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I recently bought a copy of The Automatic Millionaire. It was a good read, and much to my surprise, wasn’t full of claims to make you a millionaire overnight.
In fact, it really wasn’t even about “new” information. Everyone “knows” you should put money in your retirement account. Everyone knows that the power of compounding is good. And everyone knows that they should be doing more to save, but it’s just so hard to make ends meet as is.

This book has a few main points. And because I’m just perverse I’m going to cover them backwards. (Actually, I think it’ll make more sense that way.)

You know how when we were in college, and you could try to work on a large project, and it would sort of expand to fill all the available time you had? If it’s due in two weeks, either you wait until the last possible minute to start on it, or if you are amazing (and self-disciplined enough) to start on it early, it often takes that full two weeks. Well spending is kinda like that, too. And our paychecks are even MORE like that.

I started working at Network Synthesis making a certain amount of money. Fairly quickly, I was able to get a raise. You’d think that would mean that I’d be saving tons more money. Nope. In fact, I noticed that my needs got MORE expensive.

I said “hey, I just got a raise. I’ll buy a reciever and setup a home theatre.” Boom. $500+ spent.

And then I said “hey, I’ve always wanted a projector, and getting a TV into my 2nd story apartment would be such a pain…” Boom. $300 spent (and only that little because my roommate found an awesome deal on eBay).

When you start making more money, your needs suddenly seem to increase as well. Call this idea the “Proportionality of Your Paycheck and Your Needs”.
One of the most noticable ways that this happens is what the author calls your Latte Factor. Every day “most” people (in the author’s opinion) unnecessarily spend $5-15. Often, this is in the form of a morning latte and donut (thus the name), or going out to eat every day. [For those of you who, like me, don't drink coffee, try cancelling something you don't really need.]

So, by changing your habits a bit (bring food to work, make coffee at work, or even giving up coffee), you can save $5-15/day. That’s $25-$75 / week, or $1,250-$3,750/year (@ 50 weeks/year). Like I said, you can save a rather impressive amount of money.
Moving on, there’s an interesting corollary to the “Proportionality of Your Paycheck and Your Needs”. Suppose you lost your job, and got another one at a still reasonable (but much smaller) salary. Yes, it would suck, but you’d survive, right?

So here’s a thought: what would happen if you just pretended to have less money to spend? You probably know (because that’s basically what budgeting is): it’d fail. You’d know the money was there! So you’d spend it anyway.
But here’s the other big part of the book: suppose you were able to trick yourself into NOT knowing the money was there? Specifically, if you set it up so that a portion of your paycheck was pulled out automatically without your having to see it, or even think about it.

Then you wouldn’t be thinking about how much money you “really” had. You’d spend your pay, just like usual, while a small chunk of it (in another account) was invested and grew.

To summarize:

1. Your spending grows (and conversly, shrinks) in relation to your paycheck.
2. Setup a system to automatically send some of your paycheck into an investment or savings account.
3. Your spending will shrink slightly, but you’ll get used to it quickly. And if you eliminate something (hello Latte Factor!) you’ll notice the change even less.
4. You’ll end up with some nice $ being saved without your having to worry, or even to do anything.

Simple? Heck yes. Easy? Not at all, at first. But, try tracking your spending for a week, and see how much extra stuff you buy that you don’t really need. It’ll surprise you.

Next time I’ll talk about what I’ve gone through so far, setting up an automated system like this.

One of the most basic things to start doing is tracking your expenses (I just download statements from my credit card, checking account, and savings account, and put them into Excel.)

While doing that, I went and looked for a budget. But budgets suck! You never follow them for very long because they feel so constraining and they’re annoying, too. Fortunately, I ran across the 60% solution, which I use as a reverse budget.

By a reverse budget, I mean that after every month, I go over my expenses (like I said, big spreadsheet in Excel) and categorize everything. Then I look and see if my percentages fit the 60% solution, and if so, I’m golden. If not, I figure out what areas I’m spending more in, and work on doing better for the new month.

So, by now you’re wondering what exactly the 60% solution is (assuming you haven’t followed the link to it). Basically, you assign 60% of your monthly income to the things you must pay (taxes, rent/mortgage, insurance, utilities, etc). The remaining 40% is divided into 4 categories of 10%:

1. “Irregular” Expenses (unexpected, usually critical, very irregular stuff: accidents, repairs, major medical, etc. Since they won’t repeat, I also lump big entertainment and household purchases into this category.)
2. Paying Down Debt / Long Term Savings (If you’ve got debt, you should be paying way more than the minimum payments, but I’ll talk about that later.)
3. Retirement (yes, really!)
4. Regular Fun Money (Amazing! I’d never seen a “budget”-ish thing that said it was Ok to still have fun!)

The first month I did it, the previous month was already pretty close to these numbers. Talk about positive feedback; I didn’t even know about the system during that month, and I was almost following it!

It’s not only helped me to keep track of where I’m spending too much money, but it’s also made me feel a lot more in control. And that’s a good feeling to have.

Welcome, one and all. I have started this blog because I like helping people, and have noticed that a lot of my friends aren’t sure what to do about their finances. Worse, a lot of people (myself included) have bad habits that are wasting money.

Since I graduated from college, I’ve been reading a lot of self-improvement books, articles, and blogs (current favorites: 43 Folders and Steve Pavlina.com). I may post a list at some point, but I think it’s more helpful to just immerse yourself in as many different sources as you can.

If you’re curious about exactly what I’ve been reading, you can check out my del.icio.us account (start with toread and read).

So far I’ve run across many interesting ideas, and I’ve implemented a few of them. As I continue my voracious reading, I’ll blog about the ideas I find, and my successes (or failures) implementing them. I’m going to try to post a minimum of once a week; if I have spare time I’ll post more.
In my next entry, I’ll talk about something I read early on, the 60% solution, and later I’ll discuss a book I bought last week, The Automatic Millionaire (yeah, sounds lame, but it actually wasn’t that bad!).