Monday, December 7, 2009

Income Vs. Expenses

I hear plenty of people point out their incomes per month to me as if it's a personal trophy: But the vast majority of them have their faces go pale when I ask about their expenses.

You see, many people have this belief that more money means more spending. When someone gets a raise, they get a better car with larger payments. If they get a big tax refund, they go out and buy a flat screen TV. If they find $20 in an old coat, they take their friends out to eat, and often end up spending more than the $20.

This is the thinking that keeps people behind. Every dollar you earn has potential. It can potentially be more profit, it can potentially be a new service, it can potentially be food, etc etc.
But when people have a larger weekly or monthly potential to spend, that's what they do. They spend it.

Yes, there are some things that are unavoidable - Bills, food expenses, random emergency expenses like car problems or medical bills, etc. However, there are so many things we CAN avoid.

How many times have you gone out to eat in the last month? How many times have you gone to the movies instead of rent a far cheaper movie at your local movie rental place, or even better, your library where movie rentals are free so long as you return them within a week.

It's these little things, these small extra expenses that add up. Every extra dollar you spend takes away more than just that dollar - it takes away its potential.

With an extra 50 dollars a month, you could, say, buy a video game. That will probably amuse you for up to 50 hours.
You could buy a few movies, and get maybe 4-8 hours of entertainment out of those.
Or, you could use that money to make more. Now, your extra 50 dollars a month is an extra 60 dollars a month, then 70, 90, 120, 150, 180... and so on. Every spare dollar has the potential to go out and become more money. So how do you make sure not to do this?

Simple. Split your money, and give it a purpose the second you have it.
When your money has purpose, it becomes less likely you'll spend it on something else. When you know your rent is coming up, no matter how lousy your month has been for money, you still have that rent money - because at some point in the month, you planned out where the rent money would come from.
You gave it purpose.

There are plenty of ways to do this that might work out for you, for instance, just physically separating any money you have.

I previously wrote a rather quick article on having a Separate Business Bank Account from your personal account, which I wrote because of the various problems I went through before learning that simple solution.

Well, that can be extended even more so to encompass the problem in this article.

I stumbled upon the idea here, which I'll quote below.

"When I worked for tips, I had five separate envelopes that I put my money in so that there was no confusion as to where it belonged before it made it to the bank.

Here are the five categories that I suggest in order of importance.

1. Long Term Wealth
2. Minimum Spending Cash
3. Regular Monthly Expenses
4. Irregular Expenses
5. Fun Fund"

It is possible to have many more compartments for your money, but I find that five is enough without getting too confusing (and driving your banker crazy). Money should flow into these compartments in this order as it is received. The absolute best way to accomplish this (if your company allows this), is to automatically split your check into these different accounts when it is deposited directly on payday.

- Brian Lee

The idea is to make five bank accounts, and split money between them as you make get paid, with "fun fund" being the least important.

I find his way a brilliant way of managing money, and making sure to spend only as much as needed, and highly suggest reading that page if not more of his site.

While I have found other systems online, his is the most realistic sounding, and while I haven't implemented it yet, I do plan to in the near future.

Has anyone out there already tried it? If so, please feel free to leave a message below, and let us know how it worked for you.

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