If you’ve been following my site, you should appreciate the absolute necessity of investing your money. No matter what type of investing you choose to do you will need access to some amount of capital. Even if you follow my lead and get good at 100% financing of real estate, you will still need some money to get started in management. As I am sure you know, furnaces and water heaters break down, and when they do you better have some money set aside to fix or replace them. This post is dedicated to the discovery of the cash hidden in your wallet and will show you how to control your money so you can invest.
Investors control their expenses and do more with less
I hear people complain all the time that if only they were able to make more money, then they’d be able to afford this, save for that, give to charity…and the list goes on. I concede that more money is always a good thing. However, I believe that our ability to get ahead resides first and foremost in a willingness to make the choice to control expenses. So, if you find yourself feeling short on cash then perhaps you need to learn how to control your expenditures and do more with less. As Dave Ramsey says, “Managed money has more muscle.”
“If you buy what you don’t need, you steel from yourself.” -Swedish proverb
Writing and following a budget for investors
The secret to gaining control over your money is to get a clear picture of how you are spending it. The only way to accomplish this is to learn how to write and follow a budget. Sorry! No magic pills here! This particular task will require full-time focus and discipline. You’ve got to learn how to assign a purpose or “job” to every single penny that comes into your possession. With a budget, you’ll be able to make every single cent work for you. Visualize your life as a chess board; you be the chess master. This is how you will begin to take control of your life and get it pointed in the right direction.
Is any amount of income ever enough?
One of the worst habits that people make is spending everything they earn. With a habit like this, no amount of income will ever be enough. And it does not matter if the reason they over-spend is self-inflicted or accidental. The result is always the same – they end up totally broke with no money to put toward investments.
Having said this, all things are relative and I would like to balance the scale. In reality, financially successful people also spend everything they earn. The difference between the two types of people who apparently have the exact same habit is their budget (or lack thereof).
People who do not use a budget simply spend whatever is in their wallet or available in their bank account. Or they charge their credit cards. While they know exactly how much their car payments and rent or mortgage are, they often have vague ideas at best on how much they are actually spending on groceries, restaurants, gasoline, etc. This type of behavior causes people to live paycheck to paycheck, and to frequently be late on their bills. This reckless use of income will cause people to go through periods of feeling like they’ve got everything under control and have enough cash to support their lifestyle. Then, suddenly, they are blind sighted by spells of bounced checks, late fees, and declined credit cards.
People who use budgets rarely encounter the traumatic surprise attack as previously described. Not that they don’t experience stress and at times even panic about money, but the main difference is that they tend to know weeks or months in advance when they are going to be short on cash. This warning allows them to adjust their budget and tighten spending in certain areas to try and soften the blow. Furthermore, people who use budgets tend to have a bit of savings put away that they can rely on to help them through the rough patches.
How to improve your money handling skills
Everyone, even those who currently use some type of budget system, can improve on their money handling skills. Even if you are not a person who struggles to manage day to day expenses, you’ll find that you can make your cash stretch further if you assign it with a specific plan in mind. This means you will have to master your money. In order to do this, you’ll need to build a budget that actually works for your lifestyle and investment goals. The place to start is to do a quick analysis of your current spending habits and obligations. I say “quick” because it’s a trap for fools to spend too much time on this step. You’ll come to find that the best budgets are flexible and will account for a small margin of error, so don’t get hung up on the first step. You’ll make the necessary adjustments as you go.
Now, budgets come in all different shapes and sizes. Despite common belief, they can be just as easily written for people who work on commission and get paid irregularly as they can for a person who brings home a set salary every other Friday. It is person’s priorities, income, and debt obligations that determine the way a budget is written. Let’s go through a few examples so that you can begin to see the different components of a budget and where you should begin in writing your own.
The average person who is not looking to summit any mountain peaks will write a budget that simply keeps their bills paid and also tucks a bit away for a rainy day. Generally, this person is accustomed to a specific earning wage (large or small) and then designs their life to fit within that amount of money. Their budget accommodates the following:
1. Money for fixed expenses
2. Money for fluid expenses
3. Money for savings
A more ambitious person will write a budget that works its way backwards. First, they will itemize the areas where they must spend in order to make progress. Secondly, they will itemize all the areas where they have immediate debt obligations. And lastly, they will itemize areas where they know they will spend, but the amounts may be flexible. We can view the order as follows:
1. Money for investments
2. Money for fixed expenses
3. Money for fluid expenses
When obligations get in the way of financial goals
Often times, people will have gotten themselves into certain financial obligations (like mortgage payments) before clearly defining their financial goals and understanding the cash that will be required to accomplish them. My wife and I fall into this category. In this case, we must itemize our major debt obligations first, followed by itemizing the areas where we must spend in order to make financial progress. The third category of itemized expenses stays the same.
1. Money for fixed expenses
2. Money for investments
3. Money for fluid expenses
Saving for an investment goal
Notice how there isn’t a component for savings in the second two budgets. It’s not that people in these categories don’t save; it’s just that they save for a specific purpose and generally call their savings a “float”. This money acts like a traditional savings because it sits in the account to cover unexpected expenses or cash flow shortages. It is different from traditional savings in that people don’t keep throwing money at it non-stop. It exists for a specific purpose and need not grow any larger than its intended use.
So where is the hidden cash? It is found within the fixed and fluid expenses, never within the investments component. Fixed expenses are things that cost you the same or very close to the same amount of money each month. What people tend not to realize is that although they are reoccurring costs, many of them were elective before they became mandatory. For example, when buying a home you have choices. Just because the bank is willing to lend you X to buy a home, doesn’t mean you should take the full amount. The same is true for cars. This is where you have to sort out your priorities and stick to them. If you’ve made some decisions which are making things tough you might consider unloading a few of your treasures to lighten your load and free up some of your cash.
Planning for unexpected expenses
There is another type of a fixed expense which often throws people off track. It is the unexpected expenses which should be expected and planned for. What’s so difficult about knowing that at some point you will have to replace the tires on your truck? This type of thing is unexpected only if your head is so far up your ass that you are completely unaware of a need to replace tires which have 80 thousand miles on them. The same goes for medical bills, home repairs, clothing expenses, etc… You know they are coming; the only question is exactly how soon. So, if the tires are going to set you back $600, why not put away $50 each month and be ready to spend the money in a year?
The other category of expenses is the fluid expenses, which cover a spectrum of monthly costs ranging from utilities and groceries to entertainment and miscellaneous spending. These expenses are called fluid because while the items in this category are recurring, the amount changes every month. You need to look-up the past twelve months of these expenses and set an average budget for them. In the months when your average budget is more than the actual expense you will save the leftovers to cover months when you run over. (Hint: there is hidden cash everywhere).
Priorities determine where money is spent
When a person’s priorities dictate where the money gets spent a lot of interesting things can happen. For instance, you will find a millionaire living in an average home and driving a beat-up pick-up truck and sitting at the stop light right next to a Jaguar whose owner is sweating lay-offs at work. Believe me, you want to be the guy in the beat-up pick-up truck who probably owns the dealership that financed the Jaguar to the yuppie. So start to take control of your money right now. Set specific goals and pay yourself first every month. If you are married, then both people must agree on the long-term financial goals of the budget. I think you’ll find that it’s a fair trade to cut a few corners by eating out less often, or spending less socially when you can begin to see the cash growing in your bank. Remember, you’ve got a plan for that cash. It’s going to make you millions!
Thus, the formula for finding hidden cash in your wallet:
Budgets + Discipline = Expense Control (Hidden Cash)
And the actionable steps are:
1. To construct a budget
2. To have the discipline to methodically follow through with it