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In Budget Your Way to Billions Part 2 Matt talked about how to make your savings automatic. This is fantastic stuff! Everyone loves easy, and the easier something is the more likely you will stick to it.

In Part Three I will talk about what you can do after you have wrote out all your expenses and income.(Budget You Way to Billions Part 1) .

I started doing this years ago, but I didn’t quit doing it after the first time. I re-evaluate my expenses every month and see how I could have done better.

When I have my list of expenses in front of me I ask a very important question: How can I lower my expenses?

I also asked myself: What things did I buy that I didn’t really need? Am I buying things that I could be buying cheaper somewhere else? Am I spending money on things that will increase my knowledge?

The most important thing is to be honest with yourself. Only you can decide which things are necessary. At the moment you are fully conscious of what you are spending and see on paper the money you could have if you reduced your expenses you will be well on your way to Billions.

The Technique

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Here I will talk about my own personal technique on how I minimize variable expenses, and easily keep track of them on a monthly basis. This technique is simple and effective but I encourage you to copy it, change it, adapt it to your own lifestyle. I have found it very helpful and have put the same practice into our lawncare business. The Technique is to set a high level budget. I like to use post-it notes. I write down each bill, the amount and the due date. Every single month, every single time. You can get the information for this from the expenses you wrote down in part 1. I also add a section for Income. Like most people I am paid twice per month. Each time I get my paycheck I write in how much that is. I currently work in a job that pays commission so my paychecks vary from month to month. You may know your monthly income beforehand.One of my “expenses” is my ING Direct Savings account. This is where I pay myself first, just like Matt talked about in part 2.

Another expense is my “credit card“. I’m blessed enough to have several different ones, but I only use one. I would suggest using one that gives you reward points to maximize your benefits. I charge everything during the month that I possibly can to this card. Gas, groceries, dining out, entertainment, cell phone bills, clothing, online purchases, etc.

There are several advantages for doing this:

# 1 You don’t have to write down every transaction in your checkbook. This eliminates the chances of forgetting something, and/or overdrawing your bank account due to an error.

#2 Any unauthorized charges that may happen are not holding up your cash, they are holding up what I like to call “MasterCard’s Money”

#3 In most cases you are given a 20 day interest free grace period when you pay your balance in full each month. By making most purchases with the card you are getting an interest free loan for 20-40 days. That’s using MasterCard’s Money for free! On my last statement gas I purchased on June 20th was not due until August 1st. That’s 41 days!

#4 At the end of each month you get all the transactions on one statement. Its easy to sort out what is what. You get 1 bill, and make 1 payment. This makes your high level budget so much simpler. Instead of writing down gas, groceries, entertainment, clothes, etc. You write out one thing: “Credit Card“.

Don’t get me wrong.. you still need to take a careful look at the statement to make an assessment about how much you are spending on each of those things. The goal is to make sure those expenses are minimal and under control. This constant evaluation will be the key to your success.

Challenge yourself. I like to set goals to lower this “credit card expense”. For example let’s say last month I charged $500. This month my goal is $450. Because its a high level overview I can reduce spending in any area as long as my overall total comes to $450 or less. I can login to my card’s online billing to check on my balance from day to day.

Another key expense I have is called: “ATM” This is the budget I have for actual cash purchases during the month. I generally only use cash for small off-hand purchases. Lunch at work normally, or maybe a drink at the bar. A rule of thumb that has helped me out is the less cash I have on me the less I can spend. I know there are many people out there who enjoy carrying lots of cash on them. Others carry ALL of their cash on them because they don’t trust anyone else to have it. I challenge you to try and carry only a minimal amount of cash on you. My magic amount is $40. When I go to the ATM I only withdraw $40 at once. I will not go back to the bank until I have zero. I’ve found this to be effective because I’ve developed a feeling that lets me know if I’m spending money too fast. If $40 normally lasts me one week, and all of a sudden I’ve visited the ATM twice in the past 5 days then I need to cut back on spending the rest of the month. If you set a monthly budget of $240. Then you can only visit the ATM 6 times. Once again, I always try to challenge myself to “Beat the Budget”. If I can cut that down to 5 times, I can lower my budget next month and stick the extra $40 in ING.

So alas, we have all of our income, and projected expenses for the month. I take my income minus expenses. Whatever total remains is the exact amount I deposit into my savings account. This is the first transaction of the month, every single month. If your budget has a remainder of $0(mine does on occasion) I put down zero, and push myself harder next month to make sure I have something going into that savings account.

“Beat the Budget”:

I always leave $100-$200 extra in my checking account at all times. I use this as a safety cushion for unexpected things. Its important though to not leave more than a minimal cushion. Excess money in your checking account is costing you interest in your savings account. I had a hard time with this because when I was in college my checking account balance was very frequently below $100 . Now that I am finally in a position to avoid that I must tell myself its O.K. to only have $100-$200 left in the account. I only need to check my savings account balance to re-assure myself that I’m doing the right thing.

The beauty of this technique is that it can be applied if you make $100,000 a year, or $20,000 a year. Managing your money is a step you MUST master before you can take the next step to buying assets. I know people who are making $40,000 a year that save twice as much money as those making $100,000. What path will you take? The Path to Wealth starts Here…

A.D.

We will talk about more details in future posts such as how to build up credit, how to increase your income, what to do with money that you have saved, how to buy assets with other people’s money and more!

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This entry was posted on Thursday, August 2nd, 2007 at 11:41 pm and is filed under Money Management, Financial Wealth, Introduction. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.