In boxing, each boxer has an ideal fighting weight - the weight that provides the best balance of speed and power. If a boxer is too heavy, he forfeits his speed. If he's too light, he loses power. Finding this ideal weight and maintaining it is the main challenge for most boxers and their handlers. As it turns out, investors need to strike this same type of balance in their finances - particularly when it comes to making a budget.
Tutorial: Budgeting Basics
For example, if you are finding that you are not meeting your financial goals as quickly as you planned, you may need to trim down your expenses. On the other hand, if you set a budget that is too harsh, you will probably lose your motivation to follow it. Read on to learn how to measure your budget's ideal fighting weight. (To find out why you need a budget, see The Beauty Of Budgeting, Ten Tips For Achieving Financial Security and The Seasons Of An Investor's Life.)
Good and Bad Calories
Boxers need calories for their bodies to burn. Even when they are dieting to make their select weight groups, they rarely go below 1,200 calories a day and during training camp, they may consume as many as 6,000 calories. Boxers also pay attention to what they eat - all of their calories are carefully selected and they choose quality foods, like pasta and steak, over burgers and cheesecake.
Similarly, when you're working out your budget, expenses are necessary, but, much like the boxer and his calorie quota, you should watch out for the quality of the expenses you incur - this can make a big difference in how much disposable income and savings you end up with.
The problem with necessary expenses is that people feel that they can go all out when buying something they really need. You need a house. The house needs furniture. The car needs a wax. But these "necessary" expenses quickly become unnecessarily expensive. You need a place to live, true, but if you have a mortgage that is eating 50% of your monthly income, that is definitely cheesecake - and too much of it.
The same is true for new cars. You may need something to transport you back and forth, but buying a new car with all the options is a sure way to reduce your disposable income and ability to save. When you are looking at buying a house or a car, you have to allow room in your budget for emergencies. If you buy the biggest house you can afford, lease a brand new car and tighten your budget to the point where your monthly expenses are leaving you with a zero balance each month, it may only take something small like a faulty water heater to break the bank. And then the credit cards come out, and the slope gets slippery. (To learn more, see Wheels Of A Future Fortune, Build Yourself An Emergency Fund and Take Control Of Your Credit Cards.)
Necessary and unnecessary expenses are sometimes difficult to separate. As we saw above, within each necessary expense, there is a range of reasonable costs that you may be surpassing. There are, however, many common expenses that are more luxuries than necessities.
Whether we know it or not, we are living in a golden age of luxuries. The days of pulling potatoes out of the ground to survive the winter are over for most North Americans, especially for those who can afford the internet connection and computer needed to read this article. This is not, in and of itself, a bad thing, but it does cost you. One area where luxuries often sneak up and bludgeon your monthly budget is through the services you receive.
If someone else is cutting your lawn and cleaning your house, you may be living way outside your ideal budget. Although it is nice to have someone else cut the grass and do the dishes once in a while, using such services on a regular basis is a sure way to reduce your disposable income, savings and, ultimately, the money you have free to invest. The money you bring home to pay for these luxuries has already been earned and taxed. When you spend it on frivolous luxuries, you lengthen the amount of time you have to keep working in order to finance your retirement - is having your carpet vacuumed worth the time you spend working overtime on your 65th birthday? Spending your money on unnecessary items you could live without is a surefire way to put your savings plan on the bench.(Find out how much you need to save to retire in A Pre-Retirement Checkup, Can You Retire In Five Years? and Determining Your Post-Work Income.)
The Best Defense is a Good Offense
It is human nature to want certain luxuries. The goal is not to let those luxuries get out of hand. This doesn't just mean the high-maintenance money holes like second homes, vintage motorbikes and rarely-used boats, but it also includes smaller items like advanced cable packages or expensive internet connections.
For example, suppose that you want the internet to send emails and keep on top of stock prices. You can get different types of internet connections with varying speeds and costs based on the amount of bandwidth you pay for every month. For people who want email and some browsing, the cheapest connection often provides more than enough bandwidth. These same people end up trying out one of the faster connections and then signing on, perhaps even spending more time on the internet than they planned or wanted to in order to justify the purchase. Cable packages work the same way: people go in looking to get the golf channel and come out with the platinum plan. The same is true for most cell phone, camera, computer and other electronic purchases. (To learn which purchases are necessary, see Patience Pays For Consumers.)
If you want to come out on top, be proactive when you absolutely need to purchase a luxury. Put limits on what you will buy before you even step into the store. Nail down what you need, and then decide how much you can afford to spend and still maintain your budget. If possible, set up your budget so that saving up for a luxury is a part of it - rather than charging luxuries to a credit card and having to adjust your budget to pay off the debt later on. You may find that saving for a luxury in advance motivates you to budget more efficiently and keeps you from overspending. (To learn how to pay off old debt, see Digging Out Of Personal Debt, The Indiana Jones Guide to Getting Ahead and Seven Common Financial Mistakes.)
Blood and Sweat in the Gym Saves You in the Ring
It is the roadwork, training and effort that a boxer goes through in the months before a fight that decides how successful he will be in the ring. Likewise, the harder you work on your budget, the easier managing your finances will become. There are sacrifices. Some of them as small as getting a connection a few bytes slower or making your own morning coffee instead of getting it from a shop on your way to work. Some are big, like passing up on the cabin in the mountains or a new car in favor of a used one. It even hurts sometimes.
In boxing, you have the choice of sweating and sacrificing in the gym or getting knocked out in front of everyone when it matters. With your finances, no one is monitoring your training but you, and, if you get knocked out by being too lax with your expenses, there isn't a referee to step in or a bell to ring that will give you time to get back on your feet. It is better to do the hard work of budgeting and cutting down on your expenses on your own terms, rather than when a creditor is twisting your arm.