You have a plan for your income and expenses, a system to track them, and are routinely spending less than you make.
Why it Matters
If you are spending more than you make each month, it’s going to be very challenging to improve your financial well-being.
Having a plan for income and expenses can help make sure you are set up for success; and having a system to track your hypothesis about income and expenses can help you course-correct if necessary.
Goals for this Level
In Level 2 we want to make sure three things are in place:
You have a plan for your income and expenses (also known as the dreaded budget)
You have a way to track your income and expenses to stay on plan
You are routinely spending less than you make
Bonus – you have looked at some painless ways to reduce spending to see if we can ‘juice’ your budget at all
1 - You have a plan for your Income and Expenses (aka, a budget)*
Dave Ramsey famously said, “A budget is telling your money where to go, instead of wondering where it went.” The goal of budgeting is to make sure your money is going where you want it, including money going into savings.
First and foremost, we want to make sure you are spending less than you make. After we get to that level, most experts recommend aiming to save 20% of your income. That leaves about 50% for needs (housing, clothing, transportation, food) and 30% for wants (shopping, holidays, hobbies, entertainment, etc.). This is commonly called the 50/30/20 budget.
It may not always be possible to hit this rule of thumb – some cities are more expensive to live in than others, some folks may have more debt than others. Like all rules of thumb, we want to aim for the spirit of the rule (try to get as close to 20% savings as possible!) and adjust to our own unique situations as needed.
There are three steps to get to that 50/30/20 Utopia:
Add up our existing spend on needs, wants, and current savings. We recommend going through at least 3 months of credit card and banking history to make sure you haven’t missed anything. Many money experts recommend printing out these statements and using highlighters for the different categories to really make the message pop.
Reflect on your current state. Do any categories surprise you? How much are you spending on needs vs. wants? How might you save an extra 1% a month? What about an extra 3% a month?
Determine what monthly amount you are comfortable with across each category – needs, wants, savings.
2 - You have a way to track your expenses to stay on plan
Do you know what your credit card bill is before you check your statement, or are you consistently surprised? Do you have a rough idea of your bank account balance before you login, or are you frequently amazed at the transactions since you last checked?
It’s important to have a system to easily track your expenses so that credit card bills, and bank account balances don’t come as monthly shockers.
There are many different approaches to tracking expenses. The ‘right’ way is the way that works best for you. Here are some options:
Writing. It. Down.: Literally handwriting expenses or typing them into an excel spreadsheet is a very tactile way to drive home how you are trending vs. your spending plan.
Best For: People who really, really want to understand where they are spending. Trust us, nothing will make you more aware of your spendencies than logging each purchase.
Watch Outs: This method is a lot more manageable if you do weekly check-ins vs. waiting until the end of the month to go through your expenses. This is also more reactive than proactive. Unlike using an app, you won’t know in real-time how you are doing.
The Anti-Tracker Approach: Open 3 accounts - one for your needs and fixed wants (e.g., rent, cell monthly subscriptions), one for variable wants (e.g., groceries, clothing), and one for savings. Set up an automatic transfer each pay period to each account based on your budget and know that you are free to spend 100% of the variable wants expense category. The automatic transfers you set up for needs and fixed wants should be enough to take care of those expenses.
Best For: People who don’t want to add up expenses each month, who tend to spend more when there’s more cash in their bank account, and who know they will stop spending when that variable wants expense account hits zero.
Watch Outs: There is an upfront investment of your time to figure out what monthly transfers you’ll need for each account to avoid bouncing any bills. You also need to be 100% sure that you are saving for ‘lumpy’ fixed expenses like insurance or property taxes on a regular basis – these expenses may not hit your bank account every month but when they do, they wallop! But once you’ve got this part figured out, it’s all autopilot. It is also CRUCIAL that once the variable wants account goes to zero, you stop spending. This plan falls apart if you are going into overdraft or carrying credit card balances even after you’ve tapped out the variable wants amount.
Everything-on-my-Credit-Card Approach: Instead of dedicating a specific bank account to variable wants, dedicate a specific credit card. You will know what your total credit card bill should be based on your variable wants for the month. As you move through the month, you compare what you spent on your credit card to what you should have spent on variable wants to see how you are doing.
Best For: People with a proven history of paying off their credit card each month, who don’t want to add up expenses each month, and who have the willpower to stop spending when they’ve reached their spending target.
Watch Outs: There is an upfront time investment required to determine what your total variable want spending should be, so you have some basis of comparison when you open your statement. In addition, paying off your credit card each month doesn’t mean you won’t overspend in certain categories. Because spending on a credit card is so painless, this method isn’t the best for folks who want to really prioritize saving.
User-Friendly Mobile Banking: Switch all your banking to a bank whose app has advanced budget tracking features. That way your online banking bill payments, credit card transactions, and paycheck all go through the same app. Most apps have features to tell you what’s left in different budget categories, and how you are tracking towards savings goals.
Best For: People who want to dig into their spend across different categories, and don’t want to manually enter expenses.
Watch Outs: There will be an upfront investment to find a banking app that works for you and transfer your accounts. Full disclosure we haven’t found one yet but still wanted to include this option because, well, you never know.
Cash Detox: Take out enough cash to pay for your variable wants. Remove your credit cards from your wallet. That’s it.
Best for: People who really, really want to understand where they are spending and force themselves to stick to a budget. This is by far the best way to stick to a spending plan.
Watch Outs: There is an upfront time investment to determine which of your variable needs can be paid for in cash, and an ongoing time commitment to grab the cash from the bank. This method only works if you don’t go grab more cash once your wallet is empty! Once the cash in the wallet is done, so is your spending.
Remember – it may take trying multiple systems to find the one that works best for you. While it will be frustrating testing different systems, the literal lifetime of on-track spending ahead of you is well worth it! Even if your new system saves you $50 per month, that’s $24,000 before compounding over the next 40 years!
3 - You are Routinely Spending Less than you Make
You know you have the right budget and spend tracking system when you are routinely spending less than you make, and ideally hitting the 50/30/20 target or on track to hit it within a timeframe you are comfortable with.
BONUS - You have Looked at Some Painless Ways to Reduce your Spending
We bet you can save at least $50 in the next 30 days by trying out one of these tactics:
Remind yourself of your why
Have a daily calendar reminder of why you are saving in the first place
Tape your savings goal to your credit card
Change your phone and computer background to your savings goal
Set and celebrate mini goals
Instead of only celebrating when you’ve hit a big savings goal, celebrate smaller milestones like going X days without spending or making it X days on budget
Unsubscribe from retailer emails to resist the temptation to shop ‘sales’ and ‘special offers’
Unsave your credit card information from your browser, and your customer profiles from your favorite retailers
Mute brands on social media
Have a game plan for challenges
Be prepared for challenging situations and how to handle them. Keep in mind phrases like “If I see something I really want to buy, I’ll wait X before buying it” or “If someone asks me to go out, I’ll let them know I’m saving for X and will join them next time”
Don’t pay more than you must
Call up your cell phone and internet provider and ask for a better plan
Go through your last 3 months of credit card bills and scour for any subscriptions you are no longer using
Go through your last 3 months of banking and ask your bank to refund any fees charged
Better yet, switch to a no-fee banking account
Call your credit card company and ask them to refund your annual fee
Use a couponing app like Flipp for grocery shopping to shop the sales and price match at stores that allow it
*At Untangle Money, we link your budget to your retirement needs
In case you missed it:
Stay tuned every Thursday for a new level in the series!
Pineapple Finance Co is a collaboration between Emily and Elizabeth with a goal to answer one simple question: could they use Instagram to improve Canadian's financial literacy.
You can follow Pineapple Finance Co. over on Instagram, and we've linked two other blog posts written by Emily and Elizabeth here:
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