Thursday, January 30, 2014

Put Together Your Own Case-Study

A case study is, in this instance, a full financial picture of yourself or your household that includes line items for all your income, bills, expenses, debts, interest rate on those debts, category break downs, your thoughts, comments, questions and unique situations that aren't represented in the numbers and your current plans. Just by putting one of these together you get a much better understanding of where your finances are.

When I started out, I couldn't build a simple snapshot of my finances like this. I had no clue what was actually going on. This is why tracking expenses is the most important first step there is. You can't fix what you can't measure.

I am going to share the first case-study I put together for myself and posted for public critique. I put this together in May 2013, 4 months after beginning work on being frugal. Honestly, it took me that long to get a good financial hold of myself that I could actually build one of these and thus it doesn't show where I was at the beginning of all this, but it's close. Remember that 4 months prior to this snapshot, I had $0 savings and well over 10,000 in debt.

I challenge you to work through and build a case study yourself to better understand your finances and see where your money is going. For those who don't want to build one from scratch you can download a template here (Google Drive). Once you are comfortable, I'd suggest heading over to the "Ask A Mustachian" Forum and post it for critique and feedback. They are truly helpful!

Below is my case study. If you are interested in seeing how people responded to it and provided great feedback the link is here

Wednesday, January 29, 2014

How This Started

In January of 2013 I was spending my entire paycheck and then some. My net-worth (that is, my assets minus my liabilities and debts) was about -$10,000. I had one car, one credit card, no house, no student loans (because I was never a college student), but I was still worth 10,000 dollars less than zero. At the end of each pay period I was scrounging to make it to payday so I can start my spending habits all over again. Feast to famine. I didn't even have much to show for it.

At the time, I didn't think much of it. I knew that I should be absolutely comfortable on my very respectable salary, I had just been given a pay raise to $86,000. Two years prior I was making $38,000 and was in the exact same spot. What gives?

In February '13 I learned my credit card was charging me 16% interest on my $1,500 credit card debt. I had been under the impression that I was fixed at 9%. I wiped out what little savings I had to pay it off immediately after discovering the credit card company was tacking on ~$240 each month in interest - I was paying $250, well above the minimum payment, but hardly making a dent. This left me with zero savings, and very little in my checking account due to my existing spending habits. I think I had about $80 to my name till pay day.

But that wasn't really the catalyst that made me rethink my finances and become frugal. It was what happened a week later, when I did my taxes, expecting a 1-2K return (which is what I had every year) to help offset some of my expenses. I was miserably surprised to find out that due to some stupid mistakes I made throughout the year (withdrawal of my old company's 401K to pay for crap instead of rolling it over, raises mid year bumping me into a new tax bracket, etc...) I owed $2,200 dollars between state and federal taxes!

How the hell was I going to pay a $2,200 bill in two months when I had 80 dollars to my name and was having a hard time saving a single penny to the point that I rack up credit card debt each month?! I went into a bit of a panic, disbelief, I rechecked my numbers, I called my mother. The best thing I did, however, was start Google searches for "saving lots of money" "cut expenses", etc.. I didn't know what I was doing, but I knew I needed to suddenly come up with more money than I was use to and I needed advice.

This situation was, as I later learned to call it, face-punch worthy. There was no reason that I shouldn't be able to save 2,200 dollars in two months on my income - or already have it. However, a lot of people are in this situation right now and have no clue how to get out of it.

I was lucky that the phone call with my mother yielded 1,000 dollars to help cover my expenses - "I was in that situation once and someone gave me 1,000. I'm paying it forward to you now." I am incredibly grateful to her and it still pains me that I had to take that money. That still left me with another $1,200 to come up with and the desire to never be in this situation again. It was unacceptable.

A lot of the finance sites I went to were worthless. They were of no help at all. Think things like finance.yahoo.com, Forbes and other "financial" news sites. I finally discovered one site that I looked at in passing called MrMoneyMustache - considered a "personal finance blog". I'd be fooling myself if I said it all of a sudden clicked and I knew what I was looking at. It took me quite a bit of reading and looking at other sites before I came back to MrMoneyMustache and spent about an hour reading his "Getting Rich: from Zero to Hero in One Blog Post" article.  It was an astounding amount of information to take in on this second pass but I sat through it and it suddenly clicked. The most important part for me wasn't the tangible things to do such as cutting your cellphone bill, reduce your grocery bill and going out to eat, but rather the philosophy behind it. I'd be doing a disservice if I paraphrased, so this is the exact quote that really helped drive it home:

The bottom line is this: by focusing on happiness itself, you can lead a much better life than those who focus on convenience, luxury, and following the lead of the financially illiterate herd that is the TV-ad-absorbing Middle Class of the United States today (and most of the other rich countries). Happiness comes from many sources, but none of these sources involve car or purse upgrades. No matter what the herd or the TV set tells you, this is the truth. Far from being a social outcast, this new perspective will make you a hero among your friends. This is not a fringe activity anymore – millions of people are fixing their lives these days. And the earlier you can accept it, the sooner you will be rich. - Mr. Money Mustache

Stop here. Go back and reread that quote, it's really important. I'll wait..

Holy shit. It sounds so obvious now, but at the time I was throwing away my money to buy things that really didn't impact my happiness at all. Most of the time, all my spending actually increased my stress and anxiety! Why was I doing this to myself?  I couldn't tackle everything at once, I knew, but I did immediately perform a few changes after reading this post:

  • I created and setup a Mint.com account and pointed it to all my accounts. ALL of them. Car, credit card, savings and checking (notice: no investment accounts at this time).
  • I started tracking my expenses to the penny.
  • I set up a $150/week budget for anything that was not a bill
    • Note - this was critical in my 'first steps' success, but a mistake. I'll cover this below.
  • I dedicated to going out to eat as little as possible. 
  • I started packing lunches for work.
  • I started looking at how to cook at home better.
That's it. That's all I started with. I saved 1,200 in ONE MONTH. Looking at that list, what did I give up? What was so hard? Going out to eat as often and unchecked spending. That's all. Just by observing every expense and setting an arbitrary limit on myself, I went from saving little to nothing, to saving  a LOT of money. I'm not going to say it was all roses, it was very difficult when I first started. I was changing habits, after all. I had to resist giving in to cues that triggered spending routines without thinking about it. I still remember the first day that I didn't spend anything. It was an exciting accomplishment!

When was the last time you went 24 hours without spending anything? No transactions clocked for that day. 

The $150/week budget was a mistake, as I mentioned earlier. There's a reason people setup monthly budgets, not weekly budgets. I noticed that certain expenses fell at different times and completely ruined my budget for the week for important things... like food. Although, this did have an upside. Weekly budget tracking is significantly easier to do than monthly. It's in smaller chunks. However I eventually moved this to a 600/month budget. (same numbers, different way of looking at it). This worked out a lot easier.

This is not to say that I stayed within this budget every week or month. It was very trying. But this got me going. Needless to say I paid my taxes come April and had some money left over. All the while I continued to consume all things frugal, with the optimism of Mr Money Mustache as my go-to source, but I picked up many other sites, joined some online communities, started learning about investing. Fast Forward 12 months later and I have a $34,000 positive net worth, a paid off car, no credit card debt and no liabilities and $24,000 in invested accounts and it's only going to keep growing quickly from here.

There was a lot done in that 12 months to achieve those numbers and more to do still! I'll be going through, in depth, the different things I did through the first year, and continue all the things I plan to do going forward as well.

The Frugal Beard

Hello and welcome to The Frugal Beard! I am a person who has recently smelled the sweet aroma of frugality, financial independence and the (very real) dream of early retirement and have found it quite pleasant. I am not an extremest in any fashion and actually quite new to the whole way of thinking. Everything I've done and plan to do, is within the capacity of every normal human being without being labeled as extreme in any way. Honestly. I am just a normal guy with a beard.

What I plan on sharing here is a rare glimpse into a real live person's mindset and finances. As a public employee, my paycheck is public knowledge and posted online for all to see. I am not shy or worried about offending anyone with my salary. I have found that because of the social stigma and taboo of talking about money (especially details of your own!) that a lot of us have no idea what's going on except what marketing and advertising is feeding us ("BUY, FINANCE, CREDIT"). We have an illusion of what we should be doing with our money and because we can't talk to each other about it many ideas on how to live well within our means and succeed financially is not shared or worse, it's only shared by people who are trying to make money off of us.

We should have no problem talking to our friends about how we are affording our lives, what we are doing to make it better and sharing our successes in the world of finance without bragging or instilling jealousy. I make more than some, and others make more than me. It does not mean we are not facing the same challenges and that someone who makes less cannot offer important advice on how I can manage my money or myself better.

There are people making $250,000+ a year and are broke and there are people who make $40,000-$60,000 a year who are going to retire millionaires before their 40th birthday. Your salary is not nearly as important as what you are doing with it.

And that's where this blog comes in. I want to open communication and discussion about what myself and others are doing with our money to come out ahead. I want to show that, yes, some things may be difficult to change in our daily lives, but I'm not doing anything that is impossible or, looking back, all that difficult at all! But we have to be willing to share our successes and failures and have open and honest discussion about it.

I hope you'll join the ride. It's going to be fun.

- The Frugal Beard