Monthly Archives: April 2016

Real Savings Rates

All of our previous posts have focused entirely on earning. This is because there is no ceiling to the amount you can earn and there is a floor to the amount you can save. No matter what you do you’re going to have to pay for food, shelter, utilities, taxes and other necessities. That said… We’re going to outline our views on saving money in general since the topic has come up many many times. To reiterate. We don’t care much for saving because all of your energy should be spent creating recurring income. If you’re working 60-80 hours a week you wont have time to waste your money in the first place and by the time you make your money… well you won’t need to worry about saving. Funny how that works.

Five Point Summary

1) Saving 10% is a Scam: The general rule of thumb is to save 10% of what you earn. What they don’t tell you is this sets you up for a very long and dire path to mediocrity. The math doesn’t help you because you’re constantly increasing your annual spending in the 10% scenario. Lets look at the simple math.

Joe makes $90K per year. To make the math simple lets say he sees a take home pay of $60K. This means he would save $6K a year. He is going to see a wage increase of 10% per year and he will continue to save 10% of his income. This sounds logical until you put the numbers into a spreadsheet.

In Year 1, he will save $6K… fast forward to year 10 and that $6K is just 4.3% of his annual spending habits.

Our readers are smart so everyone can see the problem with a fixed percentage savings method. The fixed saving percentage makes every *prior* year less meaningful because it accounts for a smaller and smaller percentage of your new standard of living.

If joe was making $60K and gets a 10% raise each year he is now making, ~$155K. If he is spending 90% of that income, his annual spending is now $140K… the original $6K is just 4.3% of his annual spending habits.

2) Focus on Annual Spending Multiples: This is the fastest way to see an acceleration in your real net worth. Your real net worth is how many years you can live if you don’t do anything. It does not matter if you’re making $50K or $500K because your real net worth depends on your annual spend. To put some brackets around it, 20x annual spending is rich, 10x annual spending is comfortable and 1x annual spending is an abysmal disaster.

There are many families that have high incomes and practically no net worth. If you’re in a major city with a $400K income. But. Are forced to send your kids to private school and have a $10K/month mortgage… You’re going to be saving a dismal amount of money.

3) How Much Should I Save? We get this question a lot. Our answer puts point 1 and point 2 together to come up with a general rule of thumb. You should find a way to increase your standard of living and you should never see a decrease in your savings (in terms of annual spending). A good and aggressive rule of thumb is this: every year you work should result in a year you do not need to work.

This usually means you don’t get to spend a lot of money when you’re young. Specifically, if you’re out of college with a good income (lets call it $100K gross), then you’re not allowed to spend more than 1/2 of your take home pay from day one. In about two years you should see income acceleration from the 60-80 hours a week you’ve been working and you’ll be expanding your real net worth rapidly.

Assuming you start earning a living at age 21, you’ll be rich at age 41. You’l have 20 years of living expenses. If you start a business and create multiple streams of income you’ll reach this mark significantly earlier (it won’t even be close to 41).

4) 10x Annual Income as the Inflection Point: If you’re following along and don’t quite make it to becoming rich by age 31… it’s all but guaranteed (just don’t mess it up!). Sure there are no guarantees in life but it becomes quite difficult to fail. If you have 10x your annual spending in investment vehicles this means you’re going to put another 0.5 years away if you do practically nothing. A 5% return, which is extremely reasonable in a basket of bonds and equities, will lead to 0.5x years of annual income for you. If you simply save your allotted 1 year of income you’re at 11.5x already! Compounding becomes a rigged game… In your favor.

5) Pay the Price Upfront: While everyone else enjoys blowing their paychecks at the bars and the clubs you’ll be busy visiting the bank and your local brokerage for a couple of years. The funny thing about the math is you won’t miss out on much because 22-24 year old kids partying in the club are not interesting to 1) the owners of the club and 2) the most attractive women at the event. So you’re not missing out on much at all.

In addition, the amount you can spend will accelerate after you simply pay the toll up front. If you can put away 2 years of living expenses in your first two years out the gate, your discretionary spending can ratchet up without much impact to your future.

If you save $40K and spend $40K.. in 3 years you’ll have roughly $150K and your income should rise 25% or more, meaning you’re now spending ~$50K that year. In just 2-3 more years you’ll be able to spend in the $80K range and the game is over.

Budget With Inconsistent Income

unduhan-17I’m 30 years old and I’ve never had salary certainty. That is, I’ve never had a definite (or even approximate) sense of how much money I’m going to make in a given year.

From teenage camp counselor to professional actress to full time entrepreneur, inconsistent, unpredictable income has always been a fact of my financial life.

Even as my income has grown, the uncertainty of cash flow remains. (Turns out it doesn’t matter how many thousands of dollars are “on the way”, if none of them are in your bank account when it comes time to pay your quarterly tax bill).

To manage the demands of cash flow management with irregular income, I’ve mastered a variety of techniques to stay solvent in the short-term while also staying accountable to my big picture goals.

Today, I’m going to walk you through 4 ways to budget with inconsistent income. These strategies can be used individually, they can be mixed and matched, or they can be implemented all at once.

The objective is to create a framework that allows you to feel financially secure, even without salary certainty – to address long term financial plans like paying down debt and building savings, while meeting your monthly needs.

1. Live on Last Month’s Income

Instead of trying to guess what you’re going to make this month and budgeting off of that projection, use your actual earnings from last month to set the parameters for your spending this month.

I use my total income at the end of each month as a guide to map out my spending and savings plan for the next 30 days. That way, I stay grounded in the reality of my means, even when I don’t know exactly what my means will look like going forward.

But what happens if you don’t earn enough one-month to cover the cost of your necessities the following month? And what is “enough” anyway?

That brings me to the next way to budget with inconsistent income…

2. Know Your Make or Break Number

How much, at a minimum, does it cost to run your life each month? That’s your make or break number.

To calculate your make or break number you need three totals:

  1. Your monthly bare bones budget total. That is, the cumulative cost of your monthly necessities – anything you need to live and work normally, including housing, food, insurance, transportation, etc.

Remember to include any irregular (but necessary) expenses in your monthly bare bones budget total. An annual bill for property taxes for example, you would divide by 12. A quarterly insurance payment, divide by 3.

  1. A bare bones budget buffer. Take your monthly bare bones total and add a budget buffer of at least ten percent. Life is always more expensive than we anticipate (even when we keep it bare bones).
  1. Monthly financial goal targets. What are you long-term financial goals? Paying off student loan debt? Hitting a retirement savings target? Saving up for a down payment on a home? Taking a vacation next summer?

Get grounded in the numbers needed to achieve your goals, then break each one down into a manageable monthly mini-target. If the total monthly sum of your financial goal targets is more than you can afford, prioritize those that are most important to you, adding the remainder into your plan as you’re able.

Monthly bare bones total + budget buffer + monthly financial goal targets = monthly make or break number


Your make or break number, calculated in this fashion, is a benchmark for the financial viability of your life.

I like this system because it makes your long-term financial goals as non-negotiable as your necessities. If you find yourself having to prioritize elements of the make or break number over others – for example, transit costs over retirement contributions – you have reached “break” point, leaving you with two options – reduce your bare bones expenses and/or increase your earnings.

When you have inconsistent income, knowing you make or break number is critical as it tells you exactly how much you need to earn to have “enough” each month.

To budget with your make or break number, simply subtract it from your previous month’s income.

You’ll then know how much you have to dedicate toward discretionary spending – like eating out and buying gifts – or how much you can devote to super charging your financial goal getting.

3. Try Zero Sum Budgeting

The make or break number offers a lot of budget flexibility.

Basically, as long as you surpass your make or break point, you can spend your money however you like.

If, however, you prefer a bit more structure, or you want to fast track a certain savings goal, saving up for a wedding for example, consider the zero sum budgeting technique.

Zero sum budgeting gives every dollar you earn a destination, reducing the likelihood of pre-emptive spending on fleeting luxuries when you’re trying to save up for big picture priorities.

Here’s how it works – write down your last month’s income on a piece of paper, then subtract your bare bones budget total, that is, the cost of your monthly necessities – housing, food, etc.

With the remaining earnings, allocate specific dollar amounts for discretionary spending(spending on your wants) and your monthly financial goal targets (as defined in your make or break number, plus anything else you’d like to fund), until you get down to zero, with every dollar accounted for.

For example, if I earned $3,500 last month and my monthly bare bones total is $2,500, I now have $1,000 to designate between my “wants and my goals”. Instead of just letting my spending play out as the month progresses, I can use a zero sum budget to set my spending and savings intentions at the start.

For example, $150 to short-term/emergency fund savings, $500 to retirement savings, $100 to the vacation fund, $200 for entertainment and $50 for gift giving.

To hold myself accountable, I can then satisfy my financial goal targets, (whether it’s setting aside money in savings, contributing to a retirement account or paying off debt), immediately. Meaning, I fund my financial goals at the beginning of the month because I’ve already calculated exactly how much I can afford to contribute to them.

With those dollars already set aside in savings or elsewhere, I’m much less likely to overspend on non-necessities.

By accounting for every dollar, zero sum budgeting adds an extra layer of accountability to achieving your financial goals, even when you don’t have consistent earnings.

Learned From Tracking

Well friends, in case you missed my posts about how much I spent on my car, my dog and my blogover the past year, I’ve been tracking my spending for just over one full calendar year now, and boy has it been an interesting ride. Instead of digging into yet another category of spending from this past year’s treasure trove of data, I want to take a step back and share everything I learned from tracking my spending – so far, anyways.

Let’s all settle in, because I have learned some shit, let me tell you. This one’s a long one – maybe grab a coffee? I’ll wait.

You Will Want To Quit

Really makes you want to learn more as a first lesson, right? Like, this sounds like a great opening, I should think about doing this!

But let me tell you a story about the first few months that I was tracking my spending.

Without fail, the first few days were so exciting. New, fresh spreadsheets, with only a few fixed expenses listed on them, and visions of coming in under budget dancing in my head.

There’s nothing like feeling like you’re in control to make the universe eff up your plans.

By mid-month, with an accurate view of just how much I had really spent, and a good understanding of what I still had to spend money on that month, I would be so discouraged. There were times, especially in the first few months, where I would casually just not update the spreadsheet for days (ok, weeks) at a time, because if I didn’t see it, it wasn’t happening… right?

Wrong. Obviously.

So there were several months where I went back into my spreadsheet with mere days left in the month to reconcile my spending and add all the purchases I casually ignored. The funniest part was, it was never that bad when I finally finished it. I’ve learned that my months tend to be heavily front-loaded with spending, especially since I add in fixed expenses right away (like my car insurance payment on the 26th of the month, and my grocery budget. Ain’t nobody got time for running out of food money because you bought too many dog toys.)

Your Expenses Are Probably More Variable Than You Think

The other big reason that I found it challenging to stick with tracking my spending when I got start was that man oh man, I did not see some of my variable expenses coming. Between my $315 annual pet insurance premium, to my $458 traffic ticket, to the first Christmas where I was actually aware of how much I spent, fall just happens to be a spendy season for me.

I was so optimistic going into it that I could save half my income, and yet the hits just kept on coming, putting that goal squarely out of reach. This year, I’m much more informed of what my big monthly expenses are (minus that ticket that I won’t get again because I definitely learned my lesson, thankyouverymuch) and I can plan for them.

Sure, planning for them might just mean not buying an unnecessary third fall coat because I know I have to rustproof my car this month, but that totally counts.

You Need to Do It For The Long Term

Since I kept missing my goal of saving half my income, I got pretty discouraged, and fell into a monthly pattern of avoiding my spreadsheet for weeks at a time, only to go back and enter everything in at the end of the month. While this isn’t ideal, I have to say I’m really, really glad I stuck with it, because I now have an accurate, complete picture of what I spent money on over the course of the year.

This data – the long term stuff, not a single month – is what really matters when it comes to planning my spending and hitting my goals. A single month might have a huge number of variable or unexpected expenses, but it’s balanced out by the months where you spend less than you expected – and if you stop tracking after a month, you might just think you’re an incorrigible spender and call it a day.

Keep tracking! It’s worth it.

This is Really All About Feelings

The hardest part of tracking your spending is never going to be the act of putting numbers into a spreadsheet. Seriously, I don’t care how long you take to input your numbers every day, or week, or month. The hardest part of this whole deal is going to be the feelings.

Oh my god the feelings.

I’m talking about feeling like you “can’t afford” to do things you want to do (even if you probably can). And feeling like you shouldn’t spend money on that thing. And then feeling like you really do value spending on that One Thing, but you need to shift your behaviour because you’re spending too much on that Other Thing you don’t care about. And the high of thinking you’re going to hit your goal! Followed quickly by the crushing blow of an unexpected expense coming in and straight-up ruining your perfect spending month.

There are feelings galore up in here, that you get to have to confront when you’re looking this closely at your spending – especially if you have a money goal in mind, like my goal to save half my income.

Sometimes, those feelings will drive you to avoid your tracking project for weeks on end, or take a few months off. That’s OK. Obviously it’s not ideal, but acknowledging what’s up is the real goal – and of course, being gentle with yourself is kind of a big thing too.

If Everything is On Your Credit Card, You Don’t Need Receipts

For the longest time, paper receipts were my favourite way to keep track of everything. This actually predated tracking my spending, and started as a way for The Boyfriend and I to split our food costs every month. Here’s the thing: I carry one of those tiny wristlet wallets, and trying to shove a grocery receipt into it at the end of the month is like trying to squeeze an NFL player into a Smart Car. It can happen, sure, but it’s no one’s best case scenario.

I’ve started relaxing my all-receipts-all-the-time strategy, and I haven’t missed a single thing in my tracking spreadsheet yet. This is all down to the simple fact that for me, like basically every millennial I know, cash is a total afterthought. I already have a system that keeps track of everything I spend, and it’s called my credit card.

Now, the only times I get receipts are when the balance isn’t going to handily show up on my Tangerine online banking interface.