When you are doing well don't tell your friends or family.

I've discovered that at least in Latin America, it is best to tell people how bad you're doing. I've been working hard at cutting expenses and minimizing others. I'm still spending too much on food, but much less than many people I know.

Even though I only just implemented my investment strategy this month (The strategy I've been working on for several months), I've already gotten comments that "I make more than them so I should be more generous." or that I'm very "cheap" because I am not sharing my new found wealth.

It is ridiculous because I have been struggling and making sacrifices to save and invest what I can of the very low (much less than minimum wage in the United States) income I have. I won't see income above a few dollars a month for at least a year and that is supposing that I have non-stop work for the next twelve months. That is pretty doubtful since most of my groups cancel most of December and half of January plus a week or two for holy week in the spring. Of course for those few dollar a month earnings I'm saving much more which is a net loss every month; sacrificing money today for money years from now. It isn't as if I had won the lottery or inherited a fortune.

I have:

• found roommates for the other rooms in the apartment.
• found a roommate to share my room.
• one roommate uses my closet and sleeps in the living room.
• refused to buy a car and I only take a taxi when necessary.
• limited myself to inexpensive food when at home and eating out. When I eat out I normally buy something very cheap on the street.
• started washing my clothes by hand when I have time to do so. 
• rented an apartment in a relatively poor area of the city with good public transportation.
• recycled and reused what I can.
• stopped buying magazines or newspapers except when they are for use in my English classes. I have been reading some newspapers and magazines at the university library where I teach a few days a week and I'll read news articles online.
• refused to buy more gadgets except as a replacement.
• paid my credit card in full every month. 
• refused any unjustified regular expenses. I have my cell phone and internet at home. I don't need anything else that isn't essential.

I have many more things to do like try cooking more of my food at home, but I feel good to know that I'm making progress. This doesn't make me "very cheap", it makes me responsible.  I don't have to ask friends for a loan. I don't have to take what doesn't belong to me since I am being responsible with my low income.  No, I don't have a huge bank account. I decided to keep no more than one month's income in cash except in the event that I take a much needed vacation.  No, I couldn't live for a year on my investments. I suppose if I could cash everything out I'd be able to survive for a little under a year, but it would be only survival. Of course, I would then have nothing for retirement nor for a house or condo to call home.

It seems that all the minor miracles I've been managing to have humble savings is considered to be a horrible thing to the general population. I should, according to them, spend all my money on stuff and on them and forget about being responsible or savings. Will they take care of me one day? Will they give me food, clothing, and shelter?  Of course they won't!  They are just jealous of what little someone else has been able to manage. They are jealous that I've made the commitment to prepare for my future. 

My advice to you is that if you have friends or family who are like them, tell them you are broke, that you have no savings and that you aren't sure if you'll be able to pay your rent next month. They'll be happy thinking you're just as bad off as they are and when you want to save money instead of spending a huge portion of your paycheck on a night at a bar or on a cruise ship vacation. Tell them you can't afford it because you need to buy a new television or other stuff that they would think is important. 

Follow through and follow up on your new Budget

In the last two posts I introduced budgeting and how I normally create a budget. To get ahead you need to know where your money is going, plan for the future, and carry out that plan.
Once you have your fresh budget created you need to actually implement the budget by reaching or exceeding your savings, spending, and investment goals. Here are some important things to consider:

1. Follow up on expenses.

 Make sure they are accurate.  Did you forget to add your monthly haircut or your personal care products to your budget?  Perhaps you forgot to include your monthly gym membership?  You might have spent more than planned so you'll either need to save less or spend less in other areas. Make changes to your budget to reflect reality THEN change reality by reducing what you spend.  As you modify your spending habits, you'll see the change on your spreadsheet where you register expenses and income.

2. Review your goals

Once a month, reconsider your goals, their priority, and timeframe. Are you saving enough? Are your investments earning as much as you predicted?  You might have to increase savings or change the start date for your new projects. However without your budget you wouldn't have realized it.

3. Have circumstances changed?

Even a perfect spending plan will frequently change because circumstances change. If you lose your job, get a second job, get or lose a roommate, or decide to buy a new car, guess what? your budget will have to be updated. You are responsible for your personal finances regardless of whose fault it is.

4. Did you pay yourself first?

If you put your expenses before saving and investing you might discover that you didn't save as much as was in your budget. Really of all your spending plan, your savings and investments are the most crucial to get ahead financially.  Since you didn't meet your goals, check to see what the problem was and next month deposit the percent of income you have budgeted into your savings and investment accounts as soon as you get paid!  Instead of saving and investing with the left over money, use the left over money for non-essentials.

The Budget or Spending Plan that I Follow

For many years I struggled to find a way to budget that would work for my personality and time constraints. I know that having a precise record of spending and spending per category is useful, but I can't keep it up over the long term.  If you can that's great.

Then one day over a year ago, I was reading an article on MSN Money about the 60% solution.  I would have linked the original article, but it is no longer available on MSN. I searched for it and the link in their own search results is bad so I guess they pulled the article. It is too bad because it is the best budget method I've been able to find.

Here's how it works (at least how I remember it!)

Take your total income and multiply it by .6 to get 60% (and add a line in your budget to calculate it and to compare it with your current planned expenses)
Lets say you get paid $500 twice a month. 60% would be $600 for the month.
60% is the most you can spend on ALL of your normal expenses. Yes, thats everything you normally spend money on even your month's credit card expenses, food, housing, transportation, cable, insurance, telephone, cell phone, etc.)

The remaining 40% is for entertainment (10%) and Savings (30%).   That means that you can't spend more than 10% of your income on Entertainment (not 40%!).

If I remember correctly the 30% is divided into 3. 10% for irregular expenses like vacations, weddings, gifts or when something expensive breaks and you need to fix them.  10% for long term saving like for a new car, buy a house, etc. 10% for retirement.

It is a good system for most people since it will cover almost anything that comes up. That 30% savings every month will quickly grow an emergency fund and later investments or you could be strict and really put 10% in different accounts.

What about debt?   If you are in debt, you can spend 20% from Savings and 10% from Entertainment to pay the debt down.    Obviously if your current expenses are below 60% don't increase them!  any additional money that can go towards debt payment and investing is great.

What I'm doing differently from the 60% solution

I have an irregular income instead of a paycheck so my 60% is different every month. That means that I can't set up any automatic process of moving $x to 3 different saving and investment accounts on the 16th and 1st.  I calculate what I should make every month based on what I expect and as classes get canceled, I reduce the number and update the income field for the month.
If I'm having a really bad month I'll save only 30%.  If I'm having a good or normal month I'll deposit 50% of the money I receive twice a month (since I charge twice a month). Yeah, I know 50% is much higher than the 30% in the plan, but you never know when a month will arrive that won't let me save anything so it will probably average down to 40% this year.

My goals include buying a condo, house, or land outside of the city for building a small house.  30% savings won't get me there!  Therefore I've been slowly adjusting my expenses down from a 60% solution to a 40% solution. 40% solution would therefore be to limit regular expenses to 40%, consider 10% for irregular expenses and entertainment and put the other 50% toward savings and investing.

If I were to divide up the 50% up into groups, it would depend on age. I'm 36 now and I don't own my own home or even some place to camp on if I needed to so my first goal is to have enough savings for emergencies and to buy some place to call my own. If I save 50% the next 4 years, I should have enough money for a deposit on a tiny condominium here in Mexico City or pay for half of a house out on the edge of the city (about 2 hours in public transportation from where I live now!)  That money would probably pay for an undeveloped lot outside of the city  about 3 hours away from here. They all have pros and cons.

My next goal is to have money for retirement or semi-retirement. Until I buy my own place, I'm putting all the money that isn't emergency fund into a special account for retirement savings. There are no fees for taking money out before I'm old. If I don't see the money grow there, I might move it to a brokerage account.

If you are new to budgeting, you are probably thinking "60% or 40%? you've got to be kidding me!"   No, I'm not. I make less money than you'd make on minimum wage in the United States. I share an apartment in a relatively poor area. I don't have a car. I don't buy a lot of stuff.  I only pay for services that I really want. I don't have movie channels. I don't have a television either.  I pay for internet and an inexpensive cell phone plan. I don't have a home telephone right now either. I don't buy a lot of clothes and none of it is name brand.  I'm currently only struggling with my food expenses. It is easy to buy fast food or a taco going to or from work.  If I cooked and packed all my meals I'm sure I'd have 50% saved every month as long as I keep working and sharing the apartment.

If you can't save 30% every month, start by reducing the biggest expenses: housing, transportation, and food. Then go after extras that you pay for every month. Finally go after the entertainment related expenses until you can reach your savings goal at 30%, 50%, or more!

Introduction to Budgeting (creating a spending plan)

This post is for those who are new to the concepts of managing your money.

What is a budget and why is it important?

A budget is a spending plan. In its most essential form, a budget is a list of income and expenses for a specific period of time. You could have a budget for your vacation, a budget for a business trip, or a personal finance budget. I'm referring to the last one in this blog since it is about my personal finance journey.

What do I need to create a personal finance budget for me (or my household)?

To create a budget you need to decide how often you'll update your budget (typically every 15 days) , how long of a period it will cover (typically one month), and some place to write down all the numbers and make calculations.  You also need to know how you spend your money. It is good to have a pile of bills from the last month and the last of the bills that come every other month or longer like the utility bills or car insurance.  If you earn a paycheck take out the last month's pay stubs. If you work freelance, look at your client payment register and look at checks and deposits to your account. 

The period of a budget and the level of detail in a budget really depends on you, but since most regular bills come every month, it is much simpler to do a monthly budget and update it as you go even if you are paid every week, every two weeks, or twice a month.  

The frequency you use to update your budget is a matter of personality and dedication.  If you like to micromanage and you have free time everyday, you could update your expenses and categorize each one and then compare the end of the month with your plan. It can be great to see how you think you spend your money is different from how you really spend it!

Personally, I think of a budget as a guide. I don't really care where every last cent or peso got spent during the month as long as I'm making the desired progress toward my goals.  As soon as I start to fall short I'll make an adjustment.  I do however pay special attention to repeating, regular expenses since those need to be reduced, cut, or replaced when my income drops. 

Since I don't like to worry about every peso that leaves my pocket I consider my money as going to the following categories:

1. Basic Expense

2. Entertainment/ going out

3. Irregular Expense

4. Savings and Investments 

No, I don't actually make those categories on my budget spreadsheet, but that's how I think about expenses for budgeting.

On my actual budget spreadsheet I group them as follows:

1. Expenses (with a list of regular expenses and approx. costs)

2. Savings and Investments (divided by account I deposit the money to)

Basically, on my budget it is:

1. Money I plan to spend

2. Money I have saved

3. Money I end up spending on Entertainment or other misc. irregular expenses.

If you control every peso/dollar that you have then you just have:

1. Money you spend

2. Money you save

What is important when creating a budget?

The most important things to consider when creating a budget are your goals, and  to live below your means. That means that all your expenses planed and unplanned need to be well below 100%. (no, 90% isn't well below). If you spend 100% of your money every month, you are not going to have money for anything else and you'll either have to go without or go into debt (credit card!)

Your budget should reflect your goals. If you have no goals then make a list of what is important to you and what isn't important. What makes you happy? What would make you happy? Where do you see yourself in 5 or 10 years according to your current spending and where would you like to be?

Most people want to change or improve their finances, but they are afraid or they don't have established goals.  Without goals, it is too easy to just spend money on whatever you feel like and usually end up in debt. Another big problem is that with credit cards and debit cards it is very easy to spend money as long as you have one or the other in your billfold so to actually carry out a budget it is often important to keep those locked away at home most days or get used to having small quantities for cash for spending that day or week. You'll have to find what works best for you.

Where should you create your budget?

You only really need a notebook, a pen or pencil, and a calculator, but I think it is much better to do a budget on a computer since it can calculate percents and averages.  It is important to keep a monthly log of spending and/or saving along with income to get a better idea of your progress that you can compare with your general spending plan and your goals. 

I know that for USA and Canada there is a service called Mint.com that is useful for making a budget and tracking spending with reports, but that isn't available to someone outside of those countries.  There is also special software like Quicken that you can buy, but then you are stuck updating when you are on the computer it is installed on. I tried some budgeting software, but it was more tedious and of course if the hard drive crashed or the system became corrupt, I'd sometimes lose my data and configuration.  The best option (at least for those of us who don't have Mint) is to use a spreadsheet stored online (and a backup on your computer). My favorite service is Google Docs (now part of Google Drive).  I can create/edit/update my budget anywhere I can find a computer with an internet connection. I don't need to worry about software purchases or upgrades that way.

I recommend that after you set up your basic categories of income, spending, and savings, and of course the subcategories for the level of detail you want, add special calculations that will help you with your goals for example:

Make fields for % saved and % spent (including savings & investment)  If the number is over 100%, you messed up or you have unspent money from last month that you forgot to deposit!

A column for total spent and average spent in each category is also very useful. Over time, you'll know your average income, expenses, and savings either as approximate or precise depending on how regular you update it.  I'm more careful  updating income and savings and less worried about the rest.   

A spreadsheet page for calculating your net worth (assets vs. liabilities) over time is also very useful, but it is your spreadsheet so you should adapt it to your needs.

In the next post, I'll write about the spending plan I currently use.

Reduce Housing Expenses to save money

Since your goal should be to save as much as possible every month so you can get financial independence, early retirement, or buy your own home, perhaps you could start with those pesky large fixed expenses.

The three largest expenses for most people are food, transportation, and housing.

Your housing expenses could be mortgage payments, property taxes, maintenance, and home owner association fees. It could also be rent payments or perhaps you live with your parents for free!

Assuming you can't or don't want to live with your parents consider one of the following:

Move to a smaller apartment. Go from three bedrooms to two bedrooms or two bedrooms to one. If you are in a one bedroom apartment consider an efficiency apartment. from there perhaps rent a bedroom with kitchen access near where you work.

Do you have a two bedroom apartment? Instead of downsizing you could rent the room to a friend or post an advertisement. Increase what you want by a little to cover utilities and don't forget to ask for half of the deposit.  If you rent to a stranger ask for references and be sure your bedroom has a lock on its door.

Many people don't move to a smaller and cheaper apartment or share because they have too much stuff. The extra room is full of boxes of stuff. You may not even remember what's in the boxes, but they're there taking up space and costing you money.

If that's your situation, then you need to urgently go one box at a time and make piles of things to sell, things to toss, and things to donate. Whatever doesn't sell gets donated.

An excellent rule is to get rid of whatever you haven't used for one year.