If you catch Part 1 of this post, you know that it took me a long while to create my personal budget. And yes, there is no shame in admitting my shortfall. I was “the” finance girl who couldn’t create her budget even though she balanced business budgets for living. But at long last, I arrived! I created my personal budget with 6 simple and somewhat painful steps. As always, it was the last step that tripped me up. I couldn’t balance the book! Darn it! I am a finance girl and I couldn’t make the numbers work!
So after downing 3 glasses of wine and a 5 minutes talk with Karen, I learnt the secret to balance the book from the budget hawk: “look for ways to reduce the fixed cost while mercilessly slash the variable expenses”. You can’t cut your fixed cost complete because you need these essential services and things like food and shelter. But there may be way to reduce the fixed costs. For example, one of my fixed cost is home internet service because I work from home sometime, thus I need the internet connection to log into my company’s network. I need my job to earn a living, so it is a fixed cost. If I go with one of the big telecom service provider, it would cost me $100 per month, so I find an alternative provider who can provide the same service yet only cost $80 per month. Phew! I save $20 per month and that’s $240 per year. That’s a win because every penny count. With variable expense, you can be more merciless. Review every single variable expense that you have and constantly ask yourself:
- Do I really need this?
- If yes, is there a way I can reduce this expense by 50% or more?
Applying Karen, aka the budget hawk’s mantra I re-worked my monthly variable costs. I didn’t want to touch my fixed costs yet because I thought it could be hard to do, so I chose the easy way out by building up my confident with small variable expense reduction wins. I asked myself 2 questions to assess the true cost of each variable expense:
- Do I want this expense more than saving for retirement?
- Is there a way I can reduce this expense by 50% or more?
So let’s take my coffee drinking habit for example, it is one of my variable expense. On average, I drank 2 cups a day and worked 5 days per week with 3 weeks vacations. A Starbucks Grande Americano costs CAD $3.10, so annually Starbucks habit cost me $1,395 ($3.1 *2* 225). WOW! Coffee is expensive.
- Do I want this expense more than saving for retirement? Yes, yes and yes. Finance people “MUST” have coffee. Could you imagine working without coffee during the quarter end reporting time? Life will end. I must have coffee! It is a Must not a nice to have!
- Is there a way I can reduce this expense by 50% or more? Reluctantly, yes. There are 2 ways. If I get a medium coffee from the café around the corner, it will cost me CAD$2.5. Now, let’s do the MATH ($3.1 – $2.5 = $0.6), I would save 6 cents per cup. So, ($0.6 * 2 * 225 days= $270), this means, I could save $270 per year if I buy my coffee from the café instead of Starbuck. $ 270 saving per year is not bad, but if I buy the coffee and make it at home, I would save even more. My annual coffee cost went down to $150, so a saving of $1,240 ($1,395 – $150)
I won’t lie. It was hard work to honestly assess and account for every dollar that I spent and saved, but I kept reminding myself that I want to retired at 55 (#Freedom55 here I come!) and I needed at least $5,000 in savings to set aside preparing for the unexpected. Karen probably will tell you about the visual goal that she had on her wall. I must admit, visualization was useful and it helped me. But I refused to stoop down to her level, so I kept a reminder in my wallet. Hah! Glad to say that I was able to balance my book, but to achieve my goal, I had to make some hard sacrifices:
- Only dine out twice per month with a set meal budget
- Make my own coffee and lunch for work instead of buy them. MAJOR cost savers! Seriously!
- Only will spend $1,000 on clothing and shoes per year. There is a way to dress professionally with a set budge. I will write a post on the “fashion shopping” topic
- Only spend $2,000 on vacation/travel per year. There is also a way to cut travel cost too
- And few more things…
I still able to maintain my lifestyle, but I have to make major adjustments. I know that:
- It is possible to have it all, but you need to look for creative ways to make your ends meet. It is easier to walk to Starbuck to buy that Grande Americano than budget for an additional 10 minutes of your morning to make the cup of coffee, but just this change in spending behaviour saved me $1,395. To me, it worth the effort
- Stop procrastinating! The MATH was not hard, and honestly, I always knew what I had to do to balance the book. But I just didn’t want to give up my habits, the convenience, and the little things that I enjoyed. It took many glasses of wine, Karen nagging in my ears, visualization and the fear that I won’t be able to retire to wake me up and get me moving. So, don’t wait till it is too late
- Trade-off, what is more important to you? Trade-off is a fact of life. To be able to retire at 55, I needed to improve on retirement savings. I don’t want to give up all my enjoyments, my little bliss, so I have to find creative solutions. My trade-off is researching time. Time that I could spend watching my favourite TV shows, reading a book or doing something else. Instead, I spent the time research on the internet or talked to people to find ways to spend less. Again, it is easy to fall into habits, but you need to be honest with yourself and see if it is worth for you.
Reflecting, the second step to control impulse purchase
I promise this is the last thing that I will talk about. Okay, I sort of omitted the truth a little, didn’t want to scare you off. Yes, it only took 6 steps to create the budget, but then the actual hard works begun because creating the budget was just half of the battle. The budget is only useful if you stay commit to it. This visualization exercise alone did not help me to stay committed to my goal because I had impulse purchase issue. I used to buy all sort of things on impulse because I was stressed out or something was troubling me. I did another exercise to reign in my impulse purchase beast. This exercise is about reflecting on your action. Every time I made a purchase (impulse or not), I would ask myself:
- Do I truly need this item?
- And why did I buy it?
It is a tidiest exercise, but the key is repetition and commitment. The more you ask yourself and make your mind questions your impulse purchase the more likely you won’t do it again. It took 3 months of visualization and reflection practise to get me to create my budget and stick to it.
Now I am a believer and even the budget is not tough. Anyone can do it. The hardest part is to stay motivate and committed. Now, if you don’t have an overbearing, nosy and overly protective older sister like Karen, there are some tips that I would recommend to keep you stay on track:
- Try to engage all your senses when you visualize. The more immersive and realistic you can make your visualization, the better it will work. If you’re visualizing a peaceful day on the beach, picture the gentle breeze fanning on your face, the smell of the ocean, the feel of hot sand warming your feet. Now, do you feel like you are there?
- Make it a habit. Practice makes perfect. Visualization works better the more you try it. Include it in your morning or night routine. Your happy picture is a good reminder. Keep that picture on a spot where you can see it in the morning and before you go to bed. It will help to motivate you
- Involve your family or friend. Visualization can be a great exercise. I brainstormed the family vacation plan with my 5-year-old niece and Karen on the cartoon world map because I want to keep the feeling of joyful and excitement in my mind when I have to create a budget to fund my part in the family vacation
For a financial analyst who aspires to be free-spirit gypsy traveler, the personal budget exercised was a tough and excruciating process. But I am glad that I did it and I stick to it. Sometime you have to give up something to get what you truly want. Like everything in life, there is always a trade-off. I come to accept home-made coffee instead of a convenient of a Starbuck Grande Americano. And I learn to enjoy my caffeine addiction in a different way while saving myself a small change every year that will help me to get a bit close to my #Freedom55 dream. I hope you find this post useful. How is your personal budget journey progressing?