Marco Sison, The Intelligent Hustler
How an average guy lives an above average life- Your Guidebook for Passive Income, Side Hustles, Personal Finance, and Pro Life Tips
If You're Lazy, Everything You Know About Budgeting is A*s Backwards
Budgeting...argghh...I know, especially when you're young and the world of possibility seems endless and timeless, the idea of budgeting feels like jamming a 2x4 up your butt sideways. However, if you Learn to Budget Backwards you can increase your chances of maintaining a successful budget.
I think the way most people budget in their youth is ass backwards. Most do a bottoms up budget. You sit long and hard with receipts in box and a screen of your credit card bills, while you categorize and tally up how much you spent on food, drinking on the weekends, dining out with friends, movie dates, birth control, and rent. Then you make adjustments, "ohhh, I bought that shirt last month for my happy hour date, so that doesn't count", so you reduce your expected expense for that. Then you remember you had to change your Honda's brakes 3 months ago, so you remove that from the total expense. You put in a miscellaneous category for random spending you don't even know about yet. You reduce everything you think is unnecessary, frivulous, or excessive. You cut out your daily lattes. You cut down your "going out" allowance by 30%. You vow to take public transit or walk more to save 10% from your gas and transportation budget. You take your income + tips/bonus, you subtract your new and improved financially repsonsible expeneses you just calculated, then whatever is left, you VOW to put into your savings/401K/IRA/Emergency Stash/Jar on the shelf.
Tah Dah, you have 6 months of cash expenses and credit card line items categorized and added together for your "Master Plan" budget that is going to turn everything around for you financially.
Tear that crap up, because you know as well as I do that the likelihood of you following that budget is about as likely has finding Mr/Ms. Right at the bar tonight. It could happen, but most likely you end up doing something impulsive, risky, and regreattable, which is way more fun.
If you can't control your spending, this is what you have to do:
I want you to take self control out of the equation. I have crap for self control, yet I was able to build up a networth of several hundred thousand dollars, just 5 years out of college. I did it by doing a BACKWARD BUDGET and you can to something similar. Can you end up with over $175,000 a few years from now? I don't know. It depends on your situation and the conditions of the market. I can however GUARANTEE that you have a better chance of sticking to my Backward Budget method, than a normal budget a financial planner gives you. The Backward Budget does this by eliminating the thing most likely to tank your budget...YOU.
Here are 5 things I need you to Calculate:
1) "Oh Crap" Fund:
First you have to have a lay of the land. Are you really completely broke? Are you starting from scratch? Do you have already have $1000 to $2000 socked away in a drawer/savings account somewhere? An emergency fund is the first thing I need you to build. Emergency funds are for critical life changing emergencies. Think new engine, getting laid off, or home burglerized, NOT great deal on a new pair of shoes or all my friends are going to Cancun.
Standard advice is to have 2 months of expenses saved as an emergency. Add your 2 months rents + $1000 for an emergency fund.
2) Maximize 401K:
This is especially true if your employer has a 401K match, but I preach that the 401K should be your primary vehicle for savings. You will have to make a choice between a Traditional or Roth 401K. A breakdown of the differences is below. As of 2015. the max contribution for a 401K is $18,000.
Differences between Roth and Traditional 401K http://www.marcosison.com/s/roth401k
3) Double Up with IRA:
Psst...here is a secret tip many people do not know. You can contribute to BOTH a 401K and an IRA, if your income is less than $129,000. You will again have an option to choose a Traditional or Roth plan. Calculate the maximum contribution limit for an IRA. As of 2015, the max contribution is $5,500.
You can check here for the latest 401K and IRA limits for year and family status
4) Leverage your Heath- HSA:
Not all of you will have this option, but if your health plan through your employer or AMA allows for a high deductible HSA plan, take that option, especially if you are younger. You are less likely to go to the hospital, so you will save on your premiums. The HSA will likely be unused and after you get to a certain point, you can invest your HSA funds, just like your 401K and IRA. My plan allows me to invest, as long as I keep a minimum of $2000 as cash for health care costs. As of 2015, the max contribution is $3,350 per year.
You can check here for the latest HSA limits for year and family status http://www.marcosison.com/s/hsalimits
5) Vacation Kitty:
You need to take your allotted vacation time. If work gives you 1 week, then take 1 week. if work gives you 2 weeks, even better. Set aside an amount here for a 1-2 week vacation. Air/Bus/Train fare and $30 per day for food and lodging. Yup $30. You can see many places in the world for $30 per day. Check out these for inspiration.
The Key Takeaway:
If you have a job that pays $20,000 per year, then #1 is mandatory. #2-#5 are optional, if your rent is greater than $400. If your rent is less than $400, then I challenge you to make #2 mandatory.
If you have a job that pays $30,000 per year, then #1 AND #2 are mandatory. #3 - #5 are optional, if your rent is greater than $500. If your rent is less than $500, then I challenge you to make #3 mandatory.
If you have a job that pays $40,000 per year, then #1, #2, AND #3 are mandatory. #4 - #5 are optional, if your rent is greater than $700. If your rent is less than $700, then I challenge you to make #4 mandatory.
At over $45,000, ANYONE not living in NYC, SF, or Chicago should make #1 - #5 a priority.
Now add all your mandatory amounts together, then divide that number by 26. That is how much you will be telling your employer to take out of your check for direct deposit each paycheck. That number as of 2015 was ~$1,115.
Here is the key: If the amount is taken directly from your paycheck, it is out of your control.
"Out of sight and out of mind.You know longer see the amount, so you stop mentally spending it. You don't have it. You can't spend what you don't have."
It might suck the first 2 paychecks. After that the impact is reduced, as you adjust your lifestyle habits to live within your new spending envelope.
You might be asking yourself...WTF, how am I going to only live on $XXX per year? The answer to that is on the next post "WTF, How you are going to live on only $XXX per year?"