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investing fundamental #3 – The Leaky Bucket

{ 5 comments }

This one is actually about budgeting.
Everybody knows the bottom line is to spend less than you make, but why does the average family owe so much money?

Net worth is a leaky bucket problem (my geeky side showing here.) Your net worth is how much water is in the bucket, the income is filling the bucket, and the expenditure is the leak going out.

If you don’t have a budget sheet, you need to make one.  It will show you the incoming and outgoing rate.  The goal is to have a net positive where your income is greater than your expenditure.  When this goal is achieved, your net worth will grow over time. For our purpose here, the bucket size is infinite so we don’t have to worry about overflow.  Month to month variation is inevitable, but year over year the spending needs to be consistently smaller than the income .

There are two ways to solve this problem. One is to grow your income and the other is to reduce your expenditures. Everybody will have to deal with their own unique situation. Most of us knows how to live with small expenditures.  Think back to before your first regular paycheck, your spending is very small.  Over time, the spending grows and grows like a six-headed monster.  The first step to grow your net worth is to reduce spending. Hopefully, your income also grows with time, but if your spending is not under control your net worth will never grow.

I have done a budget sheet many times, but I do not review it on a regular basis.  I only update my budget sheet when there is a big change in the budget, such as buying a car. I update the budget and make sure our income will comfortably cover the  expenditure.

retireby40’s personal strategy

– make a budget spreadsheet

– first get your expenditure under control and then grow your net worth. Spend less than you make – you know how to do this, just do it.

– You can also try my Pool Budgeting solution if you already have a handle on basic budgeting.

There are many many sites to help you budget, I’ll find some and add them below.

Personal Capital is an awesome site to help you budget and keep track of your investments.

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{ 5 comments… add one }
  • aloysa October 14, 2010, 8:28 am

    I created a budget spreadsheet years ago when I realized that I do not know where our $ are going. It was the best thing that happened. Budgets are everything!

    • retirebyforty October 14, 2010, 3:13 pm

      I think everyone has that problem of not knowing where $ are going. Credit card actually help track spending, but then we spend more money. So now we give ourselves $100 cash allowance each week and use the credit card for only a few things. Seems to be working ok for now.

  • Lisa @ Cents To Save October 16, 2010, 8:32 am

    I am not that great with spreadsheets, but I love plain old pencil and paper… and an eraser. Always modifying and changing it.

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