Over the last few weeks, we have focused on ways to create automatic retirement income to increase your wealth ratio. However, today our focus will be on the denominator of the wealth ratio. The focus will be on reducing expenses. I know that the first thing that comes to mind is “don’t take my favorite _____ away from me. I can’t go without it each month.” That is a natural reaction. The real question you should ask yourself is this…what can I live without today, so I can have more of tomorrow?
Make Personal Budget
To do this, you have to start with making your personal budget. Start with the list of things you spend money on each month such as rent or mortgage, food, utilities, phone, gasoline, car payments, clothes, etc. The idea behind this is to get you to look at the reality of your situation. Assume you have a take home pay of $2000/month. When you start adding up these items, you will quickly see how much of your income is dedicated to pay for each of these items. The other issue is you will soon realize that you may be spending more on areas you should not be and could save a lot of money.
You, Inc.
You really should think of yourself as if you are a company. You want to develop your financial statements. One of those statements are called the expense sheet. This is what we are developing in the exercise above. If any company is to have success, it must get its expenses under control. Many people get upset at companies when they let people go. This is not an easy decision to make, but some times it has to be made to keep the company on sound financial ground so they will be able to stay in business. You may have to make similar decisions, but you won’t know you have a problem, unless you do the exercise of building your expense statement.
Your Task For This Week
We challenge you to take time this week and write out your expenses. The more detailed you can get, the better. One way to find out where all your money is being spent is to carry some paper and a pen with you. Every time you buy something, write it down. Do this for a week or even the whole month to get a good handle on where your money goes. If you do this simple task, you will have the ability to make sound decisions on which expenses should be eliminated.
We will continue the focus on the denominator of the retirement wealth ratio in the next few posts.
Until Next Time…