Last Monday I introduced a new series called Project Buy a House. This is my three-year-plan for becoming a homeowner (or at least a home buyer!) I hope you’ll come along for the ride. Click the button above to sign up for an email reminder of each week’s post and get a free 23-page C.H.a.O.S. Binder Quick Start Guide.
This week we’re going to talk about figuring out just exactly where your journey to owning a home starts.
The answer is both easy and, possibly, very difficult.
It starts where you are. Not where you want to be or where you were before the economy collapsed or where you think you should be. Just right where you are today.
The big question, of course, is where exactly are you? You’re going to have to ask yourself some hard questions to figure that out.
If you stopped using credit cards right now, could you keep paying your bills?
Do you have anything at all in reserve for an emergency?
What would happen to your family if your income took a sudden, major hit?
What’s standing between you and disaster?
Let’s start with an ideal situation. Your family has an income that allows you to cover all of your monthly bills, buy food, fuel up your car, prepare for non-regular bills like taxes and insurance, buy what you need to buy like school clothes and birthday gifts, all on 80 to 90 percent of take home pay. You have six month’s living expenses in reserve for emergency and you’re putting at least 10 percent of your take-home pay into long-term savings.
Does that sound like you?
Yeah. Me, either.
Here’s where my family is starting: spending every single penny the second that it comes in.
We can afford to pay all of our bills without resorting to using credit cards, but it feels like a constant struggle to push a boulder up a hill only to have it crush us again every time the first of the month rolls around. We have multiple income streams that are far more plentiful in the late spring, summer, and early fall than they are in the late fall, winter, and early spring–so half they year we feel on top of things and the other half we feel like we’re one misstep away from homelessness. Up until very recently every single expense that came up that was outside of regularly monthly bills was caused panic. We’re talking regular things here. Haircuts. School clothes. My husband’s work clothes. Getting the oil changed. We had nothing extra for things like these, even though we knew to expect them.
Because my pay comes in very occasional spurts of relatively large amounts (say three or four months income at once), we usually have a savings account. Only it’s not really a savings–it’s my income. We have no dedicated savings. We dig into that money every month without any real plan for how to preserve it or how to save some of it for real.
That’s my story. What’s yours?
Your goal this week is to make a good list of where your money comes from and where it goes.
Start with where it comes from. Think about every source of income you can count on every month. If, like me, you have money that doesn’t come on a regular basis, make a separate list for that for now. Stick to what you already have coming in, reliably. It would be easy, for instance, for me to add the money I know I could earn from Etsy if I found the time to re-open my vintage clothing store. The stock is right there in my garage. But that potential money isn’t going to pay my rent this month, so it doesn’t count right now.
If you have money that comes in irregularly, but reliably, take the amount and divide it by the number of months before you expect to get paid again. You can add that amount to your monthly income (starting now if you have some of it, or when you get paid the next time.)
Now, gather up your bills, your receipts, and your credit card and bank statements. You’re going to figure out where all that money is going. This might take some time, so just go slow and don’t let yourself get overwhelmed.
Start with bills you owe monthly. This should be pretty easy. Think about things like your rent, your utilities, your car payment, car insurance if you pay it monthly, your credit cards, the money you kick in to help support your grandma, kid’s allowances, your cell phone, you gym, childcare, kid’s activities, and day care. How about Netflix or Hulu or any other subscription service?
Now, think about money you spend every month outside of bills, like food, entertainment, and gas. Be honest here. Look at your bank statements if you have to. Or sign up for an account at Mint.com. You need to know, for real, exactly where your money is going.
Next you want to consider non-regular expenses. Haircuts, dog grooming, professional fees (like licenses or union dues), taxes, insurance, vacation, entertainment, clothing, Christmas and birthdays. How much do you spend on these things? Be honest with yourself.
One thing to consider is that your bills, receipts, and statements might not take into account all of your cash spending for the month. In fact, I bet it doesn’t. So you and I are going to start, today, writing down our cash spending in a little notebook. Keep track for a month so that you can tweak the numbers you come up with this week. If you sign up at Mint.com or have another way of keeping good track of your non-cash spending, you don’t need to write that down. We’re all about easy here. No need to replicate what’s already being documented.
How do your income and outgo compare? Do you earn enough to pay your bills every month? Are you robbing Peter to pay Paul? Do you have to use credit cards to stay afloat?
Look at those lists again. You’re going to have to be brutal with yourself here. Very brutal, maybe.
What do you have to do to bring your expenses into the 80-to-90-percent-of-income range?
Here’s a three-step plan for aligning your income with your expenses.
Start with the easy stuff. Maybe there are subscription services you can cut out. Or maybe you have a gym you’ve been paying for but haven’t been to in months (or years!) I hate those lists that tell you to stop buying Starbucks every day–as if everyone does that–but if you do, cut that out. Start bringing your lunch to work. Get your books from the library instead of Amazon. Get your budget as in order as possible with painless cuts. Some of these are just going to be awareness. For instance, I was in the habit of buying takeout for dinner every Friday after Ruby’s soccer practice, which ends at 6:30. I saved at least $15 a week by starting a slow-cooker meal in the morning or pre-planning leftovers from another night instead. Doesn’t sound like much, right? But that’s $60 a month–and a whopping $780 a year. It adds up, quickly.
I bet most of those little under-the-radar things you’re paying for with cash can go on the easy-stuff list.
Once the easy stuff is out of the way, dig a little deeper. Can you cut your grocery bill down by $100? What would happen if you cut out restaurants? Can you switch from cable to Netflix? Hit the thrift stores instead of the shopping mall? How about shopping around for more affordable car insurance? Can you groom your dog yourself? Downgrade your hair stylist? Maybe take a staycation this year? You’re going to feel these cuts a little more–but dig out all the extra money you can, because the next part is the hardest.
After you’ve cut your expenses as far as you can with only mild amounts of pain–if your expenses are still greater than your income, you’re going to have to make the hard decisions. How badly do you need a second car? Or a car at all, if it comes down to that. You can take a LOT of taxis for the price of the average American car payment, insurance premium, and fill up at the gas station. You might have to look at where you’re living. If you’re renting–you might need to consider moving to a less expensive place. If you’re paying a mortgage, you might need to think about renting out a room to lower your expenses. Put yourself on a strict grocery budget and stick to it, even if it means giving up foods you’re used to.
Ask yourself where your money is going, and then ask yourself how you can hold on to more of it. You must get your income and outgo into alignment so that your outgo for all of your living expenses (not just your regular monthly bills) is no more than 90 percent of your income. Eighty percent would be better.
Spend this week trying to get a handle on your income and outgo, as best as you can. Make a list of all the ways to cut your outgo that you made in all three steps.
No, Really. Now what?
So, now you have an action plan you can use to bring your income and outgo into alignment.
Is it freaking you out? Mine freaked me out. A lot. Because the next step is to start taking the steps. One at a time.
Take a deep breath. You got this. Trust me, I know. I’ve been through this before. When we moved to Reno three years ago, my husband started a new job. This was in July. He worked full-time hours every week right up until the day in November when the new schedule gave him one shift. One. And then he was told that he wouldn’t have more than one or two days of work a week straight through until spring. Suddenly it became clear why nearly all of his co-workers had two jobs. Working at two casinos, in this seasonal town, is the only way to ensure something resembling one full-time job in the off-season. We struggled that winter. We sold plasma. We took a Thanksgiving food basket when one was offered to us. We got rid of literally every expense that wasn’t essential. We asked for help. It took me three months to find a job. When I did, my relief was so sharp, I think I alarmed the poor woman who hired me.
That winter four of us moved from our house into an 800-square-foot apartment. Our college-aged daughter moved into her own place to give us more room. It took another year to get to a place where we could move into a house again.
I know that it might look grim right now, but I promise. You can do this.
Some worksheets to help you get this party started
Use the Income Streams worksheet to make a list of your sources of income. It’s pretty self-explanatory. Describe the income stream, then write the amount and how often it comes in.
Use the Monthly Bills worksheet to make a list of your monthly outgo. List the bill and the amount you have budgeted or that your bill averages on the left. This is a year-long worksheet, so find the month you’re working on and write down how much you paid for that bill that month. You can tally it all at the bottom. These are regular monthly bills, like your rent or mortgage, utilities, car payments, credit cards, loan repayments, etc. Add anything that you pay for every single month. You’ll probably have an entertainment line for things like movies and dinners out. Definitely have entries for food and gas in your car.
Use the Irregular Spending worksheet to write down things you pay for on a less than monthly basis. Some of the items on my worksheet include haircuts, dog grooming, Christmas, travel, school clothes, work clothes for Kevin, car maintenance and registration. We’re going to talk soon about how to keep these things from knocking you on your butt when they come up. For now, just write them down. Knowledge is power, right?
If you’re following along with my C.H.a.O.S. series, next week we’ll be talking about building a binder that will be the next best thing to a personal assistant. Go ahead and get a three-ring binder and stick these worksheets in it to keep everything together until then.
A Final Note
Coming to terms with your actual, real-life financial situation can cause all kinds of anxiety. Believe me, I know. Here are some ideas for making it a little easier.
1. Be kind to yourself. If it turns out you’re living way beyond your means, beating yourself up about it isn’t going to help anything. Give yourself props for taking steps to do better.
2. If you have a partner, involve them.
3. Leave the judgement at the door. Whatever your financial situation, you’re working to make it better now and that’s what counts.
4. Go slow. Take breaks when you need to. Do what you can to remind yourself that things are going to get better from here.
5. Work through your action plan one step at a time. Let yourself be excited about your successes as you cut back a little on your outgo. It actually gets kind of addicting when you start to see the benefits of what you’re doing, and feel the relief when things start to loosen up for you.
This Week’s Action Plan:
(CLICK HERE for a printable action plan)
Sign up for a free account at Mint.com. You’ll be able to see exactly where the money you spend using checks or your ATM card goes.
Start writing down your cash spending in a little notebook. Just date a page and write down what you bought and how much you spent. Write down any income that doesn’t get deposited into your bank as well.
Make an action plan for starting to bring your income in line with your outgo. The printables above should help.
- Make a list of all of your income
- Make a list of regular monthly bills
- Make a list of other monthly spending
- Make a list of non-monthly spending
Start with the painless changes and begin to implement them, one at a time. Mark off each completed step on your Action Plan.
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See you next Monday. We’ll be talking about income streams and working from the other end of the spectrum to bring your income and outgo in line.
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