This is our second part of our Build Your Financial Future series. If you haven’t already, go back and read Part 1.
Last week we introduced you to tracking your financial story and how continually improving your income has knock-on effects in your life. Let’s dive into expenses and the resulting net income today.
Expenses
Personal Capital’s best feature is providing the user a snapshot of their expenses by category. The first step is to figure out how expensive we’re living. Track your spending for a few months to get an idea. The results might surprise you, but don’t get overwhelmed! The hardest part for us was being honest with ourselves.
Now that you have an idea about what your expenses are: what steps will you take to reduce them? Math tells us that $100 invested every month for 20 years will produce $46k (assuming you invest that amount each month with a 6% annual return). Surely we can afford cutting our expenses by $100, if not more!
Our intention is not scare tactics; never leaving the house and eating rice and beans for all your meals is not the world we want to live in. On the contrary, we hope to live intentionally through smart financial decisions, which in turn will lead to building a better financial future. One thing we want to emphasize – don’t skimp on the things you love. We love to travel, so we’re not going to sit at home hoping we can retire a year or two earlier and save all our traveling until then. Spend money on what you love to do and mercilessly cut the unnecessary spending.
Now let’s get into the nuts and bolts, specifically some of the main categories you’ll find on Personal Capital.
Meals
We absolutely love eating out, trying new foods, and finding new restaurants. Unfortunately eating out can take its toll on your bank account. When Mr. and Mrs. Thrifty first met, we would eat out for dinner 3-4 days a week. Multiply that by $40-60 a meal and we had a problem.
Subsequently, cooking has become a hobby of ours and we have grown to love a home-cooked meal. It’s easy to get overwhelmed by some of the recipes out there that call for exotic ingredients. You buy it once then keep in your cabinet never to be used again.
Budgetbytes has been good to us. Beth, the owner, provides simple, delicious, budget-forward recipes with a built in dollar spend for each one. Some of our favorites are Dragon Noodles, Roasted Corn Quesadillas, and Turkey Sriracha Meatballs. You can’t go wrong with any of the recipes on this site!
Reddit is also a great crowd-sourcing platform for finding new and exciting recipes to make at home. We highly recommend the Eat Cheap and Healthy and Meal Prep Sunday subreddits. Eating healthy doesn’t have to be as expensive as you’d think, and these pages provide insight into that.
We’ve drastically cut down on grocery bills by routinely shopping at Aldi. Our general rule of thumb: if Aldi doesn’t have it, we don’t need it. We’re not perfect though, and exceptions do occur, but not as often as you’d think.
We recommend getting your cooking done 1-2 nights a week and eat leftovers as often as possible. It’s not as exciting as eating a freshly cooked meal every night, but you’ll be happy seeing the results in your bank account. It also takes the stress out of getting home from work and cooking every night.
Travel
Saving on travel can be difficult. You typically get what you pay for, so we consider this to be one of our splurge categories. Plus, we get to share our experiences with you on this platform!
That being said, there are smart ways to travel on a budget. Do your homework with hotels and flights, search for packaged deals for popular attractions, and consider traveling during offseason times of the year.
Another way to save is to use credit card rewards points to book your travel. We have saved thousands of dollars over the years by using the points based on normal spending patterns. This topic alone deserves its own post, so expect more soon.
Cable/Internet
We are those pesky millennials that have cut the cord and rely on Netflix/Hulu/HD antenna for TV. It immediately saved us $60/month ($720/year) and we don’t feel like we’re sacrificing anything. Now that we don’t have a DVR filled with shows, we can explore other shows or watch Parks & Rec on repeat for the twelfth time.
Every 12 months or so, we get a notification from our internet supplier that our rates are increasing. Not so fast. A quick call to customer service generally does the trick. Our advice is to be firm and know your facts (specifically the price of the competitor). It’s in their best interest to retain you as a customer.
Insurance
When was the last time you shopped for quotes for your insurance providers? A few hours of work means we’re now saving $75/month ($900/year) for the exact auto coverage we previously had. We’ll be looking at our house’s insurance next, with the possibility of bundling as a strong option to save even more.
Library
This isn’t a necessarily an expense category, but one that will have a ripple effect in your life. Modern libraries aren’t just books; our local library offers movies (as well as streaming services), video games, audio books, and even 3D printing! You’d be amazed at what you can find, and it saves money in unconventional ways.
Please get in touch with us about any other expense categories you’d like to discuss, or tips you’d like to pass along. We’d love to open source ways of savings for all of us to save together!
Net Income
You’ve accumulated your stats from Personal Capital for a few months. So how does it look? Is your personal business making a profit or incurring a loss? Here’s advice for what to do with the leftover net income.
Build Your Emergency Fund
Your emergency fund is self-explanatory: build an amount in an interest-paying account as a rainy day fund. Then keep it there and don’t touch it. The higher the interest rate, the better.
We recommend building an emergency fund of 2-3 months of your expenses. While this may be conservative, it’s better safe than sorry. Besides, tragedies happen in life and it’s best to be prepared.
Eliminate Debt
Your emergency fund is built. It’s now time to eliminate all debt as quickly as possible excluding your mortgage. Debt is a natural drag on your cash flow, which requires you to slowly pay interest over the life of the obligation. On the other hand, accelerating payments reduces your overall obligation and frees those principal payments for further investment.
Credit cards have eye-watering interest rates. Have you ever looked closely at your credit card agreement? We’re talking high-20’s, low 30’s percentages if you have a decent credit history.
Pay off your credit card every month in full. You’re living too rich of a lifestyle if you can’t. The consequences of carrying over balances will be disastrous to your financial future.
Dave Ramsey famously invented the concept of the debt snowball. We’re recommending this concept, but with a twist. Dave recommends paying as much as possible to your smallest (dollar balance) debt while paying the minimum on all other debts. Once the smallest debt is extinguished, add the previously paid amount to the next largest as a “snowball”. And so forth until each debt bucket is gone.
Conversely, we recommend using this concept but starting with the largest percent interest rate. Dave’s route costs you extra interest payments for a psychological boost of quickly moving from debt to debt. But you’re smart and disciplined. You don’t need a psychological boost; you need to pay off your debt as quickly as possible.
It can be a long road but stay patient. Sometimes “getting to broke” is the hardest part in building your financial future.
Invest
We will be discussing investment strategies in a future post. For now, our recommendation is a broad-based index fund with a low annual fee. Vanguard is an great choice in this regard.
Wrap It Up
Money isn’t everything, but knowledge is power. Becoming adept at managing your budget and building your financial future will lead to success. All you need to do is monitor it on a monthly basis. We hope that reading this post empowers you to take charge of your finances and build the financial future you deserve!
How are you doing in building your financial future? Get in touch with us to let us know what you think and share with a friend who needs a nudge in their personal finance journey.
Very helpful