The Foolproof Monthly Budget: How to Save Up Money to Buy Investment Properties

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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:

  1. You have an income problem (you don’t make enough money in the first place)
  2. 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 Purchase Real Estate With No (or Low) Money!

One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.

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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.

Related: 3 Smart Ways to Make an Extra $1,000 a Month Through Real Estate Investing

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:

IMG_0360

 

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?

Related: How I Saved $20,000 in 2014 and Used it to Invest in Lifestyle Design

Additional Points

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.

  1. 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.
  2. 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.
  3. 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!

About Author

Erion Shehaj

Erion Shehaj is the founder of Investing Architect. I help successful professionals design and execute a custom Blueprint Real Estate Investing™ strategy so they can achieve financial independence, retire early and gain the freedom to live the life they always wanted. Side effects might include: Early retirement, wealth and piece of mind. Follow on Twitter if that's your thing.

26 Comments

  1. Matt Deibel

    If you are serious about investing in real estate, you need to get rid of that car payment. Sell the car and buy a used Honda Civic or something that is reliable and low maintenance. You can find one for $1000-$2000 cash. If you’ve been paying a car payment for several years, the money leftover after the sale (minus the Civic) will be a great start your investment savings fund, possibly even enough to buy your first property!

  2. Tim Davids

    Rule number 1…pay yourself first. Period.

    Find some way to “hide” money from yourself and put the first dollars you make each month there and don’t touch it.

    As that money grows you’ll be more motivated, have less stress and probably find more ways to dig up extra money.

    If you have to buy a lawn mower and mow lawns on the weekend, do it 🙂

  3. Scott Trench

    Loved this article – this is the approach that I take.

    The Millionaire Next Door makes a similar point – finance is a game of both offense (income generation) and defense (savings rate). To excel, you must do both.

    Increasing your income generation (offense) can be intimidating, stressful, and lead to a WORSE lifestyle in many cases (more hours, more stress, etc). For almost everyone I know that is currently employed, the fastest high success path to strong finance (or getting involved in real estate) is to focus on defense, especially in the short term. The approach you suggest is a great way to get your defense going.

    I am NOT less happy by not having a cable TV plan, not eating out frequently, biking to work, etc. I am BETTER off in terms of my lifestyle, and I have a better financial position on top of that.

    Defense wins championships.

  4. I liked not having a car payment, but was embarrassed about driving people in my car. I had a car from 2000 that was a hand me down and super reliable, no repairs other than routine maintenance, tires, etc. Very cheap and dependable, never let me down. It just got to a point where it was a bit unsightly, so I did get a 2013 at the end of the season for around 22k. Monthly payments on a 5 year loan are $400.

    I like having the new car and no longer feel embarrassed about what I drive, but I hate paying $400 every month and hated paying $1500 in taxes to the tax man and the slightly higher insurance. I will be keeping this car for a while after it is paid off.

    I make nearly 80k per year at my job now and am able to save nearly 4k a month right now due to my current situation of no taxes and decreased expenses, so the car payment may not mean as much to me as to someone making 45k a year and having their pay taxed. But $400 more per month would be much nicer. My advice if you do need a better car, find one slightly used that has already taken a good depreciation hit but with still low miles.

    • Paul Doherty

      “I make nearly 80k per year at my job now and am able to save nearly 4k a month right now due to my current situation of no taxes and decreased expenses”

      I’m curious how this is possible. Your take home is about 5k a month, right? How can you save 4k/month of that? Do you have a free living situation?

      • It’s possible, especially if he is saving the bulk of that into tax-deferred accounts such as a 401-K. I made $60K in 2014 and saved roughly $24,000 or 40% of gross and 50% of take home pay. That is in spite of 15 year mortgage payment of $840 a month. I live a simply carefree life, on that will also afford me the ability to retire comfortably at 45, if not earlier (I am 28 currently).

        • But there are fairly low limits on how much you can put in a tax deferred account. My company’s 401K contrib limit is well under 20K.

        • True there are limits, but in 2014 with a $17,500 401k limit and $5,500 traditional IRA limit, a person could save $5,750 in federal taxes if they are in the 25% bracket, just by maxing out these two. High deducible health plans give you access to an HSA where you can make $3,300 in contributions that are tax deferred and if taken out of a paycheck are not even subject to FICA taxes! In addition, some government, non-profit, education, etc workers have thrift savings plans, 403b, or 457 accounts, in addition to a 401K.

  5. Bob E.

    Lets face it most people don’t have the cash to buy a new car outright, so if you really want a new car here is what my wife and I did.

    1st we paid extra on our car loans until they were all paid off. Then when we bought a new car we would finance it for only 36 months. After the first car was paid off in 36 months we would decide if we really needed another new car. If we did we would finance that for 36 months and not even consider another vehicle until it was paid off.

    One 36 month loan will cost you more then a free and clear car but less then two 5 year loans and you will qualify of lower interest rates.

    • Kenton Gidewall

      Here’s another idea: I love the concept of paying extra to get it paid off early. Then, once paid off, instead of deciding whether you want a new car or not, keep the car and just put the car payment in the bank. If you just paid off a 3 year loan, in another 3 years of saving your car payment you would have enough cash to buy the next car free and clear. A 6 year old car isn’t that old for today’s cars, so keep it even longer and put a portion of that car payment into real estate.

      Somebody mentioned the myth of “people think they will always have a car payment”. That is actually true, since you will always need a “next car” until you are too old to drive. The only question is, do you pay that payment to a finance company with interest, or do you pay it to yourself and earn interest?

      I’ve been following this methodology and currently have 4 paid off cars (4 teenagers with jobs you know 🙂 ) and have 10K in the bank so far for our next one. Some of those cars are pretty old, but still reliable. Planning on doing this for the rest of my life…

  6. Scott Stevens

    Yeah, I have a 1.9% rate and did not pay anything down. I never understood why people make down payments on cars, that never crossed my mind.

    We see our neighbors and friends change their minds all the time and trade cars in before they’re even paid off and so they roll the negative equity into the loan for the next car and so on. We don’t tend to get tired of cars easily and like to have them for a long time to learn all the nuisances with them so we are that much better with maintenance.

    That older car from 2000 was given to my brother and still runs just fine for him.

  7. Vilson Nikollaj

    Best quote ever “You’re not your job. You’re not how much money you have in the bank. You’re not the car you drive. You’re not the contents of your wallet. You’re not your (expletive) khakis. You’re the all-singing, all-dancing crap of the world.” -Tyler Durden, Fight Club

    Be honest with yourself and just do what makes sense for YOU and not anyone else. Once you’re honest with yourself and what your real goals in life are, everything becomes much clearer and life becomes much simpler.

  8. Nancy Wheaton

    Loved reading your article. There are so many people now who value themselves by how big their house is and what kind of car they drive. And it’s the same people who live pay check to pay check. It’s not worth it. I am happy with my payed off car and small house, and my 3 rental properties! I am all about cutting out the junky things I don’t really need (satilite TV/large cell bill/eating out) and saving money for my next rental.

  9. Steve Vaughan

    Thanks for the article, Erion! I like how you took that car payment out over time and put a value on it. How true it is! The concept of saving first and budgeting your expenses into mandatory and discretionary outflows is simple and easy to see. Just a few ‘adjustments’ from normal people have allowed me many freedoms. I brew my own coffee, brown bag my lunches, never go to a department store without a plan and don’t have car payments. I essentially do like Nancy Wheaton, and haven’t had a w-2 job since 2002. Make your choice!

  10. Good article, but I have a hard time applying it directly. I make a decent living (around $100K on paper) but with a SAHW and 3 kids it seems most of that goes to indispensable items.

    The rent isn’t too high – $735 P&I plus ins and tax. But what gets us every month is groceries and medical. We have a few health issues so medical is always there and groceries are high because we have to eat special food for the medical issues. We do give charitably and I consider that indispensable (God comes first). And when you have three kids with fast growing and odd sized feet I would consider some level of clothing indispensable – within reason of course. Our two cell phones cost only $53 a month combined.

    Granted we do have a dog and that costs a little extra for food and vet bills – but again when you have kids, getting rid of the dog to invest money just isn’t a viable option. We do eat out (budget food) usually more than we intend to, but again that usually because the kids keep us so busy on certain days with school/church activities that we don’t have time to prep food at home.

    Does anyone have advice on how to choose between saving/investing and spending on seemingly reasonable and/or necessary items for your kids?

    • I will point out that the two biggest items that affect a typical consumers future wealth is their home purchases and car purchases. Making smart decisions in these two areas can truly make a million dollar difference come retirement.

  11. Nancy Wheaton

    Hi Bill,
    I have a few ideas that maybe able to help. I am a SAHM as well, have two growing boys and a dog. Life stays very busy! A few things you could do to save money is freezer meal. Put a recipe in a large ziplock, throw it in a crockpot and you have dinner made when you come home. Also, if I know we will be out and about on the weekends, I will throw together some sandwiches for us to eat so we don’t have to eat out. It’s so easy to drop $50 on lunch for a family of 4 or 5! Also if grocery bills are high, you could try eating more meatless meals or maybe even couponing. One other tip for clothes and such is to shop off season for the next year. Kids clothes could be expensive so I always buy on sale so I won’t have to buy full price. I have found, when trying to save, every penny counts and it adds up! One last thing, pay yourself first. If you can skim 10% off the top first (or second bc of church) you may not even miss it because it has already been taken out. Best of luck!

  12. Shelly Scruggs

    I am just running across this. What if you have existing expenses such as credit cards, (Home Depot, Lowes, which are now indispensable because you can’t just stop paying them off, but are sending extra payments to pay off quicker. Do you start the budget after creditors are paid off. Or do you list them under discretionary? Also life insurance is indispensable correct?

    • James Patrick

      My wife and I are using the debt snowball approach. We paid off my credit card first, because it has the highest limit and could be used for an emergency in a pinch. Then we prioritized based on interest rate (paid off the highest first) . By mid year we should be debt free (save for student loans)

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