OK NOW WE RE SERIOUS. 5 ACTION ITEMS TO PREPARE YOU TO INVEST. TheMSBCheatSheet.com

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1 OK NOW WE RE SERIOUS. 5 ACTION ITEMS TO PREPARE YOU TO INVEST TheMSBCheatSheet.com

2 The purpose of these five action items is to help you understand where you re spending money. This is not some lame how to set a budget checklist. We believe if you understand where your money is going, you can create your own budget if you want. You know the main MSB Cheat Sheeter (Kathryn) quit her job in finance. She walked away from a lot of dough. The first thing she did before quitting was she made a list of her biggest expenses and decided what had to stay (highlights for hair and beer duh) and what could go. That s what we re focusing on here with you: knowing where you re spending your money so you can decide what should stay and what can go so you can ideally free up a little money to start investing. Even if it s just $100 bucks a month. Getting a strategy is the most imporant part of all of this. Your goal is to save 15% - 20% of your after tax monthly income. This 15% - 20% in monthly after tax income includes money in your retirement savings account and your non-retirement investing savings account. We talked about those in Simple Concepts You Need To Know About Saving And Investing. Ok let s do this! TheMSBCheatSheet.com 2

3 Figure out where you re spending your money. Create two columns on a piece of paper or spreadsheet. Label one column fixed monthly expenses and label one column variable monthly expenses. Put every dime that came out of your pocket or bank account in the last month in one of those columns. Fixed would be your rent or mortgage payment, health insurance, car insurance, phone bill, gas bill etc. Variable would be money you paid to go see a concert. This is not meant to make you feel bad, it is so you can understand where your money is going. Do you know how much you re saving vs. spending each month? Saving includes money in your retirement account or money that you re not spending. The only way to figure out how to divide up your money you have to invest (across stock and bond funds) is to know how much money you have to invest! This is not a budget. This is knowing where your money is going each month. This is going to take a little time. But knowing your fixed and variable costs each month will be very helpful in figuring out: if you re saving enough and how to increase your savings. Figure out how much you re spending each month. Total everything in each column. Then add the two columns together. Now you know how much you re spending each month on your must haves (fixed costs) and room to negotiate (variable costs). This is key for action item #5. You might have $3,500 in your fixed column and you might have $2,000 in your variable column. So your total monthly fixed and variable expenses would be $5,500 in expenses each month. TheMSBCheatSheet.com 3

4 Figure out how much you re making each month after taxes, but before any retirement contributions (for example, money you re contributing to a company 401k). If you get a paycheck, go find the most recent pay stub that came with it. That s the thing you usually throw in the garbage. Look at your gross pay. That is the amount you make each paycheck before you pay taxes or other. Let s say that s $4,000. You will see a line that says checking if you have your paycheck automatically deposited to your checking account each month. Let s say that amount says $3,000. The $3,000 is your after tax and other take home pay. You re doing this for two reasons: we want to know how much your take home pay is each month. If we know that, we can revisit how much money you re spending each month (in action item #2) relative to how much money you are bringing home. What we want to know, is, are are you spending more or less than you make (getting in debt)? Are you spending less than you make and you can use that money to invest? Or, are you spending exactly what you re bringing home and so maybe you can tweak a few of our variable costs to free up some money to start saving (i.e. investing)? Ok, that was more like five reasons. The other main reason is because if you are saving money in a 401k, this should be noted. Our ultimate goal is to save 15% - 20% of our after tax income each month and money you are saving in your 401k counts! If you re paid 2x per month, your take home pay every month is $6,000. This is after you pay taxes. Now, if you contribute to a 401k that is offered by your employer, there is a line on your pay stub that says 401k with a dollar amount next to it. Your take home pay deduced that amount as well you will notice. Take note of the amount going to your 401k. So if your take home pay on each paycheck is $3,000 and you see a line item that says 401k with *$200 next to it, put that $200 in your fixed cost column above and re-total your fixed cost column to reflect that. Compare our monthly take home pay to total fixed and variable monthly costs. Using the numbers above and not adding back in the monthly amount to fixed costs that you are saving in your 401k: you are spending $5,500 each month and bringing home $6,000 each month. This leaves you with $500 each month you can save and invest. Now you know four things: 1) how much you spend on must-have items each month (fixed costs). 2) how much you spend on variable things. 3) how much money you bring home in your pocket each month. 4) how much you re over/under spending each month relative to what you re bringing home. Most of us spend very close to what we bring home in income each month with little left over, if any. The next action item shows you how to increase the little that s left over so you can save (invest) it. TheMSBCheatSheet.com 4

5 Review what you are spending on fixed and variable costs each month. Are there items that can adjusted down to free up some money to save and invest? Look at all your items in your fixed column. Are there any items here that you could change to reduce your monthly costs? We often throw money at things every month that we don t really care about. This is not meant to get you to cut out things you enjoy and make your life miserable. It is meant to make you aware of things you re spending money on that you care less about and could push to an investing savings account. This is typically hard to do which is why it s better to focus on the variable expenses column. Don t nickel and dime yourself on lattes. Think big wins. Look for big things you re spending money on every month that are taking a bite out of your money that you might be willing to cut back on. Conclusion: What just happened? You have done the above five action items. You now know: 1) your fixed costs each month 2) your variable costs each month for you to scrutinize and 3) how much money is getting deducted from your paycheck each time for your 401k. Congratulations you know now where your money is going each month. You re ahead of 99% of the population already. This puts you in a great situation to make tweaks to your spending habits if necessary and redirect money to your savings that you can invest and grow. * Ideally you re saving 15% - 20% of your after tax monthly income. How do we figure out what % you are already saving in your 401k? Using the numbers above, if $400 is getting directed to your 401k each month (say you re paid 2x per month and $200 is coming out of each paycheck), and your monthly take home pay is $6,000, you would add back in the $400 to see what your take-home pay is before your retirement money is deduced from your paycheck. This amount is after tax but before you deduct money to your 401k. So in this case, your after tax but before 401k take home would be $6,400 per month. If you are saving $400 each month in your 401k and your total after tax take home pay is $6400, 400/$6400 = 6%. Remember our goal is to save 15% - 20% after tax each month. So we need to try save 2x that each month at a minimum. 2 Head back over to TheMSBCheatSheet.com TheMSBCheatSheet.com 5