When I started out living in NYC, I was all about that city life. Movie tonight? Sure thing! Brunch this weekend? I’m there! 40% off at Forever 21? What?! – are you kidding me – I wouldn’t miss it for the world!
Fortunately, I had a good job and managed to cover my expenses without feeling the pain too much. But I had NO clue where my money was going after my rent was paid. Savings were a nice thought, but hey – there was always next month!
I knew saving was a virtue but, quite frankly, I did not have the discipline to sit down and figure it out.
And this is where the problem lay, I was not in the know of my true financial condition. Just because I had a positive balance in my bank account did not mean that I was financially fit and ready to handle any financial emergency that could come my way.
Knowledge truly is power. In any realm of your life, not fully understanding the current situation, the possible solutions and the best and worst-case scenarios can often leave you powerless and anxious and this is so true when it comes to finances.
Many of us would avoid financial mistakes if we took the time to have a clear understanding of how our money is moving and if we set pre-determined limits on where it should go.
According to Consumers Union, banks collected $33 billion in overdraft fees in 2016 from customers who had no idea that their bank accounts were running on E. That’s right – THIRTY-THREE BILLION DOLLARS! Some overdraft charges are as high as $35. I know – I’ve fallen prey to this myself. Mistakes like these are totally avoidable!
If lack of clarity around your finances rings true for you, take a deep breath – you totally got this! We will begin by keeping track of our expenses which is the best way to take charge of our finances.
Often, the issue is not how much money is coming in, but rather, our lack of understanding in how much is going out and where its going to.
Our goal today is to get a bird’s eye view for where our money is going and what proportion is going where.
How to successfully plan for your expenses
In his awesome book, Freelance to Freedom, Vincent Pugliese created an acronym “FRUIT” to help you figure out your monthly living expenses (Follow him on Twitter). In it, he highlights the following categories of expenses one should keep track of and which also encompass the lion’s share of basic living expenses. Below, I outline a few tips and strategies to keep these categories down.
For all my fellow foodies out there, this can be a delicate one. Eating out is one of my favorite things to do – especially with great company. But it adds up. Real quick. Between the meal itself, drinks and tips – one easily forks out dollars that could have been better used for paying off debt or saving. With Seamless and other food apps, food is literally a click away and you don’t even need to spend time thinking about which card to charge if you’re a repeat user. Its so easy. But can be so expensive. I love Seamless, don’t get me wrong, but relying on food apps as plan A everyday is throwing money to the wind.
Instead, try meal prepping, as this is a great way to knock out food for a few days and it also saves a ton of time.
Pro-tip: Cut down your meat bill. Aim for one or more meatless dinners during the week.
Many experts advise that spending no more than one third of your income on rent per year is key to staying comfortably within budget.
A short cut to figuring this number out is to take your annual income and to divide it by 40. So if you’re making $60,000 a year, then ideally your rent should be:
$60,000 ÷ 40 = $1,500 per month
Which is the same as:
30% x $60,000 = $18,000; $18,000 ÷ 12 = $1,500 per month
I recently moved to a new apartment, and while I love the new place, I realize I hadn’t fully taken into consideration some of the extra costs associated with the move. Some have worked in my favor such as laundry, which I now have direct access to and spend significantly less on while others such as internet have gone up slightly.
Whatever the case, thinking through the specifics before moving into an apartment is essential.
Pro-tip: If its your first time finding an apartment on your own and you need to invest in some home goods, find a place that is slightly cheaper to allow you to buy apartment furnishing.
The most common utilities include heat, electricity, gas, water, cable and internet. Before moving into an apartment, you’ll need to thoroughly go through your lease to make sure you understand which utilities are included in your rent. Utilities tend to be a forgotten expense as they are not at the top of one’s list when apartment hunting.
Of all the utilities, cable is the one to approach with the most caution as it is generally expensive. Aside from the time spent parked behind a TV that could be used for other productive means, cable can easily add another $50+ to your monthly expenses. Do the math, that’s $600/year or $6,000 over 10 years. That money could either go to savings or debt repayment or could cover a much-needed vacation.
Pro-tip: Determine if you really need cable. If you do, call your cable company to see if they have any good specials.
Health insurance can be challenging to shop for and expensive. Depending on your income level, you can shop for a health insurance plan on the government health care exchanges. One way to see how best to lower your premium based on your income range is to check out this tool from healthcare.gov. After entering information such as your state, number of people in your household, and income, the tool will advise on whether you qualify for a lower premium, or Medicaid or other forms of cost sharing.
The key to health care is to take advantage of the open enrollment window and shop around. For 2018, open enrollment runs from November 1 to December 15 giving a good window to shop and compare pricing.
Pro-tip: Whatever the circumstance, don’t go without health insurance. Its tempting to think your health is in perfect condition and that insurance is not necessary but the cost of falling sick while uninsured is steep. Moreover, there is a penalty if you can afford insurance but choose to be uninsured and it can hover around $695 per adult.
Transportation is one of those things that we can easily put at the back of our minds as something that we need to do everyday while not making concrete budget decisions about it. Considerations vary from city to city, from subways in NY to highway tolls in Atlanta. In either case, your employer could be helpful in lowering your overall transportation bill – not through reimbursement but rather through helping you reduce your tax bill.
The way to realize this value is to reach out to your HR and find out if they have a mechanism where you can take transportation costs out of your pay-check pre-tax, reducing your taxable income and saving you some dollars.
Pro-tip: Car payments, gas and car insurance account can be a sizeable portion of one’s budget. If you’re moving, or about to move, find a home as close as possible to your office and also ask for a work from home arrangements every so often from your employer.