Chapter 5: Living with Money
Alberta Marlow: “I'm not so obsessed with money as you seem to be. I can do without it.”
Rick Leland: “You stick around with me and you'll get plenty of practice.”
– Across the Pacific (1942)
It’s time to dig into the messy business of figuring out how to live with what you got, moneywise. There is no single right way to do this. The trick is to find a way you can stick with and that fits your personality. If you’re a real planner and list-maker, you might have the discipline to track every penny coming in and going out. If not, you should at least establish some guardrails to keep from careening into a mountain of debt and crashing your financial future.
Try this five-step approach. Pencil and paper required.

Step 1: Get the Lay of the Land

Your mission is to prepare two financial statements that are key to understanding your financial situation. The first is your personal cashflow statement, which lays out how much money you make and spend in a month. The second is your personal balance sheet, which measures your wealth.
If you have never done this, do it today. In the future, repeat it if things seem to be going off course and in particular before you make major financial decisions such as signing a lease, making a large purchase, making a life change such as moving or having a child, or taking out any loan (student loan, car loan, mortgage, personal loan).

The Cashflow Statement

Start by writing down all money you have coming in every month (or expect to be coming in if you are starting a new job). Include your net pay, side-hustles, business profits, child support—any source. If your pay is very variable, try to figure out a conservative monthly average. Add to this any contributions to retirement or savings plans withheld from your paychecks.
For money going out, I like a method described by Elizabeth Warren and her daughter Amelia Warren Tyagi [6], which creates three buckets: “must-haves,” “wants,” and “savings.”
Must-haves are the big bills you have to pay for necessities: taxes (if not withheld by an employer), housing (rent or mortgage plus home maintenance), utilities, essential groceries, childcare, health and other insurance (if not withheld by an employer), transportation, minimum debt payments (student loans, car loans, credit cards.) Again, for bills that come quarterly or annually, estimate a monthly average.
    taxes (if not withheld by an employer)
    housing (rent or mortgage plus home maintenance)
    utilities
    essential groceries
    childcare
    health and other insurance
    transportation
    minimum debt payments (student loans, car loans, credit cards)
For bills that come quarterly or annually, estimate a monthly average.
Now add up how much goes to savings each month. Savings includes retirement contributions made by your employer, any money you put aside for future use, and any change in your debt balances. Think of debt as negative savings: if the balance goes down, add the change to savings; if the balance goes up, subtract it.
Here comes the magic. Subtract the “must-haves” and the savings from the money coming in and you have the money you can spend on “wants:”
If you keep track of these four big things there is no need to write down every movie ticket, chai latte, or pair of jeans you spend your “wants” money on.
Below is an example of a cashflow statement, using some of the numbers from the sample pay statement. (Recall that we assumed each month consists of two pay periods.)
Sample Cashflow Statement
Money In
Take-home pay
$3,244
Lyft driving (net of expenses)
$150
401(k) contributions withheld
$200
HSA contributions withheld
$200
Total Money In
$3,794
100%
“Must-Have” Expenses
Est. taxes on Lyft income
-$40
Rent
-$1,400
Utilities (electric, heat, water)
-$200
Essential groceries
-$400
Student loans
-$300
Credit Card Payment
-$50
Auto loan payment
-$250
Auto (gas, insurance, service)
-$125
Health insurance
Withheld by employer
Total “Must-Have” Expenses
$2,765
73%
Savings
401(k) contributions
$200
HSA contributions
$200
Savings account additions
$300
Increase in credit card balance
-$200
Total Savings
$500
13%
“Wants” Expenses
Total “Wants” Expenses
$529
14%
Take stock. What fraction of the money coming in goes to these essential expenses? Warren and Tyagi recommend a simple 50-30-20 Rule that says you shouldn’t spend more than about 50% of the money you have coming in each month on “must-haves.” You can spend 30% on “wants,” and you should try to save 20%. These numbers aren’t hard and fast, but they represent a balanced goal that will allow you avoid a lot of money anxiety. If you are way off the mark, it’s time to adjust. Warren and Tyagi’s book, while a little out-of-date, gives some practical pointers on how to approach difficult choices if they are necessary. In our example, “must-have” expenses of 73% are high compared with the guideline and may require some tough choices. To achieve the 50% goal, “must-have” expenses would need to be lowered by $868. This would allow more savings and more spending on “wants.”

The Balance Sheet

The second financial statement you should prepare every now and then is a household balance sheet. It’s important because it focuses on both your assets and liabilities. Your wealth is measured by your net worth, which is the difference between the two. The goal is to increase net worth over time by increasing assets and reducing debt. Here is an example:
Assets
Liabilities
Checking Account
$400
Student Loan
$27,000
Savings Account
$2,550
Auto Loan
$5,000
Investments
$12,000
Credit Card
$800
Primary Residence
$280,000
Mortgage
$242,000
Total Assets
$294,950
Total Liabilities
$274,800
Net Worth
$20,150
A balance sheet is always as of a point in time. Refer to your account statements and write down outstanding balances, not payment amounts. To estimate a value of a home, you can use market values used for property tax calculations or develop your own estimate with some research. Real estate sites such as zillow.com will often show estimates of value, or you can look up values for similar homes that were sold in the previous two years or so.

Step 2: Set Goals

By now you should have clear picture of your financial situation. The next step is to write down your goals. Try to be specific both in terms of the timeframe and the amounts involved. Having clear, specific goals is a foundation of a lot of planning. Goals should be in order of priority, and usually go short-term to long-term. For example:
    Save an emergency fund of $1,000
    Contribute to a 401(k) up to any employer match
    Eliminate credit card debt and auto debt in twelve months
    Pay off college loans in five years
    Save $40,000 for down payment on a condo
Your goals should be individual to you, but they should reflect the following priorities:
Emergency fund: You should be able to handle an unexpected expense without adding to debt. There is no hard and fast rule as to how big such a fund should be but start with $500 to $1,500 as an initial goal. This should be the minimum balance in your savings account. Try to build it to two and ultimately six months of expenses over time to handle bigger unexpected events such as a job loss or medical emergency. If you find yourself dipping into it every month, it’s not an “emergency” fund. Use it rarely, and make sure to replenish it after you do.
Retirement fund: If you have a 401(k) or 403(b) plan at work, make sure to contribute at least the amount needed to maximize any matching contribution from your employer. The match is compensation that your employer expects to pay you, so be sure to take it. There are also reasons to set a higher target which we’ll cover in the chapter on retirement.
Pay down debt: We will cover debt in detail in another chapter; in general, you should try to pay down as much as possible as quickly as possible, starting with the highest interest debt.
Beyond these general priorities, save for the big things that are important to you. Being explicit about how much you are trying to accumulate can be daunting, but as you begin to progress toward your goal, it can keep you motivated.
So go figure out your goals. Write them down. Stick ‘em on the fridge (okay, maybe not.)

Step 3: Adjust

You’ve faced your financial reality and set goals. If your spending is in balance and you have positive net worth, you may not need to adjust much. If your “must-have” spending is around 50% and you are saving 20% you are in good shape, unless you set very aggressive goals that require you to significantly increase your savings. If your spending is out of balance, or you have significant negative net worth you may need to consider changes in your living situation and maybe even your job(s). You should, of course, be prudent about spending on “wants,” but pinching pennies at the corner coffee shop isn’t going to pay off your student loans. It is the large changes that have the most dramatic impact.

Step 4: Automate Spending and Saving

When it comes to money, we can be our own worst enemies. Temptations are everywhere, and the “math” we do in our heads is often completely off base. One way to fight these impulses is to automate spending and saving, taking some money “out of sight, out of mind.” Here are some tips:
    Make sure to set up contributions to retirement plans from each paycheck
    Have part of your paycheck deposited directly into your savings account
    Set up automatic payments for recurring bills on paydays

Step 5: Create a Budget

Once you have a cashflow statement in hand it’s time make a budget. What’s a budget? It’s a plan for spending in the future. Take your cashflow statement and for each major category write down how much you expect to earn, save, and spend next month. Try to plan for at least three months, or, if you’re feeling ambitious, for a whole year.
Writing down a budget forces you to be specific about the amounts you plan to spend and allows you to compare your actual spending to your plan. It’s a commitment to yourself to keep on track. If you end up spending more than planned in one area, compensate by spending less in another or in the following month.
Budgeting is a chore that falls by the wayside despite the best of intentions. Newbies need to build new habits and discipline. It doesn’t much matter how you do it, as long as you find a way to stick with it.
One very low-tech approach is to literally use separate envelopes in which you put cash for different purposes for the next month: for food, for gas, for entertainment, etc. This allows you to ration your money in a very physical and direct way.
When you don’t use cash, you need another way. You can write everything down in a notebook. You can use one of many spreadsheets available for free (or build your own). Or you can use a budgeting app, of which there are a many. Some are free, others charge between $40 and $130 a year. One of the largest is Mint, owned by personal finance behemoth Intuit. It’s free, but you agree to share personal information and subject yourself to marketing pitches. You Need a Budget (YNAB) is a well-regarded paid option. There are many others. Check out the latest reviews on Nerdwallet.
With many of these apps you can connect to your bank, credit card, and investment accounts and automatically update your balances, pay your bills, and categorize your spending. To take advantage of these capabilities, you need to share usernames and passwords with the apps. This is a risk, but if it helps you save and control your spending the risk may be worth it.
Another important consideration is whether you are budgeting just for yourself or for a household that includes others. Some apps are designed to sync easily across devices and allow more than one person to enter information.
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