Step 1: Jot down any fixed payment you make each month, including rent or a mortgage, loan repayments, cable bills, cellphone plan charges, prescription drugs and gym membership fees.
Step 2: List your variable monthly expenses. Comb through your credit card and bank statements, figure out how much you spent on various categories over the last year, and then divide by 12 for a monthly average. Categories might include electricity, groceries, restaurant meals, clothing, recreation, transportation, travel, gifts and donations.
Step 3: List infrequent expenses. Look for once-a-year and other infrequent payments, such as insurance, dental work, vacation travel, tuition payments and so on. Divide each category’s annual total by 12 to get a monthly cost.
Step 4: Subtract your total spending from your total income. Compare what you’re actually spending each month with what you bring home via paychecks or other sources (such as a side gig or rental property income). If your spending exceeds your income, you have a real problem on your hands. Ideally, you’ll want to be able to cover all your expenses and still manage to sock away 10% or more of your income into savings and investments. If your retirement savings are woefully inadequate, saving 15% or more is wise.
Step 5: Find ways to shrink spending. You’ll probably need (or want) to spend less overall. So take a close look at your spending habits and see what changes you can make. You might slash one major expense, such as your rent payment. Or try a series of smaller changes, like spending less on a hobby, cutting the cable cord and being more frugal at the supermarket.
Review your budget occasionally, and make changes when necessary. But keep saving what you need to save, and you can achieve lots of financial goals.
My Dumbest Investment
From A.C., online: My dumbest investment has been wasted time.
The Fool responds: That’s a profound observation. The time we waste can have terrible ramifications in both our personal and financial lives.
There are many examples: If you don’t like your job, for example, you might stay in it far too long before jumping into some training for a better job. If you have a crush on someone, you might end up regretting that it took you several years to ask them out — especially if you end up marrying them. If you put off seeing your doctor about some symptom, it could turn into a much bigger problem.
Procrastination can be costly when it comes to retirement savings, too. Imagine that at age 45, you start socking away $5,000 each year, earning an average annual return of 8%. By the time you retire at age 65, that account will have grown to about $247,000. But if you’d started saving and investing that $5,000 annually beginning at age 35, you’d have ended up with roughly $612,000 — more than twice as much money!
Meanwhile, any years in which you don’t pay off high-interest-rate debt (such as that from credit cards) will cost you a lot in interest paid. Paying 20% on a $20,000 balance will cost you around $4,000 each year just for interest. Waste less time, and you’ll also waste less money.
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