Personal finance tools posts

Pinpoint your spending ‘blind spots’

Looking at the statistics of consumption and levels of consumer debt in the Western world there is not much doubt in my mind that most of us, most of the time spend too much money, on too many consumer items. This is how we have become over-spending, over-consumers – we eat too much, drink too much and have too much stuff. Even when this is valuable stuff! I certainly did fit the bill until very recently. Having realised this I started thinking about ways to limit consumption – my consumption, in this case. One way to do this, as I discovered, is by mastering my wants and working out what are the things I really, really value. By accident, whist doing the exercise, I also noticed that there were, what I have come to call, spending ‘blind spots’.

The Money Principle Budgeting Tool: let’s play

I am sitting in bed with my leg up and it is 35C in Sofia. I am hot, bothered and not very patient – with myself and with the world. Under this circumstance what better way to pass time than to finish something I have been promising for some time now and have been working on for even longer.

In a previous post I argued that whilst budgets don’t do much for me (in fact budgets get me seriously vexed) I am a firm believer in budgeting. I also discussed three kinds of expenditure: constant, changeable and variable.

Budgeting that works: The Money Principle Way

When I needed a budgeting framework that is easy to apply and does not constrain me within a budget I used Arkad’s rules. This worked really well for two reasons. One, I could automate the negative wealth repayment and get on with my life instead of obsessing over it all the time. As a result my quality of life improved, my work improved and my work results improved. This will soon pay off, I believe, in career and financial terms. Two, we built an emergency fund and started building savings/investments. This made me feel less fearful about the future and, let us face it, less vulnerable to any adverse future developments. So, Arkad’s budgeting was good for quite some time.

Several months ago I noticed that we spend hardly anything on fun and on ourselves. This wasn’t because there was nothing left to spend but because of the way in which we budgeted: fun was not in our budgeting frame. Having realised this, and the detrimental effects it has on family life and individual feeling of worth, I started playing around with the budgeting frame. After all this is one of the advantages of budgeting: if it doesn’t work you look at it and re-work it rather than feeling as a complete failure.

Budgeting that works: Arkad’s Simple Rules

This budgeting frame is particularly appropriate when paying off ‘negative wealth’. When people have debt negative wealth, the customary advice is ‘don’t save; throw everything to pay it off’. I happen to disagree with this and from the very first days of my financial awakening I set myself two goals: one pay negative wealth and pay it fast; and two build up an emergency fund and savings. As it turned out I am in good company and Arkad, the richest man in Babylon, also agrees with me. Arkad’s advice to people who have negative wealth and wish to become wealthy was the following:

Ten percent of all you earn should be saved and invested.

Twenty percent of all you earn should be used to pay debts negative wealth– if the amount is insufficient one should negotiate with their creditors firmly and convince them that this all that they can afford but that they will pay diligently.

Seventy percent of all you earn should be used to cover all living expenses.

Budgeting that works: The Balanced Money Formula

The Balanced Money Formula was suggested by Elizabeth Warren and Amelia Tyagi in their book All Your Worth: The Ultimate Lifetime Money Plan . I have already mentioned that budgets don’t do much for me – this is not a budget. The Balanced Money Formula is a guideline for exactly ‘what it says on the tin’ – for achieving financial balance that will allow you to live a life of abundance and also ensure that you save towards your dreams and your future.  Applying the Formula assumes that you know your net income (income after tax) and have detailed, itemised knowledge of your expenditure.

Warren and Tyagi’s Balanced Money Formula consists of three elements: needs, wants and savings. ‘Need’ is everything that you absolutely have to pay and will include shelter, facilities, cars and insurance, food and basic clothing. ‘Want’ is everything above the basic needs that we have in our lives like eating out, going out, holidays etc. This category can include the things that you can cut out but this will cause temporary discomfort. Savings includes also ‘negative wealth’ repayment till it is gone.