Fighting for Financial Balance - Part 2
Fighting For Financial Balance - Part 2
In the last post, we looked at Step 1 and Step 2 of Fighting for Financial Balance (Gathering the Honesty and Courage to Start, and Starting to Keep Track). In this post we look at Money In and Money Out. Everyone agrees that having more money coming than is going out is essential for financial balance. But if it were that easy, we'd all be financially stable and all the bankruptcy lawyers would be out of work. But that's not the case, and it's not that easy. This exercise is about where you're at now and where you'll be in the future. It's worth the hard work to do both of these exercises!
Step 3 - Money In - A Sobering Dash of Reality
How much income is enough?
Look at your household income. How much are you taking home every month from your work? After you've paid taxes, health insurance, retirement, work permits, documentation and any other non-optional deductions, what do you get to work with? And is that number going to go up or down in the upcoming year or two?
Be brutally honest and be sure to add a healthy dose of future-oriented realism. We only get to control a part of this income equation (your efforts). You can be an excellent salesman, but if your industry is on a decline globally, your outlook isn't very good. If you think your salary is going to increase in the near future, you should have a good reason why that is the case.
Cost of living increases often don't keep pace with the true price of life, especially when you live overseas and currency value fluctuates and government decisions can dramatically impact the cost of life overnight. Throw in other variables specific to you, such as having kids, who should have their own inflation and cost of living increase tables (how is it possible that my son drinks his body weight in milk every day? Is this physically possible??).
The currency that you're being paid in can mitigate some of these problems, or expose you to new ones. Being paid in U.S. dollars or Euros can give you some independence from the fluctuations of the local economy.
Whatever you do, don't bank on "hopefully," and don't assume that your world tomorrow is going to be the same as it is today. Change is one of the few constants in life, and we should plan accordingly.
You also need to ask yourself if your income is "enough." I hesitate to ask this question, because of potential misunderstanding. I'm not asking is your income what you want it to be, that's an easy answer - of course not! We'd all like our income to be a little bit more. But is it enough? If it's not, you've got to consider making some changes - maybe switch jobs, maybe start some side work, maybe make a move into a higher paying position; there are always options, but they almost always require initiative, risk and sacrifice on our part.
But again, ask yourself, is this salary truly enough? And if it is not, then what can I do about that? This is too big a topic to dig into inside of this post, but it is worth considering what steps would you take in order to increase your household income. It might be finding a new position in a new country, or a new position in the same area you currently live in. It might be starting a side job, or doing some free-lance work. It might be doing some bartering and trading your time and expertise to reduce some of your expenses. Thinking outside the box is uncomfortable, and can be awkward initially, especially if you're an expat and you're unsure of where to start. But consider your skill set (for many expats, teaching English can be a nice side income, whether its tutoring, teaching a class or doing online editing, also consider consulting and remote work, but again that is a conversation for another time) and consider how you might monetize that skill set. The opportunities are there, we just have to be proactive and persistent in finding them, and be very aware of the trade-offs we are making in starting that new work.
Step 4 - Money Out - Organizing our Expenses
Start by looking at your planned expenses.
We tend to have expenses that reoccur like clockwork. Our electric bill. Our rent payment. Our internet bill. School bills. Our cellphone bill. We know what they are, and we can't really avoid them without seriously disrupting our lives. Take a look at them and add up how much you pay for monthly bills. Make sure you capture as many as possible. We're not making changes to our spending behavior yet, we're just mapping out where our expenses are. But during this process a funny thing starts to happen - we begin to really notice where our money is going. And we start to realize that we're paying for services we don't use anymore, don't like anymore or we're overpaying for services. This is a great opportunity to take a roll call of all the monthly expenses we are paying, and decide if we really need them. These expenses are usually pretty stable, and we don't expect them to fluctuate dramatically from year to year.
Seizing Opportunities for Financial Wins
One thing to keep in mind is that while these expenses are stable, there are occasionally opportunities windows that open up that can affect your spending. Take for example renewing a rental contract, deciding where you live can dramatically affect a variety of other living expenses, and can impact your financial situation dramatically. Moving from a 5-bedroom house to a 3-bedroom house can help lower your living expenses, but it can also cause other trade-offs. The key is to make these limited window decisions well before the change window presents itself so you have the time to consider all the impacts of any change.
Expenses Unique to Living Abroad
Some expenses are a little harder to nail down, especially when living overseas. Visa costs can vary dramatically from country to country, and different employers deal with this differently. From some expats, visa costs aren't considered at all because they are absorbed by the employer, for others, they are paying the whole bill themselves. Processing fees, taxes, agent fees, registration fees, reporting fees and more can all add up quickly, so be sure to have an estimate of how much you think you'll pay each year for visa expenses.
Infrequent and Inconsistent Expenses
Some expenses aren't consistent like an electric bill, but you will want to be sure to gather those expenses as well. Semi-annual bills and replacement expenses (such as replacing a cell phone) aren't constant, but they are real. Vehicle maintenance costs are a key factor to consider. Gas and insurance costs are usually stable, but maintenance costs, tire replacement costs, and the eventual vehicle replacement costs aren't stable, but when they hit you are either well positions (having the cash on hand) or you're not (and have to pay a harsh financial penalty in the form of high-interest vehicle loans).
Factoring those less predictable expenses into your money out planning is more speculative, but it's still important to capture, especially in countries that function on a cash basis. For instance, my rental requires at least two years of rent to be paid before I can move into the house. Knowing when that expenses will hit becomes essential, as does having the discipline to set aside funds today for that impending rent payment or school fee.
The key here is to be as thorough as possible. Reviewing the previous months' worth of credit card expenses, direct debits and service subscriptions is a good place to start, however be sure to search out reoccurring expenses that you don’t plan on, such as banking fees incurred for international transfers. Searching your email is another good place to find reoccurring bills for subscription services.
Some spending falls into categories rather than discrete monthly bills. Groceries, eating out, clothing, entertainment, dates (including babysitting), workout clothing, house supplies are all examples of this kind of spending. While I may eat out at different restaurants each week, generally I'm practicing the same activity, I'm just varying the location. I don't want try to itemize my shampoo expense for the month, but I do want to know how much I'm spending on toiletries in total. These categories are usually pretty inaccurate, but they can provide a good sense of approximately how much you're spending. One suggestion, separate your food bills from your house supplies, even if they're coming from the same store. You don't want to stop buying vegetables because you need more toilet paper.
This categorical spending is important because you have a lot of control here. Choosing where you will invest and where you will reduce will become really important in the process of establishing financial balance.
Assigning Value to your expenses
As you go through these expenses, it is helpful to identify any expenses that are:
Necessary, but not reducible
Necessary, but might be able to be reduced in the future (and if so, when and how?)
Unnecessary, but provide significant value either now or the future
Unnecessary, but really nice to have
Unnecessary, but could be replaced by a lower-cost alternative
Just unnecessary, and need to be eliminated
No one can assign these categories but you. To one person, a gym membership is wasted money, but to another the gym is a investment that helps them mind, body and spirit, provides social contact, stress release and contributes to a healthy self-image. It can also be a much-needed escape from the day-to-day chaos and discomfort of being in a foreign culture. Its the same bill, but two very different values depending on how it's used. That's why its important for you to be honest with yourself about how you're spending you money, it reflects both your values and your appetites. Some appetites are good and healthy, and when you're balanced in life, they tend to take their proper places. However, when we're out of balance, appetites can become tyrannical, resulting in overspending, over-indulgence or total neglect, depending on your personality and response to stress and difficulty. Be honest about where you're at today, but also look to where you want to be. Howe we spend our money is deeply connected to our identity, hopes, fear and insecurities.
Figuring out where you're spending your money is probably the second most difficult step of fighting for financial balance (the first being the initial decision to undertake this endeavor!) and I think it's the part where most people give up. They decide that it is just to difficult to figure out where their money is going, but stick with it - it is really rewarding to find a bill that you can reduce, which is basically putting money in your own pocket instead of putting it in someone else's pocket! The key is to take your time and slowly go through this process. Start a document to keep track of what you're finding, use your calendar to set a reminder of when your next opportunity to renegotiate / reduce / cancel a reoccurring expense will present itself, or talk with someone you feel comfortable about it (whether it is a spouse, close friend, co-worker) and most likely you'll find people who are more confuse than you about their money situation, but sharing your success and new found opportunities (which is just code for mess-ups that you're now fixing) can provide the encouragement to keep on the path to financial balance!
To be continued...