Who said “Follow the Money” first? Deep Throat. That was the code name for the Watergate informant about wrongdoing by the Nixon whitehouse that eventually led to the resignation of the President, and who was first made famous in the 1974 book “All The President’s Men,” by journalists Bob Woodward and Carl Bernstein, and was later played by Hal Holbrook in the 1976 film of the same name. It was most decidedly NOT said in the Linda Lovelace porn film of the same name, or in efforts to have Courtney Love and later Lindsay Lohan depict Linda Lovelace on film which were scuttled due to the actresses well documented struggles with substance abuse. (Extra Credit: Deep Throat was revealed to be William Mark Felt Sr., former Associate Director of the FBI, in the July 2005 issue of Vanity Fair.) But I digress.
But I’m not talking about Watergate. I’m talking about you, and your path to financial wellness. In the earlier post “You Need Your F*@k You Money!” we went over a simple way to calculate your Net Worth. If you haven’t done that yet, please jet over there and work through that exercise. Now we have to do the next step in getting an accurate read of your financial situation: where you are spending your money and how that compares to your income.
Do you know where your money goes? You absolutely have to. Fortunately there are now simple ways to track your spending that don’t involve you writing down every time you buy something (although that tried and true method is not a bad idea for a week as it forces you to think about every expense as you make it). One of the best out there for people without complex investments is the free online service from Intuit (the makers of Quicken) at www.mint.com. You simply sign up, enter your online user name and password for all your accounts (checking, saving, credit card, brokerage, etc…) and the site will go get the previous 90 days worth of transactions and categorize everything for you. You’ll very quickly be able to see where your money is going. The site will also send you periodic updates and alerts. And best of all it’s free! (If your investment situation is more complicated you may want to spend a few dollars and get the slightly more robust Quicken, which will cost you between $20-40.) So go do it now. Click your electronic bootie over to www.mint.com and set that up. We’ll wait.
Welcome Back! Now I have to tell you something sobering. There is no magic bullet. The only way you are going to increase your net worth is to save money, and that means spending less than you make. Once you’ve done that for a while you will have some money that you can put to work for you in investments. But the time to save is not some time in the future, it’s now. Like right now.
People often come to me and say things like: “but I can’t save now, I don’t make enough money,” or “there’s nothing left over after my expenses,” or “but I can barely make ends meet and I’m living paycheck to paycheck.” Hogwash. As long as you have an income, you can save money.
Unfortunately most people get it backwards. They think about their spending first, then they compare their income to what they “have to” spend, and whatever is left over (if anything) is savings. No no no!
First look at your income. That’s it – that’s all you are going to have.
Usually taxes are taken out by your employers, so that the government makes sure they get theirs.
Now the very first thing you need to do is to take out what you’ve decided to save. Before you even think about spending anything, put away the amount you have determined you will save. Your savings should be just like taxes – not discretionary. And don’t co-mingle or you’ll lose track of what is savings and what is available for spending. Have a separate long term savings account either at a bank or at a brokerage firm.
Tip: Use an automatic transfer to a special savings account timed with your regular paycheck so that your saving happens automatically!
How much to save? Save as much as possible – especially if you aren’t making a lot of money and are just getting started. It’s a habit that will follow you through your life, and if you don’t start now it will only get harder later. My advice is that you should save at least 10-15% of your gross income. Yes, that’s right, 10-15%. Gross. Before taxes. Before any spending. This should probably be split between retirement accounts like a 401k or IRA and regular savings.
Only now that you’ve safely squirreled away your saving, we can look at where the rest of your money should go. This is where the power of a program that automatically tracks your spending like mint.com or Quicken comes in. Take a look at the categories and your last 90 days. Where is your money going?
Now let’s get serious about what you need as compared to what you want. You need food, shelter and clothing. But what kind? Well, how much do you have left over after your savings? You don’t want to spend more than 1/3 to 1/2 of what you have left after taxes and savings on your housing. Many people get caught in the trap of aspirational living. Renting or buying a place based on what they hope to make in the future, or what their friends have, or what they “deserve.” It’s a trap. Your goal line will always be moving forward and you could get stuck on a financial treadmill. Get creative. Find a roomate, or someone with a house who would rent out a room. Be willing to look at other neighborhoods where rent is cheaper. Look at smaller places. The trick is to live within your means now, and build up the financial power to give you the freedom to enjoy better things later.
Now split the money you have left into the most important buckets: groceries, transportation, utilities. Make sure you set aside enough for entertainment, gifts, time with friends, but also be realistic about what you can afford.
That’s a lot to think about, I know. But it’s the most important thing you can do for your current and future financial health. Now make it official. Write all of this down, and also enter it into the financial tracking program you’re using – mint.com, Quicken, or some other. That’s right, we’ve been talking about a budget.
Now that you have your budget goals in place make sure that you check how you’re doing against this budget at least every month if not every week.
While all of this may seem a bore and a chore, I guarantee it’s critical to getting control of your financial life and setting yourself up to build wealth over time. We’ll have you swilling champagne on your yacht in no time. But for now, let’s focus on setting up your automatic savings and sticking to your budget, even if that means some sacrifice in the short term.