Step 1 – What Can You Actually Afford?

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Step 1 – What Can You Actually Afford?

 of the The Total Budget Makeover Series

Step - 1  What can you actually afford? - Spending Signage

Photo credits:  Spending by 401 (K) 2012 CC 2.0

Step 1 – What Can You Actually Afford? of The Total Budget Makeover Series requires you to ask yourself that question and answer it with complete honesty and transparency.  We would all like to think that we can afford whatever we want but the truth is we need to view our spending habits with a fresh and new perspective if we are to take control of our finances.

I avoided creating a budget for myself for many of my younger adult years because I was afraid that I would be restricted in my spending or appear to be cheap or poor in the eyes of my peers.  Now that I am older and wiser I can honestly say that I really don’t pay attention to what anyone thinks of my frugal lifestyle.  I am sleeping well at night knowing that my finances are in order, my priorities are straight and my family would be fine if my husband were to suddenly lose his job or we are hit with a sudden catastrophe.

This kind of financial security took time, hard work and committing to developing good spending habits.  I worked my hiney off to get to this point, but it was worth it because I am reaching my goals and living out my dreams.  You develop good spending habits by first carefully examining how, why and where you spend your money.

How, Why and Where you Spend Your Money 

 You can learn so much about yourself when you track how, why and where you spend money.  How you spend your money and time reveals to you what’s most important in your life.  Why you spend your money tells you if you are trying to survive or if you are investing in your financial future.  And finally, where you spend your money shows you how emotion can play a large part in your spending habits.  An honest and thorough evaluation of these three areas will help you regain a healthy balance and total control over your financial future.

You need to begin by creating a list or spending journal and it needs to be extensive and detailed.  You really do have to account for every penny that comes in and every single penny that goes out.  The easiest way to start your list is to gather up all of your financial statements.  Collect all of your monthly bill statements that come in the mail like your water, electric or gas bills, credit card, student loan, car note, car insurance, mortgage, home owner’s insurance, phone bill, etc as well as your bank statements and pay stubs.

Once you have these collected you will make three piles of papers and create your list from the piles.  You will use your list to create your yearly, monthly and weekly budget.  We will work on this list in a moment but let’s get back to separating the piles.

The Three Priority Piles

The best way to see where your money goes is to create priority piles.  You will have three priority piles:  The Top, Secondary and Flexible Priority Piles.

Your top three priorities in The Top Priority Pile are shelter, safety and security and reliable transportation to your job.  It’s difficult to survive without these three basic necessities.

The Secondary Priority Pile includes bills that can be paid off within 5 – 7 years and costs that won’t affect your survival.  You need to constantly figure out how to eliminate costs in this pile and think very carefully in the future when adding another bill payment to your budget.

The Flexible Priority Pile is strictly grocery and personal care items.  It will include dining out and your weekly coffee break habits as well as household supplies like cleaners, toothpaste, deodorant, laundry detergent, etc.  This category is the most flexible with tweaking and the easiest for creating instant disposable income – without having to get another job!

Did you hear what I said?  (Well…what I wrote!)  You can very easily create instant disposable income by making a few minor changes in this category!  Read on to find out how!

The Top Priority Pile

If you have a mortgage payment or pay rent then this is your first priority bill for The Top Priority Pile.  Be sure to include home owner’s or renter’s insurance if you pay it separately.  My home owner’s insurance premium, yearly property taxes and PMI insurance premium are included in my monthly mortgage payment and set up with escrow, as are most conventional mortgages.

If you aren’t sure what’s included in your monthly mortgage payment then simply call or log on to your lender’s website and check to see if your payment includes home owner’s insurance, yearly property taxes and PMI mortgage insurance.

The next statement to go in your The Top Priority Pile will be your car note and insurance payments because not only do you need a place to live but you also need reliable transportation if you work outside the home, as most people typically do.  Be sure and include the monthly cost of fuel to drive to and from work, and possibly toll fees, etc – so crunch the numbers, write it down and add it to the pile.

If you live in an urban area and take public transit to work then add up your monthly transportation costs for bus, cab or subway fare and write it down on a slip of paper and place it in this pile.

Next is your water bill so you can use the toilet and bathe, and energy bill (gas and electric) so you can see when it’s dark and heat or cool your home and cook.  I do realize that some people live in rural areas and have well water instead of public utilities so just don’t worry about adding a bill to your pile if you aren’t billed for your water.  Lucky you!

Federal student loans belong in this pile because there’s no getting around paying those off.  If you lose your job, come down with a terminal illness or become disabled you STILL have to re-pay these life sucking bills until every last red cent is paid in full.  Even in some circumstances, death does not negate the loan and the living co-borrower still has to repay the loan.

I do NOT ever recommend taking out student loans for your education but that is another series of posts I will save for another time.  Avoid borrowing money from the government AT ALL COSTS!!  When we get to Step # 2 – The Envelope System, we will design your personal budget and this will be one of the first debts I talk about paying off.

If you have a cell phone or home phone or both then place them in the pile.  Most people these days eliminate the extra cost of a home phone and strictly use a cell phone for all of their needs and I am included in this group.  It is my personal opinion that everyone needs a phone in case of emergency and to be contacted by your employer, spouse, family and friends.  If you’re job hunting then it can be very difficult to land a job these days without a good contact number where you can be easily reached.

Practical Money Saving Hack:  I was a single mom for a few years before I met my husband and I could only afford a pre-paid cell phone plan on my meager wages.  These are really affordable and easy to use so if your wireless plan with data is eating you alive in costs then consider switching until you can afford to resume paying the full price plan.

My phone carrier is AT&T and I have a two year contract for service with my plan which is not uncommon for most wireless carriers.  If I find that I am unable to continue paying the full monthly bill plan then they offer some money saving options.

I can either drop my plan to a lower amount of talk time minutes and data usage to reduce my monthly bill or I can place my plan in the “inactive” mode and just pay a small maintenance fee per month.  If I break my contract then I am required to pay $200+ and there’s no getting around that since I agreed to an early termination fee when I signed up for service.

My actual phone bill is now $180+ and I can afford to pay it comfortably every month.  But let’s say I find that I can no longer afford it and I want to cut down my monthly cost.  I can call AT&T and ask them to place my account into “inactive” mode and pay $20+ a month for the maintenace fee.  I get to keep my phone and did you know that ANY phone that will power on can make emergency calls?  If that old analog phone from 10 years ago will power up, then you can make a call to 911 in case of emergency.  Good to know, right?

So by doing the above aforementioned action plan, I will save $150+ a month easily.  But let’s say I still need a working phone so my spouse, kids, boss, friends, family, etc can contact me.  I can go out and purchase an inexpensive pre-paid wireless phone and monthly phone plan.  You can usually find these at your local retail stores like Wal-Mart, Target, AT&T, Sam’s Club, pretty much anywhere that they sell electronics.

You will then potentially save $100 a month by using the pre-paid plan because you no longer have the contracted bill of $180+.  You are out the one time cost of purchasing a pre-paid phone – unless you’re one of those people who always loses your phone – and then you only have to buy the monthly plan for unlimited talk and texting at around $50 per month.

 Old contracted plan                                              $ 180 / month

Inactive plan maintenance fee                        –  $  30 / month

_______________________________________

 

Savings by switching to inactive plan                    $150 / month

New pre-paid plan fee                                       –    $50 / month

______________________________________

   Total savings : $100 a month

 

 Great hack, right?  Now back to How, Why and Where you Spend Your Money…

The Secondary Priority Pile

So you now have your Top Priority Pile sorted with the items which are absolutely necessary for your survival.  The next pile to create is your Secondary Priority Pile or things that you can do without if you had to or things you pay that you can eliminate within the next 5-7 years.

Credit card debts to include department store cards, gas cards, home improvement stores etc. belong in this pile.  If you rent-to-own furniture, appliances or anything at all along with your cable and internet bill or monthly subscriptions to Netflix will go in this pile.  I subscribe to Amazon Prime membership yearly and so I would write down the yearly fee and place it in this pile as well.  Yearly gym memberships, magazine subscriptions, newspaper subscriptions, monthly or yearly club or association dues, homeowner’s association fees go in this pile.

Any cost outside of the first priority list will be included in this pile except for groceries, dining out and household items like laundry detergent, cleaners, etc.  Medical insurance and/or bills that you pay or other costs such as monthly presciptions or medical supplies (like diabetic testing supplies) go in this pile although I do realize that most of us with monthly presciptions can’t do without them over time but they are still a secondary priority in terms of this budget plan.

Do not include your monthly grocery budget into the Secondary Priority Pile because you can’t eliminate buying groceries with time unless you decide to move to a remote area of the world and plan to grow your own food and hunt and trap animals.

The Flexible Priority Pile

The last pile will be The Flexible Priority Pile which are your food costs.  Write down what you typically spend in a month to feed yourself and your family.  Don’t forget to include what you spend when dining out or anywhere that you spend money on eating or drinking.  Do you treat yourself to a weekly latte at Starbucks?  Do you buy a cold drink when you fill up at the gas station weekly?  If so, write it down and include it in The Flexible Priority Pile.  

The reason this pile is called The Flexible Priority Pile is because what you spend to eat and drink really is far more flexible than you may realize.  If you really are serious about saving money and sticking to a budget then this pile is the easiest to tweak and adjust and you can use a daily and weekly journal to help you track the costs.

You can literally cut your grocery bill in half by making a few changes like using coupons, shopping the sale and clearance items, learning your local sales cycles and stockpiling when items are at their rock bottom prices.  If you want to learn but don’t know where to begin then read my Beginner’s Guide to Couponing to get off to a great start.

It really does amaze me when people I know complain that their refrigerators are never full but they won’t take the time to learn to coupon.  They claim it takes too much time and energy to do it.  I know I would rather invest in the time to learn and save money in the long run than to make more excuses and complain.  Hopefully you share my opinion and can see the value in learning something new in order to create a better future for yourself.

One last thought to leave you with about couponing.  I failed miserably at learning to coupon three times before the light bulb finally clicked on in my head and it all made sense.  I now offer Coupon Coaching for anyone else struggling to learn to coupon because it was such a personal struggle for me and I can relate to your pain and suffering because I lived through it myself.

Learning to coupon has improved my life drastically in more than one area of my life and I love helping people turn their pennies into dollars with my coaching.  If you are struggling then just know that you are not alone and you can easily find support online from other like-minded individuals who want to save money just like you.

What Can You Actually Afford?

Separating everything into these three piles show you where you spend your money.  Now we need to examine how and why so you can really see what can you actually afford in your budget.  You can’t stop paying for any of the costs in your Top Priority Pile otherwise you will become homeless, without transportation to a job and eventually jobless.  The Top Priority Pile is called TOP priority because you must pay these no matter what!

My Financial Coaching Advice:  If you have an adjustable rate mortgage (or ARM) then talk with your bank or mortgage expert and make it your # 1 priority to do what you can to either refinance for a fixed rate loan or check if selling your home would be the best bet for your financial future.  This should be at the very top of your list of things to do before anything else.  Get this taken care of first and then come back to re-evaluate your budget and savings.

The Secondary Priority Pile reveals how you spend your money.  You really need to exam yourself with this pile.  If you know you can’t afford the designer clothes that you bought at the department store but you still decided to buy them with your charge card then you might need to seriously reconsider the reason for this purchase.

Did you buy the clothes to make yourself feel better?  Is it because you feel like people expect you to look your part and wear the latest designs with each season?  Do you really need another black purse or pair of brown leather shoes even though you have 3 just like them in your closet?

Parents get themselves into debt every year with Christmas gift purchases because they feel like they need to give their children everything they never had growing up.  I did this for a few years and I got tired of repaying loans all year long just so they had more presents to open on Christmas morning.  They had so many toys that they didn’t actually appreciate any of it and I was reminded all year long of this when I had to repay the loan.

I now have a set limit per child and I shop all year long for their Christmas gifts and hide them in our bedroom closet in a large plastic tote.  I do the same for their birthday gifts too.  This way I am not out the extra expense in November/December, fighting the holiday crowds and my kids end with more gifts because the budget went further because I was on the lookout for bargains.

Practical Couponing for Busy People Methods Hack:   My husband and I agree that we would rather wait until after Christmas to purchase our gifts for each other.  Everything goes on sale the day after Christmas to clear out inventory and make room for the Valentine’s Day new arrivals.  The actual day that I get the gift makes no difference to me so long as I get the item I wanted for less than full price.

You would be surprised at how inexpensive the hottest and trendiest toys are after Christmas is over.  January is when stores begin to mark them down to clearance to move them off the shelves and make room for the newest toys coming out.

I purchased my kids the Skylanders Swap Team set for Christmas two seasons ago.   The Skylanders Trap Force set released this past year.  It’s funny how both systems released right before Black Friday two years in a row.  I think they do it on purpose to make more money!

I purchased the Skylanders Swap Team set for only $35 at an early Black Friday sale at Wal-Mart two years ago.  It was originally $99 and I saw it go on sale twice before Christmas for $79.95 but I caught the $35 special that only lasted one day.  Lucky me, right?

I did not purchase the Skylanders Trap Force set this past Christmas because I only found the tablet version on sale on Amazon for $35 and my kids only have a PS3.  But guess what?  Christmas for my kids wasn’t ruined because they didn’t get another Skylanders Game System.

I still have their birthdays in August and September so I have plenty of time to wait for the latest system to go on sale for $35.  I saw it on sale at Toys R Us a few weeks ago for $39.99 for all systems but I still did not purchase it.

The point to this hack is to wait until it goes on sale and then purchase it.  I promise you won’t die from waiting the little bit of time to get a better price.  Kids will be kids and they always want everything RIGHT NOW but I can promise you that they can wait and it’s healthy for them to learn the lesson of delayed gratification in life. Teach them this vital lesson now and they will develop good spending and saving habits for their future early on from you!

Did you like that hack?  Great!  Now let’s get back to The Priority Piles!  

You have to ask yourself some honest questions about the purchases made in The Secondary Priority Pile.  You need to know the difference between a want and a need.  My kids need clothes to wear all year long and I have to make more frequent purchases because kids do what kids always do, they grow and will continue to grow until they become adults.  So clothing purchases are clearly a need because we can’t have naked kids running around everywhere!  But this need for clothing quickly turns into a want when I buy the brand name designer jeans for $50 a pair instead of the discount store brand jeans for $19.99 a pair.

Don’t get me wrong, if you can work your coupon, store discount and clearance sale magic and get the $50 pair of jeans for $19.99 or less then by all means, go for it!  I love a good money saving deal as much anyone else.  But if you pay the full $50 price for the jeans just because your child insists that they “need” it to feel good about themselves then it’s no longer a need but rather a want that needs to be re-evaluated.

If you pay your children a weekly or monthly allowance then tell them that they can purchase the $50 jeans, expensive toys, game system games or whatever they want for themselves with their own allowances.  They will learn the value of earning and spending their money.

I know of some parents who allow their older teenagers to shop and spend their own clothing budgets and once it’s gone, it’s gone.  They have to make it last and not wear out until the new budget year or they work their little hineys off to find extra jobs for extra money.  They also save their cash gifts from friends and family to make their additional desired purchases.

One mom told me her son didn’t take her advice and wasted his entire yearly budget on expensive colorful and designer NIKE shoes.  She didn’t cave in and break down when his jeans and t-shirts had holes and no longer fit and he was begging her to buy him new clothes.  Instead she suggested that he sell his extra pairs of shoes and use the money he receives to buy new clothing.  He learned his lesson painfully that year and has not been wasteful with money since that incident!  Don’t be afraid to teach your children the consequences of poor money management while they are still under your care.

The Secondary Priority Pile needs to be constantly re-worked and evaluated when planning your budget.  You need to be fully aware that budgeting means handling your budget on a daily, weekly and monthly basis.  You need to be constantly asking yourself one question – What can you actually afford?  If you don’t ask yourself this question and take control of your spending then you will forever be a slave to money and all those you have to pay or repay.  That’s no way to live in my opinion.  Learn these healthy habits, develop them and realize that it’s an entire lifestyle change but it will be more than worth it in the end.

Let’s just be totally honest and transparent here for a minute.  Maybe you really can afford everything you already earn and spend without any hassle or struggle at all.  And if so, then why are you reading this post?  Is there something still lacking and you are looking for the answer?  I know I wasn’t happy with my life prior to using The Envelope Budget System.  My husband and I were both working and earning a salary but what I really wanted to do was to quit working at the hospital and work from home.  Re-working our budget and Secondary Priority Pile made this dream more than just a possibility for me.

I love Life Coaching and I am a Certified Professional Life Coach and I didn’t think it was possible to afford to work from home, without pay, on just my husband’s income alone.  What I learned was that I could afford to work from home and build up my coaching business if I learned to coupon, stockpile and eliminated the unnecessary items in my Secondary Priority Pile.  My husband was also able to afford to purchase his new car by re-working and tweaking our Secondary Priority Pile.

The ultimate goal of The Secondary Priority Pile is to see how much you can cut down or eliminate from it.  Really take some time to examine some costs like cable TV.  Some people really do consider this a need but it’s actually a luxury in my honest opinion.  You can live without cable and watch the shows you love for free online or waiting a little while for it to release on Netflix or Fire TV.

Just dropping down to a Netflix or Fire TV subscription will greatly reduce your costs in this category.  How many hours of TV are you actually watching a week anyway?  If your monthly cable bill is $80 and you only watch 3 hours total of TV a week, for a total of 12 hours a month, you are actually spending $6.66 an hour.  My Netflix subscription is only $8.95 a month!  That $80 cable bill would actually help me pay my water bill if I cut it out of my budget and just watch Netflix and read more books.

Maybe you are like me and could stand to lose a few pounds so why not eliminate the cable TV and make a commitment to walk everyday instead of spending the time channel surfing?  Why not use your local library and read a few self-help books and improve your living and well-being?  Why not learn to play a sport or try a new inexpensive hobby that gets you out of the house more and on track for a healthier lifestyle?

Find any means that you can to eliminate wasteful spending habits and to whittle this pile down to the bare minimum.  Keep reminding yourself that you are taking control of your financial future and you decide how, why and where you spend your money so that you can make your dreams your present day reality.

The Flexible Priority Pile has the most freedom when working out your spending and budgeting.  You can easily eliminate many costs by making a few minor adjustments.

If you purchase Starbucks coffee every morning on your commute to work then make a commitment to get up 20 minutes earlier and make your coffee at home for a fraction of the cost.  Invest in a sturdy coffee mug and make your coffee before leaving.  Skipping that daily or weekly Starbucks run can save you some serious cash so why not put that extra money towards a debt like your student loans or credit card and help eliminate that balance?  Start brown bagging your lunch during the week and only dine out for lunch once a month.

You can easily adjust your monthly grocery bill by using coupons, shopping store generic brands and sales and cooking Money Saving Recipes like the ones I feature on my blog.  The smallest little changes will make a huge impact in your wallet and your budget in the long run.

For example, it’s more convenient to buy pre-cut vegetables in your supermarket but do you really want pay more than double in price just for that extra convenience? Purchase the bulk items and take the extra time to chop the ingredients yourself.  You will learn to appreciate the meal more when you prepare everything yourself.

Money Saving Recipe Hack:  With just a little bit of meal planning and preparation you can save money and time and cook great tasting budget friendly meals.  I like to do my shopping and meal prep on the same day and when I worked a 9-5 office job, I did it every Sunday.

I would sit down and write out my meal plans for the week.  Raw chicken value packs would be on sale for 99¢/lb at the store that week so I would buy a large pack and think of how many recipes I could create from that one packet of meat.  We could have baked chicken one day, chicken soup another, chicken enchiladas with green chilies and chicken broccoli fettuccine alfredo another day.  If I got tired of chicken after two different recipes, I could still make the other two recipes but freeze them and pull them out for a meal later when chicken was appealing again.

I like to chop up all of my vegetables at once if I know I will be using the ingredients for more than one meal.  I always have items for a fresh salad on hand and cutting up the fresh broccoli, carrots, bell peppers and mushrooms ahead of time helps me to throw together a tossed salad in no time at all.  I am also more likely to reach for freshly cut veggies than an unhealthy snack if I have them readily available to eat.

I can use these chopped veggies in my vegetable tofu stir-fry recipe or throw it in my pot of chicken stock with canned or leftover cooked chicken and create an easy chicken soup.  Toss in a hand full of pasta and you now have chicken noodle soup.  Use up stockpile canned items and fresh veggies and you have my Chicken Dump Soup Recipe.  Leftovers of this soup and a small fresh salad will make for a light and healthy brown bag lunch at work.

Having these fresh chopped veggies also makes it easy for my family to snack on these healthy choices instead of reaching for processed junk foods like chips or cookies.  I just chop and then drop them into see-through plastic storage containers with lids.  I leave them on the shelf in the fridge that is eye level with my kids.  Making it easy to see with see-through containers ensures that they know exactly what’s available for them to eat.

I also pre-cook all of my ground beef or ground turkey when I buy it and then store it for later use in the fridge or freezer.  I don’t have to worry about thawing and dirtying up another pan just to get dinner going on a busy weeknight.  I do the same with raw chicken.  It is super cheap to buy raw chicken because it always goes on sale.  I buy a large value pack, season it and bake it all off in the oven at once, allow it to cool completely and break it down for recipes.  Cook it once to save time but use it all week long in your recipes.  Work smarter, not harder, right?

I love homemade mashed potatoes and I make a large batch so that I can freeze half of it.  I store it in an old butter/margarine container and label it with the date.  Homemade mashed potatoes will only keep in the freezer for a week if you don’t vacuum seal them but we don’t have to worry about that problem in our house because they never last that long!

I highly recommend investing in a Food Saver Vacuum Sealer System and purchase your meats in the cheaper but larger packages.  For example, I purchase the bone-in pork chops in the bulk packages to save money.  I break down the package as soon as I come home from the store.  Since I already know how much I need to cook to feed my family of five, I just portion enough for a meal and then vacuum seal them in a food saver bag, label them and pop them into the freezer.  FYI – I don’t pre-cook my pork chops because they get a little dry and tough when re-heating.

I save time, freezer space and money by taking the little bit of time to do a little extra work on the front end.  I also save more money using the vacuum sealer because my food won’t get freezer burn.  If you plan to freeze any items for longer than a month then you really need to be sure and get every bit of air out the packaging.  Air in the package is what causes your frozen foods to taste weird and have a nasty mushy texture.  I can also rearrange the items I am vacuum sealing so that they lay flat or take up less bulky space in my freezer or deep freeze.

I learned all of these little hacks when I was a single mom.  My kids were 4 and 1 at the time that I lived alone and I had to find ways to get a fast, decent and inexpensive meal on the table while keeping an eye on my two babies.  I didn’t learn to coupon until after I re-married which is a tragedy to my finances because I could have been able to afford and save more back then if I had only known how to coupon!  But what’s done is done and I am passing on all that I have learned to all of you now!

Final Thoughts on What Can You Actually Afford  

Ultimately you will be the deciding factor in what is affordable to you and what you can live without.  If you want to pay down debts and save money badly enough, you will make the changes necessary to get the results you want.  I do want to add that you do need to temper your budget with some restraint in areas that are wasteful but you also need to be able to have some wiggle room for fun as well.

My life motto is to play as hard as I work or it’s all pointless.  I work hard to live frugally, pay down debt and save money but I want to enjoy my life as well and sometimes that takes spending a little money here and there.

At the end of Step 1 – What Can You Actually Afford – you should have a very detailed list or journal of your spending habits and three priority piles of where you spend your money.  You should have a clear understanding of how, why and where you spend your money and a worksheet of things you can change to help you waste less and save more.  Double check your bank statements for any charges, fees or payments you forgot to include in your list.  In the next step we will take your list items and plug them into the spreadsheet and create your personal yearly, monthly and weekly budget.

In Step 2 – The Envelope System of The Total Budget Makeover Series I break down into detail the way the envelope system works and why it works.  I must admit I thought it was the dumbest idea when I first learned about it but now I am so happy that I use it!  The envelope system will keep you honest with yourself, help you stick to your budget and will get your creative brain juices flowing when you want to purchase extras or save a little more.

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