When writing this blog, and many many other papers growing up, most of the time the hardest part is getting started. I don’t know why, but for me it’s always been the first few steps to get moving that is the most troublesome. The same thing happened with our finances when we realized we dug ourselves a hole and now had to shovel and climb. We want to help anyone who reads this to not feel like we did when we were buried. We had to realize that we couldn’t get overwhelmed by the amount involved in managing our finances. To help get started, think of it like a pumpkin pie with a single piece missing. Don’t worry about the missing slice, focus on the biggest majority that is in front of you. If you go chasing after the 1 little piece missing, you may never get back to the bigger part. What we had to do was focus on one area of our finances, understand it, document it and move to the next. The Napkin Budget mentioned in the 2nd post is a great way to get started (it’s how we started). It does a great job of revealing some of the largest leaks in your budget.
What is a budget leak? We refer to a budget leak as anything in your life that takes money from you without your knowledge when it shouldn’t be. Leaks, like in any container, can empty your bank account in no time. The next step after the Napkin Budget is to identify the largest leaks in your budget and focus on them. Many times these things can be classified as “wants” instead of “needs” in your life. That’s where we looked first. Now, there are things that are absolutely essential to living… food, water, shelter, utilities and clothing to start with. If these needs are not lavish, I recommend starting to look elsewhere for the biggest budget leaks. The purpose of this detective work is containment so your finances do not get worse and your accounts don’t leak any more than they have to. Every dollar you don’t have leaving your bank account to pay a bill is a dollar that can potentially be working for you. We’ll share some of the biggest leaks that we found and hopefully you’ll find even more.
One may argue that transportation is a “need”, and to an extent I agree, but too many times we cruise by the cars that fit the “need” column and land in the “want” column. Odds are the cheapest car you’ll ever own is the car that you currently have (especially if it’s paid off), but if you can’t pay it off in under 3 years it’s probably a pretty big budget leak because when you stretch those payments out for 5 – 7 years, you’re paying A LOT of interest for those “low” payments.
Another leak commonly found is in the entertainment category. Whether it’s outdoor equipment, electronics, cable/satellite subscriptions, sporting events or whatever it may be, it has a tendency to add up in small amounts over time. I’m not saying to have no entertainment in life, but when is the last time you sat down and thought about how much value you get for what you pay for? Do you really need the 300+ channels & premium movie channels on your TV? How long have the Jet Ski’s been sitting in the garage? How many computers and mobile devices are just sitting around powered off? It may be time to cut back and sell some things you don’t use.
There’s also a leak waiting to happen if you happen to have financed anything at a 0% interest rate where the accrued interest lies in wait if you don’t pay off the item in the time specified in the contract. This is often called “Deferred Interest” (although you won’t see that anywhere in the advertisements). This is a popular way that furniture and appliances are financed for a fixed-term (12/18/24/etc Month 0% APR). What happens is that you are setup with minimum payments that generally WILL NOT pay the item off in time and if you only make minimum payments, the fixed-term will lapse and every penny of interest that you have not paid to this point gets added to the balance of the loan. Beware of this type of leak if you’re in this situation. (We financed a piece of furniture like this, but after learning of this gimmick, we paid it off early to avoid the penalty.)
The final major budget leak that we faced was one that is all too common and easy to miss. It’s so convenient that it often flies right under the radar and instead of sinking the boat with a huge hole, it drilled a thousand tiny holes. The next leak is eating out. It can become such a part of your routine that it slips by, but it can seriously derail anyone’s finances if not kept in check. By my calculations (and they were pretty conservative, but your mileage may vary), eating out costs at least 2 times as much as purchasing pre-made dinners (“freezer” meals) from the market and nearly 3 if not 4 times as much as eating meals prepared at home from scratch. Leftovers are the unsung hero of the budget-minded. They’re not glorious or sexy or anything, but eating food that has already been paid for and prepared stretches your dollars to lengths that no dollar menu can match.
There are many, many more categories that we have to account for in our financial lives, and the few that I’ve mentioned here are just the start. The leaks mentioned above are some of the bigger ones that we faced when we first started trying to figure out why there was more time than money in the month. Don’t try to tackle everything all at once, do what you can to control the largest unnecessary expenses in your life to reduce and/or eliminate them. Getting 80% of it taken care of and moving in the right direction is so much better than getting 0% done because you chose not to start. In time, we’ll have everything 100% accounted for in the final budget, but for now focus on determining where you can cut back to reduce the outgoing flow of cash. Initially, filling in these leaks is easier than anything else in creating a better financial life. There was one budget leak so large that we didn’t include it in this entry, because honestly it deserves an entry of it’s own… In the next entry, we’ll share why we cut up our credit cards.