Dear Dollar, Genus? Species?

Yesterday we talked about the basics of what I call The Babylon Budget.

For a brief review, this is a budget in which you allocate all of your paycheck as follows:

1/10th to savings
2/10th's to debt
7/10th's to living expenses

The tenth of your income going to savings is pretty straight forward. Take your paycheck and divide it by 10. That is the amount you should be putting directly into savings each paycheck.
For example, if you get paid $500 every time you get your paycheck, you should be automatically putting $50 into savings. This is going to help you start to build your personal wealth and we'll talk more about investments at another time.

So now we have two categories left: debt and living expenses. Everyone has lots of different bills, utilities, housing, gas, credit card payments, etc. So how do we decide which expenses to classify as debt and which qualify as living expenses?

My rule of thumb is that if I owe money over a period of more than 2 months, it's considered a debt. Here are a few examples of things I allocate 2/10th's of my income to:

- Credit card payments
- Past due accounts
- Medical bills

What's really lovely about this plan is that once you have eliminated your debt, you now have the 2/10th's of your income that was previously paying off debt just sitting there, burning a hole in your wallet!
Let's use the same example as if we made $500 each pay period. You would be putting $100 toward paying off your debts every time you get paid. As long as you don't rack up any other debt, your credit cards and other debts will be paid off in no time!!

What about the mortgage and the car loan? Aren't those technically debts?

Yes, technically they are. However, since you need a house to live in and a car to get to your job, we classify them as living expenses. Here is a brief list of things that could be considered in the living expenses category:

- Mortgage/rent payment
- Car payment (&insurance)
- Groceries
- Gas for your car
- Utility payments
- A few creature comforts (non-necessities)

Example: If you make $500 each pay period, and you are allocating 7/10th's of your income to living expenses, you would be budgeting to spend $350 on these things each time you are paid.

So to go for a brief overview and example, your Babylon Budget might look like this:

Keep in mind this is just an example. 

As difficult as it may seem to think about, you really can afford things. That is one thing using the Babylon Budget has taught me. It made me realize just how poorly I was managing my own finances by forcing me to break down how much should be going towards everything each month. Better yet, having everything in a list like the one above can make your bills seem a lot less intimidating.

As always, please feel free to contact me with any questions you might have. I am more than happy to answer them!

Cheering for you always!

Dear Dollar, What are the Rules?

Everything in the world is governed by a set of rules.

There are limitations to physics on earth, and a set of rules that tell us what those limits are. The same idea applies to money - there are rules and limitations that govern what money can and cannot do. It's much easier to play a game (and win) if you know the rules before you begin.

In a fantastic book that I would highly recommend you read, these rules are laid out and explained. The book is called, The Richest Man in Babylon and we'll be talking about it a lot when it comes to finances. Top financial companies all over the world use this book as part of their training program for their financial advisers and investors. Get it here if you don't already have a copy.




Here is a brief list of the rules in summation:

1.    Start thy purse to fattening
2.    Control thy expenditures
3.    Make thy gold multiply
4.    Guard thy treasures from loss
5.    Make of thy dwelling a profitable investment
6.    Insure a future income
7.    Increase thy ability to earn

I'll be going a little more in depth with each of these rules, discussing the parables as we move along through the book. Just consider it your own personal money Bible for now.

Yesterday we discussed Budgeting for Lazy People however, the budget I'm currently trying to work with is what I call the Babylon Budget. It's a budget derived from the principles described in this book. Just quickly so you can get an idea of what I'm talking about, it looks kind of like this:

Of All that You Earn,
1/10 is yours to keep (savings)
2/10 goes towards paying down debts
7/10 is for living expenses

So as an example, your budget might look kind of like this:

Well get further into how to properly classify your expenses in the next post.

Always cheering for you!!