Want More Money to Invest? Give Your Budget a Checkup.
Now, we don’t talk much about personal finance around here. We normally spend our time looking for investments — either safe, reliable income payers or more aggressive growth picks. We even touch on short-term trades and options.
But getting the most out of your personal budget is important. And it’s something worth discussing from time to time, if only briefly. After all, by giving your budget an occasional “checkup,” you’re likely to find extra money to put to work by investing.
Do a Simple Budget
Budgets are like balance sheets. They’re pretty simple but seem to somehow scare people silly. It’s not the list of expenses that makes people uncomfortable; it’s the “other” number that makes them weak in the knees — their income. People just hate to stare that number in the face.
Chances are you think you’re underpaid. We can worry about that later. Why? Because even with a larger paycheck, most folks end up falling into the same bad habits. It’s called “lifestyle creep.”
Get a promotion at work? Most people end up buying that new car they’ve been eyeing rather than paying down debt. And therein lies the problem. So here’s our advice: Don’t focus so much on what you make.
Make a spreadsheet in Excel (or, for the less tech-savvy, take out a sheet of paper) and add up what you spend. Be complete and accurate, or it doesn’t count.
If you’re blowing $12 at Starbucks every morning, it’s time to reevaluate whether that double-shot mint latte is really worth it. Yes, it’s only 12 bucks, which most of us can regard as nothing. But it adds up to more than $3,000 over a year, and that’s something. In fact, that really starts to grow over time when the miracle of compound interest kicks in.
Yes, the Starbucks example is a bit of a cliche at this point. But it’s still important to consider your spending. Be honest with yourself. It could be your cellphone plan, streaming video subscriptions, or even your car payment.
Discretionary vs. Non-Discretionary
What you ultimately need to find with your budget is your total non-discretionary spending. This is what you must spend to keep your household running, and it should be subtracted from your monthly take-home pay.
The rest is discretionary income — funds you can do whatever you want with. Maybe that’s new clothes, an annual vacation, it doesn’t matter. But after you make out a budget, ask yourself this:
“Am I really putting away enough money to invest and reach my long-term goals?”
Some people go so far as to put investing in the non-discretionary category. Others leave it in the discretionary column. It really doesn’t matter where it gets listed so long as you’ve thoroughly considered whether you’re socking enough away.
Fact: You will never see an individual or family go through a round of budgeting and NOT find they could spend less and invest more. It boils down to priorities. The occasional splurge is just fine for most people. But what if your top financial priority was ensuring you spend as little money as possible so that you could invest? What if that was your way of life?
We’re not saying everyone should do this. We’re just saying it’s worth thinking about.
The Bottom Line
Our advice: If you haven’t already, make a household budget based on three months of spending data. Write down your spending priorities, and seek to right-size your monthly allocation to your investments. You may be surprised by what you see.
We’ll even take it a step further. Saving to invest more is good, but having the right mix of assets in your portfolio is a lot more important than people think.
A good financial advisor will tell you this, and they may even recommend something like a mix of stocks and bonds based on your age. That’s fine, but it’s ultimately up to you. And while we are not your financial advisor, longtime readers know that we’re fans of an 80/20 approach.
It works like this: Put 80% of your money into safe, conservative investments (like an index fund, blue-chip stocks, or safe dividend payers). Then take the other 20% and really go for it.
Spread this allocation among aggressive positions in companies that have the potential to deliver substantial long-term returns. It could be a drug company working on a novel therapeutic drug… a tech company that could be the next big household name… you name it.
If you’re looking for other promising profit-making opportunities, consider our colleague, Nathan Slaughter, the chief investment strategist of High-Yield Investing.
For the last 16 years, Nathan has made it his solitary focus to help everyday Americans invest profitably for retirement.
As a high-yield expert, Nathan has devised a simple strategy that could help you generate a steady stream of cash, almost like clockwork. Click here for details.