Before you make any changes to your finances whatsoever,
you really need to understand where you are currently, as is,
without any changes.
Today, we're going to talk about financial awareness.
It might sound a little bit "woo-woo," a little bit "out there," but in my opinion,
if you're trying to make it to Beijing, and you're starting in Chicago,
it's a completely different story than if you're trying to make it in Beijing, and you're
starting in Shanghai.
So, understanding where you are is gonna help you to create a map
to get to wherever you're trying to go.
This means we need to look at how much money you have coming in
verses how much is going out: your income verses your expenses.
First, you should understand how much money you have coming in.
Gather your paystubs or look at your direct deposit information, and get the total monthly
amount.
Your employer may have some of your income automatically for things like
taxes, insurance, or contributions to a retirement account.
If this is the case, for now, take the number for what you're left with
after those subtractions have already happened, and we're just going
to talk about that money that you have control over right now.
If you have a job with an income that varies from month to month,
then the expert advice seems to be to take the average of your past six months,
or take the lowest amount that you earned over the past six months and use that as the
standard.
We'll consider this number to be the amount of money that you have control over currently,
that you can designate towards your expenses.
So next, we'll want to figure out how much those expenses are,
what are your current expenses as they are, without changing anything.
One way to do this is to look at the last three to six months of receipts
and bank statements and put these expenses into buckets by listing them all out.
Lots of people use Excel, or they use Word.
I personally use the Pages app (*Notes app) on my phone,
and I can actually access it also on my laptop, but
if you just have paper and pen, that works too - it doesn't need to be complicated at
all.
Don't try to use any kind of software that you're not familiar with.
Just keep it simple for now.
Anything you have available where you can write stuff down will work perfectly fine.
The three buckets that I use for my expenses are FIXED, which includes things like
housing, utilities, insurance, services, and debt -
these amounts generally don't change from month to month, so that's FIXED -
The next bucket is FLEXIBLE, which includes things like food (certain types of food),
services,
and anything else you have to pay for on a monthly basis but that varies from month to
month.
The final bucket is OPTIONAL.
This might also include different kinds of food, subscriptions and memberships, and entertainment.
Some people like to include a line for "miscellaneous" expenses under each of these buckets,
or just one of these buckets, and that could be for things like gifts,
that are an occasional expense a few times a year, but personally,
I find that saying "miscellaneous" is too wide open for me, and I want more clarity
than that.
So just do what feels right to you, this is entirely customizable, and personalized to
what you need.
This three-bucket approach is actually a little bit different than lots of peoples' approach,
which is more of a two-bucket, where they just have FIXED and VARIABLE -
I took the VARIABLE and divided it, into things that are FLEXIBLE,
that I have to pretty much spend money on, and then things that are OPTIONAL,
that, if we were in a crisis, a complete crisis, if I lost my job tomorrow,
I could just completely do away with the OPTIONAL expenses.
The flexible stuff, like groceries -
sometimes I'll spend a lot more on groceries, sometimes I won't -
so, that's always something that I need to spend money on,
therefore it's kind of flexible.
It's not completely optional like take-out would be.
At this point, you might discover that you were spending much more money than you thought
on take-out or groceries each month.
You may be surprised to realize that you were spending more on subscription services than
you thought you were.
Take note of these things -
this is the "financial awareness" that I was talking about.
Instead of trying to address them right away and trying to
do away with them or completely change your habits,
think about them for a few days maybe.
And consider: what were you getting out of that expense?
Was it just from convenience, or is it something that you actually value
that could be worth the money?
You might actually consider doing that with the entire list that you've come up with.
Are these expenses worth the value that you're getting from them?
Is there an alternative?
Because of your unique way of living and valuing things,
your budget should be, and will be, entirely customized to you.
This is great, because then you can live by your values
and determine whether a monthly haircut is something that is required,
flexible, or completely optional.
But, also because of this customization, unfortunately, there is no
one-size-fits-all approach to making a budget.
No one can do it for you, but after a couple of hours of collecting the information
and listing it all out as discussed, you'l be really able to start
understanding the current state of your finances,
your "financial health."
And this, my friends, is priceless.
The next video I'm going to make, I'm going to talk about
ways that you might be able to cut back on unfulfilling expenses,
so that you can save up to spend on things you actually care about.
So...
'til next time!
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