As mentioned in My Happiness Project update on money, I recently read the book Your Money or Your Life. I’ve picked up a few habits from the book that I want to share with you to spend and earn more wisely. I have used some of these habits, like the net worth tracker, for years, but others were new finds. All have helped me build a better budget and move closer towards my financial goals. Financial Freedom is the main goal of Your Money or Your Life, but these habits can be applied towards any money goal.
The Wall Chart
Although many of us believe we have a steady income, that doesn’t tell the whole story. I receive a biweekly paycheck for a consistent amount, but look at those spikes in my income! Those are from bonuses, birthday money, or occasionally selling furniture or clothes. Even though I have a budget that I follow strictly (I love spreadsheets), you can see that my expenses aren’t consistent either. Biannual car insurance, trips that I have already saved for, and Christmas presents can change my monthly budget significantly. I have two sections of my budget: Section A, which stays the same every month (rent, most utilities, health insurance, charity), and Section B, which I change monthly. Section B includes money for trips, clothes, presents, and other expenses I expect to come up that money. On the first day of every month, I look at my calendar and at my budget for the same month of the previous year. I calculate how much to allocate to those categories. I rarely deviate from my budget once it is set, as the monthly planning gives me the flexibility I need.
Income versus Expenses
The value of the Wall Chart is watching your Income, Expenses, and Investments over time. The goal is for income to rise, expenses to fall, and investments (a.k.a. investment income) to rise and eventually pass the expenses trend. Although I made this chart a few weeks ago, you can see a big drop in my expenses in September, when I re-evaluated my spending and decided to dedicate more focus to saving money. Seeing my expenses drop so low compared to my income is a huge motivator for me to continue saving.
The Investment data is how much you are making monthly from your investment accounts. To make it easier, Robin and Dominguez recommend using an average return rate, not calculating the actual monthly return rate. If you have mutual or index funds, you can google the annualized return rate and divide it by 12. Take off 3% that number to account for inflation. I approximate my annual rate of return at 4%, which is what I would feel safe withdrawing from my account based on the Trinity study calculations. Once your Investment income passes your expenses, you have reached the point of Financial Freedom. You could live on only your Investment income, and no additional income is needed.
The Net Worth Tracker
So, how do you increase your Investment income? By increasing the amount of money in your investment accounts, which leads us to the net worth tracker.
I track my net worth monthly, a habit that I started when I graduated from college. My net worth has increased by 863% since then! My net worth is comprised of the money in all my accounts: brokerage, 401(k), and my emergency fund. (Note: for the investment calculations for the wall chart, I don’t include my checking account or emergency fund because of the significantly lower rate of return.)
Real Hourly Rate
For many salaried employees, we don’t actually know our hourly rate. And if we do, we calculate total salary ÷ 48 weeks ÷ 40 hours. But do you really only spend 40 hours a week on work related activities? Your real hourly rate includes the time you spend commuting, going to networking events, working overtime, or stressing/decompressing because of work. For me, I would increase that 40 hours/week to 55 hours/week.
Next, there are many expenses I have solely because of my job- gas for a long commute, work clothes, work lunches.
The equation now becomes (total salary – work expenses) ÷ 48 weeks ÷ 55 hours
*48 weeks is based on vacation time
For me, this decreases my hourly rate from $21/hour to $12/hour. That’s a huge change! You can see that a traditional job, while beneficial, comes with cons as well. If you love your job, these cons are probably worth it. But if you’re about to take a “high-paying” job just for the money, make sure to take into account the expenses and time you will have to put into that job.
- Did I receive fulfillment in proportion to the hours of life energy spent?
- Is this expenditure in alignment with my goals and life purpose?
- How might this expenditure change if I didn’t have to work for a living? (more, less, same)
Finally, Robin and Dominguez urge you to ask these three questions for each expense you have. You can change the questions to fit your situation (I combined the first two), but checking in with how you feel about your expenses will make a huge difference in how you spend. I have adjusted my budget to decrease money spent on restaurants, but I have also increased what I spend on self-care because it makes me feel great. It’s all about knowing your values, and spending based on what’s important to you.
Building a Better Budget
Getting to financial freedom, or whatever your financial goals may be, is a result of evaluating and improving these current patterns. Looking into your finances takes courage, but it can give you so much in exchange. Try out one or all of these habits, and get ready to see some major changes!