Your Magic Number

I hope that you have spent some time researching how much you spend.?Remember what we said: ?It is not how much you MAKE, but how much you KEEP.?For those of you who did not get a chance to read the second article in this series entitled “It’s Not How Much You Make”, I would suggest that you take some time to do so.?Please note that if you would like the spreadsheet, you can email me at [email protected] and I will send you a copy so that you can track your spending.

Your Magic Number

A lot of us fear budgeting and would prefer to avoid doing this.?Therefore, Avraham Byers suggests that we simply find our magic number.?In his book "Your Magic Number", he defines the magic number as the money available for spending every day on things like groceries, gas, eating out, and entertainment.?It is calculated by deducting your fixed annual payments like mortgage installments, electricity bills, car and other loan payments, insurances, mobile phone, internet and cable and any other subscriptions from your annual take home pay and dividing the result by 365. ?Avraham also suggests that you deduct payments you need to make to build your emergency and retirement funds.?He defines fixed payments as payments that MUST BE MADE, i.e., payments where you have little or no discretion.?They are payments that you don’t come out of your wallet at the store.

(Annual Take Home Income – Annual Fixed Expenses) ÷ 365

So, if you and your spouse each earn $10,000 per month after tax, your annual take home income will be about $240,000.?If your fixed annual expenses total $150,000, then you are left with $90,000 for groceries, education, etc.?That’s $7,500 per month or $246.58 per day.?Your Magic Number is therefore $246.58.

Please note that if your monthly recurring expenses are greater than your MAGIC NUMBER, you will need to cut back on your expenses.

I want you and your spouse or partner to really invest the time to find your Magic Number.?You can email me at [email protected] for a copy of a spreadsheet you can use to calculate your magic number.

This is the number that must inform your decisions as to whether you should eat out or prepare your own meals.?You may also want to spend some time working to increase this number by looking for ways to reduce your electricity, mobile, internet and cable bills so that you have more to spend on discretionary items, items where you can choose how you want to spend your money.

Let me be clear, I do not want you to live life like a beggar or a Scrooge.?Your Magic Number is a guide.?It lets you know how much you can spend on that movie or hanging out with friends.?It also forces you to PAY YOURSELF FIRST.?Put aside money for your emergency fund FIRST.?Invest in that annuity to ensure that you are building your retirement savings.?Make the hard choices now and remember EASY CHOICES, HARD LIFE. HARD CHOICES, EASY LIFE.

As Dr. Byron Mackay notes, and I paraphrase, “if we make the easy choices in life, over and over again, and keep doing that for long enough … it results in a hard, painful life.”?For example, if you make the easy choice to eat fast food all the time, and not cook and eat healthy food; if you make the easy choice to spend all you earn, borrow to buy what you need and not have the discipline to save … it ultimately leads to a difficult life.?You may find yourself out of a job or facing a medical emergency with no access to the funds necessary to survive.

Take the time now to save for that rainy day.?Make the hard choices now.?Choose the hard way instead of having it thrust upon you later on.?Even the smallest amounts can grow.?Next week we will look at the power of compounding and how it makes a difference the earlier you start.?Please be sure to send your questions.?Have a disciplined week.

Cheers, Nigel

Nigel Romano, Partner, Moore Trinidad & Tobago, Chartered Accountants