The Art of Being Broke

As I mentioned in a previous post, I often find myself running out of spending cash for a couple of days a month. The really strange thing is I don’t notice it most of the time. Why? I plan for it.

During those few days of being broke I plan activities that cost nothing and by filling up my time during that period I don’t even notice the days that I’m broke.

Some of my favorite activities include:

– Go the library and check out a few books and a couple of DVD’s.
– Clean the house/yard or do some other chores I’ve been avoiding
– Go through the house and write up the monthly grocery list and then go shopping (the food budget is separate from my spending cash)
– Write (either a blog entry, short story or get back to that novel idea)
– Dig into your home DVD collection and watch an old favorite
– Visit family/friends and drink their coffee (it even cheaper than drinking your own coffee)

So next time your broke for a day or two, I suggest looking at it as a challenge. You might even find you enjoy not spending money.

Know Thy Self and Index Investing

Over at the Canadian Capitalist, he has an interesting post on index investing and investor average rate of return. The general idea is that it is hard to beat an index (TSX, S&P 500, etc) by choosing your own stocks. The main reason for this is the index cheats. It picks up the winning stocks and dumps the sinking stones for you.

Early this year I changed my retirement mutal funds over to all index funds because I realized that I’m not that good at doing my own research yet. To cover myself from being tied to just one index I have the following breakdown:

25% Bond Index
25% TSX Index
25% S&P500 Index
25% International Index

This is the high growth version of the Couch Potato portfolio which I read about in MoneySense magazine. Overall I’m very happy with the results to date. Even with the big income trust bomb I’m still ahead with about 8 months into the new portfolio.

I think the major thing about doing a system like this is being honest with yourself. How much time can I put towards investing and can I really beat the index? If you don’t know or you know you can’t beat the index I would suggest using index funds.

30-30-40 Budgeting

Ok, budgeting does have bad reputation. Who really likes tracking every little cent you spend? So over the years I have tried a few different things, but I found a nice rule of thumb to see if you are on track: 30-30-40.

Basically it goes like this you should be spending about 30% of net (take home) pay on housing, 30% towards retirement savings and debt repayment, and the remaining 40% all other living expenses.

That first 30% toward housing should be used to pay off your mortgage. If you don’t own your house I suggest looking for one. After taxes the next biggest monthly expenditure for most people is their housing cost. Once you remove that monthly cost you are a lot closer to retiring early.

The next 30% for savings/debt payment may seem like a lot, but you are most likely a lot closer to this level than you think. For example, if your net pay is $3700/month and you have the following monthly payments: Car $300, RRSP Savings $100, Spouse RRSP Savings $100, Student Loans $610, you would be at the 30% level. The real trick with this 30% is to take any extra cash you get and pay down those debts faster to leave more of the 30% for savings.

So after you’ve been responsible enough with the first 60% of your net income, the last 40% becomes fairly easy: you spend it. The only real trick I found for this amount is to limit those little daily purchases on things your really don’t care about (coffee or a lunch out at work). An easy way to limit these is to just use cash (No credit cards or debit cards). That way when the cash is gone you stop spending. My wife had the idea to take cash out twice a month. That way you typically are cashless for a few days in the middle and the end of the month.

Now isn’t that a relatively painless way to budget?

A blog about early retirement and happiness