So, first, we looked at our income. Then, we looked at the necessary expenses that we have.
Now, we run a quick comparison to see where we stand, so far.
The comparison is rather simple.
Estimated Income – Estimated Expenses (from necessities) = “where we stand, so far.”
Once you’ve performed the above calculation, you’ll find yourself in 1 of 3 categories.
- Deficit: The amount of money you spend on necessities is more than you make.
- About break-even: Your result from the above calculation is an amount you consider close to zero.
- Surplus: You still have some money left over to work with.
Before we talk about each category and how to proceed, I want to note a few things about how we got here.
First, remember that we that we underestimated our income by rounding our amount down, and we left a few items out, such as overtime/bonuses, tax refunds, and any money we may already be contributing to retirement accounts.
Second, we overestimated our expenses by rounding our monthly bills up just a little.
So, if you find yourself at break-even or a slight deficit, there are still some things we can do.
Now, on to our analysis…
Deficit: I’m Sinking
That’s right. I’m starting with the worst and most stressful of our possible money scenarios.
I thought about the opposite approach, starting with the “surplus” section and celebrating any successes out there.
But, in the end, I decided it was best to start at the bottom. Not because deficit spending might fit your situation, but because it definitely fit mine for a number of years.
The mistake I made while I was here, a mistake I want anyone that fits in this deficit spending section to avoid, was complacency.
I was blessed to have fairly steady and healthy income as a salary, as well as being eligible for a nice bonus, at my job. So, rather than cutting some of my spending aggressively, I was content to pace my overspending such that my bonuses got me to that coveted break-even point. My strategy here was to wage a war of attrition with my student loans and car payment.
^^^ DON’T DO THIS! ^^^
If I had cut my spending a little more aggressively, or sucked up my pride and did something to earn some side income, I could have cut a year or two off of that march to breaking even to a budget surplus.
Rather than be complacent, I want you to:
- Increase your income. This doesn’t have to mean working an extra job, though it can mean that. Ramit Sethi has some good scripts for how to negotiate for a pay raise at your current job in his book. You’ll have to agree to up your game at work before the money comes, but this step can be quite rewarding.
- Cut spending on big things aggressively.
- Again, Ramit Sethi has some scripts for getting some credit card interest rates down, if you have any credit card balances weighing you down in his book (Seriously, click the link above).
- You may also consider whether or not you’re driving too much car. Trading down to a more affordable option could help get you to break even a bit faster.
- Cut spending on some little things aggressively. I’m not going to say you should never eat out, splurge on that cup of coffee, or cut out that Netflix subscription, altogether. But you can cut back on some spending categories, strategically.
- Eat out or get that cup of coffee more sparingly while you’re cash flow resides here.
- If you subscribe to more than one streaming service, cut back to one at a time, binge everything there and switch to next service. (Or, if you already only use one service, suspend it for a few months at a time.)
- Keep a process for your saving and investing.
- Keep contributing to your retirement accounts to get the full company match as long your finances have room for you to do so.
- Keep saving a little money in your emergency fund each time you get paid.
- I did this by employing a strategy I called “juicing the turnip”. It’s not very lucrative from a strictly financial standpoint. But, psychologically, it kept me in the game because I could identify myself as a saver. Basically, I increased my average monthly balance by direct depositing $200 per pay period into savings during the month and transferring those deposits over to checking to pay bills at the end of the month.
- If juicing the turnip isn’t worth the effort to you (mathematically, it isn’t), start with a 1% direct deposit each time you get paid and do your best to leave that money in your emergency savings.
- If you have any bad debt to attack, make a plan to pay it off. You can use the debt avalanche, snowball, or some hybrid of the 2. Whatever it is, have a plan and start executing it.
- If you get a large tax refund (more than $1000), consider increasing your federal examptions to help slow the deficit or get you to break even. I am able to change my tax exemptions through an online portal, so I increased exemptions 1 at a time and subtracted the difference in my next paycheck (times 26, the number checks I get in a year) until my expected refund was less than about $500 (my arbitrary, personal comfort zone).
Now, on to the next…
Break-Even: Cutting it Kind of Close
If you find yourself here, you will still want to follow the deficit steps above. You will likely not feel a need to juice the turnip when you’re breaking even versus when you might be running a deficit every month.
If you are still carrying debt on credit cards, student loans, or car payments, any windfalls, such as overtime, bonuses, or tax refunds should still largely go towards those debts.
If your only debt is a mortgage, those windfalls can start going more towards a small rewarding splurge (operative word = “small”), but I’d make sure some of that money goes toward starting a taxable investment account (Schwab, Fidelity, etc.). If you have no high interest debt, it might be a good time to start investing in a way that your income increases and you have have access to that income before age 59 and a half (the age required to access money in most retirement accounts).
If you find your financial situation here, you’re starting to feel a little better about things. But, money is probably still a source of stress in your life. But, despite the stress, you can probably start to see some light over the horizon.
And, of course, that light is…
Surplus: You Still Have Money to Play With
Assuming no one in your household is working multiple jobs to get you here, this is the easy part…sort of. (If anyone in your household is working multiple jobs, you might want to stay with your break-even strategy for a bit longer.
When cash flow in is bigger than cash flow out, it means there’s a lot less to be stressed about:
- You have more freedom to save in an emergency fund and invest in retirment accounts at, or closer to, full strength.
- You can start saving and spending on activities and things that are important to you. You might even set up separate accounts specifically for those purposes. (You should absolutely do this.)
Oh…that second bullet point? That’s also why I said this part was “sort of” easy.
If there is more than one person in your household, there will need to be some discussion and compromise over what falls into the “important” bucket.
For me, I struggled a little here, even as a single person household, because I spent so much time working through the first 2 categories.
I struggles with what types of things are important to me that money can help with. Even though I wasn’t overly aggressive as I moved from deficit to break-even to surplus, I’m not entirely sure the things I splurged on during those days were truly important to me. So, be thinking about the important things in life as you move towards a budget surplus rather than waiting until you get here. (It’s good for motivation, too.)
And, I also struggled (kind of still do) with the lingering thoughts that a single event could knock me right back down; so, I am still a little hesitant to let loose on the fun stuff. Slowly, I’m kicking broke kid in the mirror out of that reflection. It took over a year. It’s not easy.
Remember, your plan evolves with you. You will revisit the budgeting/cash flow management periodically as you move through life. I’ll probably come back to this post from time to time, myself.
Thank you for visiting Finunciate. Come back, soon.