People often write to tell me about their biggest challenge: How to save money to acquire income-producing investment properties and execute our Blueprint Real Estate Investing Strategy. Getting started is their hardest roadblock to overcome. Is that you? Then read on!
Most budgeting methods tell you to look at where your money is going and then to cut the unnecessary expenses. The problem is that most our current expenses “feel” indispensable to us due to stories we have been told by marketers and the stories we tell ourselves.
There are two main reasons why you aren’t able to save money:
- You have an income problem (you don’t make enough money in the first place)
- You have an expense problem (you make enough money, but spend it all instead of saving and investing a portion)
If you were to ask most people, they’d tell you they fall in the first category. “There just isn’t anything left at the end of the month” is a common refrain you hear.
In most cases, the opposite is true.
The truth is, there’s an ongoing war on your spending power. Right now, there are car companies, banks, phone companies, TV providers, restaurants etc. all vying for a slice of your monthly income. They employ powerful marketing to tell you a story that goes something like this: “You have a problem and we can solve that for you for $x per month.”
They’re very effective and good at what they do.
In addition to that there’s something even more insidious: The stories we tell ourselves about who we are, what we’re supposed to drive, where we are supposed to live, how many games we must be able to watch simultaneously and so on.
So that’s pretty much how we arrive at the expenses you incur today. Slicing line items from that list doesn’t work very well because we like to think of ourselves as rational beings who don’t do anything without good reason. Admitting that we have made a mistake or that we’re mindlessly spending money without paying attention isn’t pleasant. Then it’s no wonder that we only make radical changes when we hit a low point and have had enough.
The following budgeting method I’m about to share with you will show you how to save money to acquire income-producing investment properties so you can achieve financial freedom and live the life you want to live.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
A New Method of Budgeting in 5 Simple Steps
Imagine you’re not you for a second. Instead, you’re an accountant and have just taken charge of a business that is your financial situation — with all its income and expenses.
How would you approach it differently?
Most likely, you’d start with your take home income to see what you had to work with. Then you’d take a long hard look at expenses and determine which were vital and which ones were discretionary. Then you’d “spend” the income you made on the most vital expenses first and eliminate the expenses that the income couldn’t support, right?
The budgeting method I’m suggesting follows the same route.
Take a blank sheet of paper and draw a line right down the middle.
On the left side at the very top, write your take home income.
Step 1: Decide on a Savings Rate
What percentage of your income would you like to save each month? You can start small and increase as you see more opportunity. Ten percent is a good number to start with. If your income permits, do 15, 20 or even 30%.
Multiply the savings percentage rate by your take home pay and write that number on the right side at the very top.
Step 2: Determine the Amount You Have to Spend on Expenses
Subtract the number on the left from the one on the right. The result is what you have left to spend on expenses.
Write the “income to cover expenses” number below your take home income.
Step 3: List All the Indispensable Expenses
Put these along with corresponding monthly amounts on the right side. In this category belong expenses you can’t live without: rent/mortgage, food, utilities, gasoline. Add it all up and subtract the total from your “income to cover expenses” figure. The result is what you have left to spend on discretionary expenses: car payment, cell phone, eating out, cable/satellite, shopping, etc.
Step 4: “Spend” the Remaining Amount on the Most Important Discretionary Expenses
Stop when there’s no money left.
Everything that didn’t make the cut… well, it didn’t make the cut. There’s no more money left to spend. Therefore:
Step 5: Eliminate the Discretionary Expenses that Didn’t Make the Cut
Using this method, forces you to priorities, pay attention and execute. Your decision to “keep” a set portion of your income before expenses come into the equation is the most critical step you can take toward saving the capital to invest. If you take care of your expenses first and then save what might be left, you will come to the realization that there’s usually nothing left. Savings come first, expenses follow.
Here’s an example of what your budgeting sheet might end up looking like:
With all this being said, not all expenses are created equal despite the stories we tell ourselves. Let me ask you a question to illustrate my point: If you got laid off tomorrow and had to make due with half your current income, what would you do? What expenses would you cover, and what expenses would you cut? Let me ask you another question: Isn’t financial freedom a better reason to make life changes than an unfortunate circumstance like a layoff?
Now that we’ve gone through the important 5 budgeting steps and shown you how to save money to purchase investment properties, I want to share some additional points with you.
- If after going through the 5 budgeting steps, ALL your discretionary expenses are included, your savings rate may be too low. I would encourage you to take another look at those discretionary expenses to determine if that money might be better saved than spent. This is especially true if you want to be an investor sooner rather than later.
- If your take home income isn’t sufficient to cover your indispensable expenses from Step 3, there are two possibilities: 1) Either you have an income problem or 2) your mortgage/rent is out of control. The first case is harder to solve, and the only solution is to generate extra income through a better paying job or additional jobs. The second means you’re house-poor, and your savings capacity will not change until that situation changes.
- I know your eyebrow probably went up a little when I included the car payment in the discretionary column, especially if you live in a state where you can’t get around without I car, like I do. However, the reason why that item is categorized as such is because while a car is probably indispensable, a car payment is not. Sometimes it does come down to a choice between the “Ultimate Driving Machine” and millions of dollars of wealth. Don’t believe me? Let’s do a little math. The average used car payment in the US last year was $500 per month. Couple that with the fact that most people believe “you’ll always have a car payment” and roll from car loan to car loan in perpetuity. That $500 monthly payment invested for 20 years at 8% per year is worth $294,000. Over 40 years, it’s $1.75M! I don’t know about you, but I’d be willing to drive a simpler car if it puts almost $2M in my retirement account in 40 years.
Now it’s your turn to weigh in: What’s your budgeting strategy? What advice would you give to someone who wants to save up money to invest?
Leave a comment, and let’s talk!