I think we should all budget. Budgeting and investing are probably the fastest ways to build wealth in the long-term. If you save $5 a day, or $150 a month, and we dump it into some ETF such as VOO/VTI/FXAIX (the latter of which is heavily endorsed by my boyfriend) with an average of a 10% annual growth rate and wait 50 years, then the balance on your account will be a whooping 2.189 million dollars. When you look at it like that, becoming rich doesn’t really seem that hard at all. You just have to have the self restraint to save $5 a day for 50 years.
Frankly, I don’t really have faith that many people do have enough self restraint for $5 each day. We live in a materialistic world. What’s cooler, spending an additional $5 on a Tesla Model Y lease and impressing pretty women in your twenties with your physical marks of wealth, or waiting until you’re 65 when you might be dead before you have over 2 million in your bank account? Well, I personally think the latter. But, as a woman, I don’t get the impression that men are ever particularly impressed with the car I drive.
Additionally, I’d rather build some generational wealth for my children. On the other hand, I don’t really want spoiled kids who never have to struggle a day in their lives and have everything handed to them, so I guess I’d probably set up some kind of trust for them, even though I don’t have too much faith that my body is designed to live past 50.
So, if you’re interested in having a net worth of over 2 million around the time of your death, you should budget. And if you want to drive around that Tesla and simultaneously be somewhat financially secure, you should budget. If you want to be broke and blow your money, well, I suppose you’re here because reverse psychology is effective on you, and I assume that you carry a balance on your credit cards every month.
So, how can you budget?
Step 1: Determine your categorical spending rewards on your cards
A lot of credit card rewards are differentiated by category. For example, let’s say that you have the US Bank Altitude Go (AG) and American Express Blue Cash Everyday (BCE). Your categories are as follows:
- Dining (4%, AG)
- Gas (3% BCE, 2% AG)
- Supermarkets/groceries (3% BCE, 2% AG)
- Online shopping (3% BCE)
- Streaming (2% AG)
Step 2: Split your spending into the corresponding categories and choose a limit.
Okay, so we’ve got dining, gas, supermarkets, online shopping, and streaming. How much do you want to spend on dining each month? $100? $200? $400? How much on the others?
Choose something reasonable. Even if you’re trying to cut down on dining out, don’t drop that number to $0, especially if it’s possible that you don’t have time a couple days of the month to cook, or if your friends invite you out to eat once in a while, or if you’re dating someone new and like to get to know each other over dinner.
How many times do you want to go out for dinner each month? Let’s say you want to go out 5 times, about once every week. Then take a look at your past bills and make a good average guess. I personally grab fast food once or twice a month, usually averaging at $15, and I do a sit down restaurant two or three times, each averaging $40-$50 including tips and sometimes a drink. So the high limit of this would be 2×$15+$50×3 = $180 monthly. That seems reasonable.
Do this with all your credit card categories.
In the end, I have something like:
- $180 dining
- $200 groceries
- $40 gas
- $150 online shopping
- $30 streaming
Step 3: Determine your other expenses and pick the limit.
This should include all your recurring expenses, such as health or auto insurance, car payments, student loan payments, rent, utilities, entertainment, phone/Internet bills, personal care items, clothing, and anything else you might buy in a month. I recommend scrolling through 2-3 months of your past transactions to list all of these.
At the end of this, you should have a long list of categories and monthly costs. As specific as possible is great.
Step 4: Determine how much you want to save monthly based on the long-term wealth you want to build
How much do you want saved in, say, 30 years? Twenty years? Let’s say that you want 1 million saved in 20 years.
Plug those numbers into the calculator at this link: Savings Goal Calculator. Put 10% in as the annual interest rate, as this is the average growth rate of the market.
For 1 million in 20 years, you need to save $1316 each month.
Step 5: Figure out how much you would save if you followed your current monthly expenses
Add up all your expenses after you’ve gathered the categories and numbers from steps 1-4. Let’s pretend like all your categories add up to $3000 for ease. Then, determine your net income. Let’s say that you make $4000 monthly after taxes and retirement contributions.
This indicates that we’re able to save $4000 – $3000 = $1000 a month. But in order to get to 1 million, this is $1316 (step 4) – $1000 = $316 short.
Step 6: Figure out how to lower your expenses to reach your savings goals.
$316 is not really that much money when you think of it in terms of daily expenses. It only requires you to save about $10 additionally each day. If you have an income of $4000 monthly, this is only 5% of your daily pay.
You need to figure out a way to cut these expenses out of your budget. So, take a look at all your bills and discretionary funds. What options do you have?
- Reducing gas costs. Let’s say that you have a car that averages 20mpg, and the gas price is currently $3.50 a gallon. If you drive 60 fewer miles in a day, you should be able to hit your savings goals. But that’s sort of unreasonable to drive 60 fewer miles in a day for most people. It is, however, reasonable to cut out 5-10 miles every day, replacing it with walking instead, which can save almost $25-$50 monthly. You’re almost 1/6 there.
- Reducing rent. Even getting a slightly cheaper place for $50 less a month will add up. If you get a roommate, you’ve most likely already hit your savings goals.
- Reducing grocery costs. Increasing plant consumption, for example, saves significantly more money than eating meat regularly. Ground beef can be over $5 a pound in many areas, while a can of chickpeas is only around $1.50. Many vegetarians can save an additional $150 a month over heavy meat eaters. But even if you don’t want to give up meat, it’s much cheaper to cut down on processed foods, eat more bread/pasta/rice over pastries, switch to chicken breasts from steak, quit coffee or drink instant coffee, and generally just cooking more meals from scratch.
- Reducing dining costs. One of the easiest ways to reduce dining costs is just skipping out on the drinks and opting for water. A beverage can easily be $15-$30 each meal including tip, which could be $120 a month if getting a beverage every week. Also, just skipping out on your daily Starbucks and making your own coffee, or choosing not to go out when you just want a quick bite. Save restaurants for social events. If you don’t know how to cook, learn. It’s one of the easiest things to learn in the world and all you really need is a pot or a pan, a spatula, some olive oil, raw ingredients, and salt to make something tasty. Oftentimes, home cooked meals, even created by a beginner cook, taste much better than the trash they sell at restaurants.
- Shopping around for cheaper insurance. Many forms of insurance, especially auto insurance, have raised prices every year. Switching to a new company can easily drop your rates by $20-40 monthly.
- Buying fewer discretionary goods, or buying fewer luxury discretionary goods. I know you like the smell of your conditioner, but your hair really won’t look significantly different with a $1 conditioner versus a $40 one. Also, do you really want to compromise your chance of being a millionaire in two decades over a new shirt, a new phone (when your old one is perfectly functional), the nicest hotel room you can find? Consider your needs prior to buying something, and its long term worth. Anything short-term is not worth spending a luxurious amount of money for.
- Setting your temperature a couple degrees higher or colder. You don’t need to be in 69 degree indoor temperatures all the time. You’ll survive in 75 or 80 or 55. And your body adapts quickly if you let it, so soon a warmer or cooler temperature starts feeling natural. I can get to a point where both 90 Fahrenheit and 20 Fahrenheit both feel fine. And I don’t know if you’ve ever looked at your AC bill, but it can easily exceed $200 monthly in a one bedroom apartment if you’re setting it at 69 when the outdoor temperature is 100.
- Cutting down your streaming subscriptions. I know it’s nice to have the option to watch any movie or show you desire, but there are a lot of nice shows on HBO Max, you don’t simultaneously need Netflix just to watch something on there once a month.
Step 7: Track your purchases every month.
There are a lot of ways to do this. I personally just have a Google Sheets that I put all my expenses and the corresponding category on. Every two or three days, I check through my transactions in my banking app and write them down. You can also write them down on paper or mark them every time you swipe your card. Make sure you don’t exceed your categorical budget each month. You’ll have to add your expense to the total every time. For example, if I make a purchase at Aldi for $10 May 1, and $20 May 2 at Whole Foods, then I add those together to get a total of $30 of grocery expenses. Every time I add a new purchase to the corresponding categorical total. If you notice you’re hitting your limits too quickly, then you know it’s time to slow down.
Step 8: Dump your savings, outside of your emergency fund, into an investment account.
I recommend opening a Fidelity Cash Management Account or Brokerage Account. Vanguard has some good options too. If you bank with Chase, then JP Morgan might be your best choice. If you bank with Bank of America, Merrill Edge might be best. It doesn’t really matter.
Dump your monthly savings amount into the brokerage account and buy VTI/VOO/FXAIX. These three both track the general trends of the market. Don’t pull out or sell your funds when the market dips. ETFs will grow and fall constantly, sometimes at scary rates, maybe dropping even 30%, but the market always grows in the long-term and averages around 10% a year. Maybe it’ll be a 30% growth this year and 20% drop the next year, but in the end of your timeframe, you’ll have a very large sum of money.
Credit Paradise 