paste it into a spreadsheet and fill it in with your data. Edit it, add/remove sections, make it your own.

Steal This Template!

I use a spreadsheet but you could do a handwritten version if that’s more your style. Find a software, or format that works for you. I add extra columns for whether a bill is on autopay or not and when subscriptions renew. My budget has all sorts of crazy formulas because I’m an excel geek. But don’t overcomplicate it at first, just get the numbers down.

Net Income: the Key Indicator of Financial Health

Your monthly net income is THE MOST IMPORTANT NUMBER you need to figure out. You may quickly find that you’re spending more than you make, i.e. your net income is negative. Don’t freak out, this is good to know, because once you see the numbers staring you in the face, it’s harder to continue making the mistake. Don’t beat yourself up if this is the case, instead start to devise a plan of what to do.

What are your biggest expenses? Sort them from largest $ amount to smallest, and look for ways to reduce each one. The biggest is probably your rent or mortgage, likely followed by your car payment. What can you do to LOWER this expense? Don’t stress, you don’t have to decide right this second. Just brainstorm. Can you:

• Move to a less expensive area?
• Get a roommate?
• Sell your car and find something less expensive, but still reliable?

Go down the list of expenses thinking of possible strategies that could save money at each line, most expensive to least, and then add up the new (hypothetical) numbers and see if your income can cover it. If not, then do the same exercise for the INCOME side of your budget. Can you:

• Negotiate higher pay at your current job?
• Find something in the same company/industry that pays better?
• Get training or education to make you eligible for higher paying jobs, possibly in a different field?
• Start a side hustle if you don’t already have one?

Play with the numbers and consider what might work. Maybe you’ve thought in the back of your mind of working in a certain industry, but you don’t have the training. Now’s the time to do some research! Look up jobs in that industry online, how much do they pay? The Bureau of Labor Statistics has tons of information on average pay for careers in various industries. Google it if you’re not finding what you need. Talk to people in your network, go through your connections on LinkedIn. Do you know someone in that line of work, or someone who knows someone? You may find it’s actually fun to consider the possibilities for yourself, not just the limitations.

Budget Your Dreams

This is a key concept: don’t just create a budget for your current reality. I mean, yes do that first, but after that, create budgets that reflect your dreams. The vacation you’ve been wanting to take, the career that you’d like to have someday, but don’t yet have. Line out what those dreams look like, and start dragging them out of your head, and onto paper. Bring them to life.

You may be far from your dreams in your TODAY budget. I’m saving for a down payment on a house, and it’s going to take me a while, probably three years at least. But being able to picture what you’re working for and strategizing how it will happen is tremendously powerful. Just by doing this, you are one step closer to making it a reality. In the words of Napoleon Hill (writing about Thomas Edison):

“He knew that the mind could produce ANYTHING THE MIND COULD CONCEIVE AND BELIEVE“

The insightful personal finance writer Paula Pant likes to say you can afford anything, but not everything. Ramit Sethi teaches people how to pursue their Rich Life. They’re both talking about the same thing. Achieving your dreams boils down to being able to visualize what you want, creating a strategy to make it happen, and not getting side-tracked along the way. Budgeting is a crucial tool that sits right in the middle of this process.

Crazy as it may sound, budgeting can help make your dreams a reality. This may help you think differently about budgeting.

Rinse & Repeat

The first few time you go through your budget can be eye-opening, but the real power is in making it a habit. It doesn’t have to be all the time. I review my budget once or twice per month, spending 5-10 minutes each time. Sometimes I skip a month. But repetition is how you become familiar with your monthly net income and put it to its best use.

Notice the way I lined up my expenses, I put savings and debts before anything else, even before mortgage and rent payments. If you’re not in the habit of saving money regularly, the “savings” line might be blank. But hopefully you’ll find that, as you get better at managing your income & expenses, that your monthly net income starts to grow. Once this happens, USE THIS MONEY TO PAY DEBTS (first priority if you have them) OR PUT IT TOWARD SAVINGS/INVESTMENTS IN NEXT MONTH’S BUDGET.

The numbers can fluctuate over time; you’re not a robot and life happens. You’ll change jobs, get a raise, have unexpected car repairs, etc. Some months you might not hit your savings goal. But as you repeat your budget over time, you’ll get a better sense of the money coming in and out of your household, and how successful you are at directing it toward your goals and dreams.

Continue Your Journey

Remember the steps on our “Journey of Empowerment” graphic below. Learn to live on less than what you make by budgeting and then move on to “Build Savings” with the money left over at the end of the month. Do this until you have 3-6 months’ worth of expenses in savings (you know exactly how much that is now that your expenses are neatly listed in your budget! Look at you!), and then direct your monthly net income toward “Investing for the Long Term”. The arrows on the left show you what to do at each step.

If you aren’t a homeowner, you may want to save up for a home purchase at some point before, or as you fund your investments. Owning a home can help you avoid paying continuously increasing rents if you’re in a growing city, save you the stress of having to move often, and home ownership can be a great wealth-building tool as well. But you may prefer to rent, and there’s nothing wrong with that. Just keep making progress on your journey!

Are You Alive?

Time to get your hands dirty. Take your financial pulse – how are you doing? Be honest with yourself, even if you aren’t currently earning the money you’d like to. Learning to budget will should give you confidence, reduce anxiety, and it doesn’t take much time once you get in the habit.

Figure out your net income, and focus on boosting it because that number will fuel your dreams. Pull your dreams out of your head and into your budget, and do this until they become real.

This is the way to building wealth.

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