EXPENSE ACCRUALS

What are expense accruals? Accruals are nothing more than money that you set aside for future expenses. They are funds created for substantial expenses that do not come up each month, but will eventually have to be paid at some future point. You must make allowances for these expenses. You must create ‘cookie jars’ for their eventual payment. If you do not accrue money for these expenses, you are deluding yourself into assuming you’re making more money than you really are and you will not have the funds available when the time comes for their payment.

Accruals are the expense categories that most people forget about. These are the clandestine expenses that creep up behind you and take a bite out of your pocketbook. They are very real, but overlooked by many because they don’t introduce themselves to your checkbook every month. Accruals just mount and mount every month until they ‘pop up’ one day and have to be paid, shocking their unsuspecting owners. Don’t be broad sided. Save the money necessary for these categories and their payment will just become routine, rather than a hardship.

You don’t literally have to set up different money accounts. There is no need to open a dozen different bank accounts or dig holes in your backyard to bury cookie jars stuffed with coins of the realm. Just summarize your checking and savings accounts. Then deduct the amounts in your various ‘funds’ from your cash accounts. The net amount left is your actual money that is available for spending. Once the money has been set-aside in your ‘funds’, it doesn’t exist anymore. It’s been theoretically spent. Then, when it comes time to actually pay out the money it will be there ready and waiting. There is no stressing over where the money is going to come from. Surprisingly, paying bills or buying that large ticket items will even become fun, because the money has already been spent on paper and is just sitting there waiting for you to write the check.

Auto Insurance: $100 Typically paid semi-annually.

Basis: Young and thus expensive. At your age, many of your friends (not you, of course) drive like idiots. The highest proportion of accidents occur in your age group, thus the rates are very high, so the insurance company lumps all of you in the ‘idiot’ category. Varies by type of vehicle, coverage, location, gender and driving record. The right vehicle, a responsible driving record and astute shopping can save you a great deal of money.

If you want to save money in this category, check with your insurance agent before, you purchase a vehicle for an estimate of the cost. The type of vehicle, especially when you’re in the ‘young and stupid ‘ insurance age classification, can make an enormous difference in your rates. Basic coverage for collision, liability and comprehensive coverage are all that you require. Other coverage, such as personal injury protection and uninsured motorist, in my opinion, only duplicate other coverage you should have and are a waste of money. Keep your deductible as high as you can afford to lower the premiums further. The money you save will end up in your wallet, if a claim is not filed. Besides, minor claims should not be filed if you want to keep your long-term rates low.

Auto Repairs: $75

Basis: Varies by age of vehicle, type of vehicle, personal maintenance ability and care of vehicle.

Researching and buying the right vehicle with a good consumer report evaluation will keep your repairs low. Checking the history of a used vehicle for accidents and flood damage will also minimize your chances of picking a lemon. There are huge differences from one vehicle to another.

If you’re the ‘do it yourself’ type you can save a lot of money. If you’re in the ‘I haven’t got a clue what’s under the hood’ category, then it will be very important

to find a honest and competent repair facility. They can perform preventative maintenance to maximize the life of your vehicle and avoid major repairs.

Auto Replacement or Auto Loan Payment: $100

Basis: You have a choice here. You can either borrow money for your vehicle and have a monthly payment or you can save up for a vehicle. Either way, you should have a monthly payment. You will either pay the finance company with interest or pay yourself.

The value of the old vehicle will go down in value each month, thus decreasing its’ value at trade in time. You must set aside money for your vehicle’s replacement. Even if you own your vehicle outright, it WILL wear out and need replacement. This amount will vary, depending upon whether you purchase with a loan or choose the smarter alternative and pay cash for what you can really afford. It will also vary upon the type of car, how many miles you drive, how often you trade it in and how it is maintained.

Our example assumes a $5,000 pre-owned vehicle, replaced after 5 years and driven average miles. Huge variances can exist here depending upon your individual circumstances. Poor judgment in purchasing or maintaining your vehicle could double or triple this number.

Health Costs: $30

Basis: Health expenses you pay under your health insurance deductible. Assumption is that you are young and healthy. Health club dues are not included.

To a large degree, you control your health. Eat properly, exercise and find a means to release stress and your healthcare costs will be a fraction of what others pay. Contrary to common belief, most illnesses and diseases, are not randomly bestowed upon some unsuspecting sole. They are a direct result of a poor diet, lack of exercise and the effects of stress on your life. A diet predominated by fresh fruits and vegetables, a daily exercise routine and regular time for contemplation or meditation will not only keep your health costs low, but will also bring you happiness and contentment and the clarity of thought to make the right decisions.

When it comes time to plan a family, you’ll need to save several thousand dollars for pre-natal care, the hospital delivery and doctors care of the newborn. You will need to set aside a good portion of your budget, making sacrifices in other areas.

Clothing: $50

Basis: This example assumes modest tastes. Can vary greatly by profession, gender, location and most importantly buying habits. Purchasing on sale and at end of season closeouts can keep this figure to a reasonable level. Clothing has a tremendous mark up and can be purchased for as little as 15% or 20% on the dollar if you have the patience to find those routine bargain racks and to wait for end of season sale clearances. Save your money for these special sales and you’ll have a

huge inventory of clothing for a mere pittance. You can walk out of the store with arm loads of clothes for what you would have normally paid for one or two items.

Furniture & Equipment: $50

Basis: $100/2 roommates. Purchase and replacement of furniture and equipment for your apartment or home. When you are first starting out you’ll obviously have more to buy. However, you can usually get by with hand-me-downs and pre-owned items until your income justifies upgrading them. Even if you have ‘everything,’ items will eventually wear out, become damaged or go out of style, necessitating replacement.

Furniture may include living, dining, bedroom, kitchen and lawn furnishings.

Equipment will vary depending upon your choice of an apartment or home, but may include computers, telephones, stereos, televisions, kitchenware, sports equipment, washer & dryer, stove, refrigerator, air conditioning and heating devices, lawn care, and repair tools. Some items are essential. Others are elective.

Purchasing furniture and equipment should be given much consideration. These are assets that go down in value, so, until you’re ‘established’, keep the cost in this area to a minimum by shopping extensively for sales, closeouts and the pre-owned market.

Gifts: $30

Basis: $360 per year for Christmas, Easter, Valentines Day, birthdays, anniversaries and other special occasions.

Vacations: $25

Basis: You can’t afford to take much of a vacation at this income level. Think hiking in public parks, camping, libraries, museums, movie rentals, sorting out your old photo albums or grouting your tile. Better yet just take long weekends or forgo the vacation and take the pay.

Financial Freedom Money

This is the most important item on your personal financial statement. This is YOUR money. This is the item you will want to feed firstly, regularly and heartily.

Short term, this could also be called your ‘Take This Job And _____ It Money’. Until you have accumulated a reserve to fall back on and to invest, you’re living pretty much at the mercy of your employer. There are some fairly unscrupulous people out there who I would not want to depend upon for my next meal. Besides, who likes to grovel? As you accumulate more and more capital, you’ll have more and more leverage and staying power in your negotiations with your employer. Your job will be much more pleasurable when you know you don’t ‘have to’ work.

In addition, this will serve as your ‘rainy day fund’ for those large expenses that you have not accrued (saved) enough for. For example, you save for auto maintenance in a special fund, but one day your entire transmission decides to part with the rest of the car and you need help NOW. Your job, your investments and most importantly, your seriously cute date on Saturday night depend on it and walking is way uncool. Or, in your infinite youthful wisdom, you decide that your little red sports car is faster than that big clunky freight train. Surprisingly, it isn’t and you have to pay a medical staff to return all your body parts to their proper positions.

Long term, your FFM money will get you out of the ‘rat race’ and into a comfortable early retirement. How early? Well that depends upon you. The more emphasis you place on this category, the faster you’ll become your own master.

Unless you want to be enslaved 9-5 everyday until your social security kicks in, pay attention to this one. At the very least, I’m sure you want to look forward to more than dog food cuisine and a world of television reruns until you wrinkle up and roll over.

This is the most important item on your income and expense summary. This is the pivotal point in your quest for financial independence. The more you can increase your income and decrease your expenses, the more this little fellow will grow into a titan. And as he grows, so will your freedom.

The idea of saving for your old age might seem too distant to catch your youthful attention. Saving might lull you to sleep, but the freedom created by building funds should have you salivating. There’s nothing like getting up in the morning, looking outside at a big beautiful sun and a clear blue sky and deciding that you’re going to go surfing, sailing or skiing today instead of working. And there’s nothing like surfing the internet, finding a cheap ticket to Paris, dropping everything and running off a week on a whim. These are the kind of things you can do when you’re free. Your Financial Freedom Fund can bring you this kind of a lifestyle or any other kind you choose. You will have the ability to control your destiny.

You will want to do everything you can to increase your income and keep your expenses as low as possible. Technically, once you exceed your break-even point, the point at which your income and expenses meet, almost everything you earn after taxes falls down to the bottom line and into your Financial Freedom Fund. Realistically though, unless you’re willing to live like a monk, your expenses will increase somewhat as your income increases.

If you’re smart, you will do everything you can to keep your ego and expenses in check as your income grows. This will enable you to reach your goal faster. Once you achieve financial independence, you can jump out of your shell and spend like a ‘crazy dog’ as you kick back and enjoy life, while others continue to chug along and grovel at the feet of their employers.

To give you an idea of how important it is to maintain the line on expenses and to maximize your income, let’s compare some common examples of income and expenses for higher levels of experience and education and see what happens to that bottom line if you hold your expenses in check:

A) Beginners Example:

Income $2100

Expenses 1945

Freedom Money 155

B) Experience/Education Level I

Income $3000

Expenses 2330

Freedom Money 670

C) Experience/Education Level II

Income $4000

Expenses 2850

Freedom Money 1150

D) Experience/Education Level III

Income $5000

Expenses 3290

Freedom Money 1710

E) Experience/Education Level IV

Income $6000

Expenses 3725

Freedom Money 2275

You should glean a couple things from the above examples. First, as your income rises, your disposable income or Freedom Money increases dramatically. It takes you much less time to achieve financial freedom at the greater income levels. Higher education can rapidly propel you toward these goals. You can make it without it. You can succeed in a business environment by being smart, ambitious and hard working, but without certain degrees, it is a harder route for most people.

You can succeed in a business of your own, but most enterprises require capital to get started and grow. Starting out at a higher income level will provide you with the means to accumulate that capital.

Secondly, you should also note that if you hold your expenses at a constant level or only moderately increase them as your income grows, you will rapidly achieve results in your quest for financial freedom. The above examples are not extraordinary. You could achieve much better results by scrutinizing your expenses and creatively finding ways to reduce or eliminate them.

You can dramatically reduce your expenses if you start to think in terms of what you ‘have to have’ versus what society and advertisers deem you ‘should have’. When you get right down to it, all you NEED are food, shelter and clothing on the most rudimentary level. EVERYTHING else is unnecessary. By thinking in those terms, it becomes much easier to weed out expenses others dictate you must have. Designer clothing, cable TV, and top-notch restaurants aren’t necessary. New cars, entertainment equipment and elegant furnishing will only go down in value.

If you have a thing for spending money, that’s okay, just spend wisely. Focus that desire on either purchasing necessities on sale or in bulk. Knock yourself out buying food items, soaps, toiletries and cleaners when they’re half price. Have fun. Make a game out of ‘cherry picking’ those inexpensive enticements the stores use to lure you in and save a ton of money in the process.

Better yet, fulfill that need to spend money by purchasing things that go UP in value, like real estate, collectibles and stocks at below market prices. You can make thousands, sometimes tens of thousands for your efforts.

Adhere to the above suggestions and your ‘net income’ or ‘financial freedom money’ will increase quickly. As your financial freedom fund grows, you become less and less dependent upon your employer or business for your livelihood. You ‘have to’ work less and less, until the day comes that you can finally say; “I don’t need a job anymore. I can spend the day doing whatever I want to do. I’m independent. I’m my own person.”

A funny thing happens to many people though when they reach financial independence. That very same work that was previously tedious, now becomes fun. Amazingly, if you enjoy what you do, your job becomes fulfilling instead of taxing when you’re there because you ‘want to be’, rather than because you ‘have to be.’

Remember; keep your income high and expenses low. It’s not just about how much you make, it’s about how much you get to keep. Make a fortune, spend a fortune and you’re still poor. Play with the numbers. Push your income to the upper limits and keep your expenditures as low as you can possibly tolerate.

If you’re clever, ambitious and hard working enough, you can achieve financial independence in years rather than decades. At that point you can do whatever it is you want to do without listening to me or anyone else. You will finally be free. You will have maaaaaaade it!

YOU, INC.

MONTHLY INCOME & EXPENSE SUMMARY

INCOME

Wages __________

Interest/Dividend Income __________

Other Income __________

Total Income __________

EXPENSES:

Cash

Payroll Taxes FICA Tax __________

Federal Withholding Tax __________

Rent __________

Home Mortgage Payment __________

Utilities Electric __________

Heat Gas/Oil __________

Water __________

Trash Removal __________

Telephone Land Line __________

Cell __________

Auto Fuel __________

Health Insurance __________

Groceries & Toiletries __________

Dining Out __________

Entertainment __________

Media Services __________

Miscellaneous __________

Accruals

Home Real Estate Taxes __________

Subdivision Maintenance Fees __________

Home Maintenance Costs __________

Auto Insurance __________

Auto Repairs __________

Auto Replacement/Loan Payment __________

Health Costs __________

Clothing __________

Furniture & Equipment __________

Gifts __________

Vacations __________

Total Expenses __________

Net Income/Financial Freedom Money

__________

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