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Remember your financial house?
We previously published a two part series about how to get your financial house in order (here’s part 1 and part 2). In part 1, we described how to evaluate your spending - here’s a refresher on what we covered:
If you find yourself living paycheck to paycheck and consistently spending more than you make, it may be a good exercise to create and follow a budget. The first step in budgeting is listing out your known expenses and incomes. You’ll need to determine all fixed costs, including your rent/mortgage, approximate utilities, internet, groceries, gas, car, etc. There are some simple ways to reduce these fixed costs that you can implement today - for example, make a list before heading to the grocery store. There are also longer-term strategies to reduce fixed costs - as examples, you can trade in your new car with a high monthly payment for a cheaper used car, or you could house hack (which we wrote about previously) to save money on your mortgage. These are some ways to reduce fixed costs, but at the end of the day, when it comes to budgeting, your fixed costs should be relatively stable month to month.
You will also have what some call “sunk costs.” Sunk costs include unnecessary spending, like eating at restaurants, excessive shopping, excessive drinks at a bar, and many others. While you should aim to minimize excessive and unnecessary spending, some of the money will be spent on things that can bring joy to your life. In my opinion, spending on things that bring you joy is a total waste, so I believe you should aim to keep this spending low, but not completely eliminate it. For example, I enjoy eating at restaurants and going out for drinks with my friends, but I try to limit the spending while I’m out. I try to limit going out to eat once or twice per week and limit going out for drinks the same amount - and I always include this spending in my budget. Instead of going out to eat everyday, shopping at a grocery store and meal prepping can be a lot cheaper (and often healthier). Going out to a bar can be expensive, but bottle service is never a must and you can always just buy drinks for yourself or switch buying rounds for friends as long as those friends are kind enough to return the favor. At the end of the day, if you plan to include some “sunk cost” spending in your life, just make sure to add it to your budget and set a reasonable limit for yourself.
To evaluate where you’re excessively spending, you’ll need to look at your income, fixed costs, and sunk costs. Once you have these numbers, you’ll need to evaluate where you can minimize spending. Granted, it is always easier to justify eliminating the sunk costs, but it is more advantageous to try to reduce the fixed costs because those are monthly and usually do not go away for a period of time. Once you’ve set a budget, I’ve found it helps to have a goal, whether it's to save for something or invest a certain amount each month to reach an investing goal. Goals help keep you on track! Budgets can be tiring and annoying, but at the end of the week or month or year, if you’ve kept on track with your goals, you’ll feel amazing. And along the way, be sure to treat yourself every once in a while! You’ll find that once you start hitting your initial goals, it becomes easier to hit them week after week, month after month, and year after year. This simple step of evaluating your income versus your spending will help you greatly going forward because gaining wealth starts by spending less than you make and living below your means.
Okay I’ve evaluated my spending, now what?
I have found that giving your money purpose greatly helps me stay on track financially. For example, I know where every dollar that I get on pay day is going to be allocated (e.g., X amount goes into a housing fund, Y amount will be invested in the stock market, Z amount will be used to purchase Bitcoin, etc.). Giving each dollar you earn a specific purpose will help you stay on track to meet your long term financial goals.
If you’re the type of person that doesn’t want to manually allocate money every payday, don’t fret! There are many products that will auto-withdrawal money from your account on specified dates and can help automate the process of allocating your money to your specified purposes. For example, you can automate transfers to many investing platforms, automate purchases of equities, or better yet, if you use a Strike bank account, you can automatically get a percentage of your paycheck in Bitcoin. If you haven’t looked into Strike yet, you should and use our referral code here.
A budget gives you control over your hard earned money - with a budget you know exactly where each of your hard earned dollars is going. When you know where your money is going every month, you can put together a plan for long term financial success. In other words, with a budget, you can take control of your future!
If you’re new to stock investing, check out our introduction to stock investing series:
If you’re new to real estate investing, check out our real estate investing series:
Have a great rest of your week!
Brandon & Dan
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Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.