You Are Not Underpaid, You Overspend

I probably won’t reveal any mysteries when I say that living paycheck to paycheck is no fun. You find yourself in the situation when your wallet starts growing cobwebs and the lonely box of crackers and a can of beans will have to be your dinner until payday. Or maybe all your friends are going on a tropical vacation and your “staycation” is nothing to brag about. Right when this realization sinks in, a strangely comforting self-pity wraps you in its mousy blanket: “if only I made more money… Maybe I can use the credit card for now. It’s free money, right?” Stop right there. Before you joyfully skip out of the house with the intention of blowing “free money” on a trigger-happy plastic shopping spree, let’s examine how you ended up here in the first place. Are you working a minimum wage, means-to-an-end, miserable job that barely pays your rent? If so, you should probably start evaluating how you got to this point and start making some serious changes. But chances are, you have a “career” job with decent pay, but you still can’t seem to make ends meet.

Heal your Piggy Bank

Money management is no “rocket surgery,” but it does take discipline. Setting up a good budget is very much like learning to cook: it takes technique, perseverance, and a little creativity. Here are the steps I use in helping my clients establish a budget:
1. Figure out where every single one of your dollars goes. List out your fixed and recurring expenses. These are the ones you must always make sure you have enough money to pay first. Look at credit card and bank statements to ensure you don’t miss any.

2. Scrutinize each expense to see if it can be reduced or canceled. With the abundance of free internet sources, is cable TV really necessary?

3. Consolidate all recurring expenses in one location. I like setting up auto payment plans using a credit card that earns miles, but I make sure to pay it off at the end of the month. Use this method only if you are absolutely certain you will have the discipline to pay the balance in full monthly; otherwise, the high interest charges will cost more than the “free” miles.

4. Pay yourself first. Set up a money market account and automatically deposit a percentage of your paycheck as soon as you get paid. Build up an emergency stash first, and then start a “a piggy bank” for a “dream purchase” – a tropical vacation, a new TV, or those Justin Beiber locks you so fancy.

5. Downsize. Yes, it’s a little extreme, but not completely irrational. Humans are proud and competitive creatures, and “keeping up with the Joneses” can get us in trouble. Are you a slave to monthly car payments? Will a smaller (older/used) car be able to serve the same function as your swag (and very expensive) luxury ride? Trade. Financial sense will make you look even cooler than 22” rims.

6. Setup realistic amounts for any expense category that varies by month. These are discretionary and here’s where you can save the most. Some of you will find keeping a separate bank account and funding it once a week with just enough funds to cover the expected expenses will help you stay on track. I track expenses in these categories:

  • Clothing
  • Entertainment – Movies, concerts, so forth. I include food eaten at a venue in the restaurant section.
  • Food / General household – This where I put my expenses for grocery shopping and things for the house.
  • Gas
  • Health – Such as medicine and a gym membership. (If you really want to get into shape check out boot camps like A.J. Tucker’s iChooseFit)
  • Misc – I don’t use this very often, and if I do then I’ll think about adding a new category
  • Restaurant

7. Track your spending down to the penny to see whether you are within the limits you set for the category, and adjust your budgeted monthly amounts accordingly. The goal is to spend less than your budgeted amount per category per month. The money you spent under your allotted budget should be moved to savings.

8. Review and modify monthly. I can’t stress how important it is to get in the habit of tracking expenses. Without an accurate list of transactions your whole budget is at risk of falling apart. Mint.com is an amazing (free!) tool that compiles all your accounts in one place and uses handy visual graphs and charts to see where your money is going. I use a free app called Budget Tracker for my EVO. Whatever software you decide to use it is essential that it allows you to quickly review how much you’ve spent per category and as a whole.

If you’ve never dealt with budgets, the first few weeks will be exceptionally painful. However, once the learning curve is behind you, you will be on your way to a tropical vacation in no time.
 
 

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