Today I had an interesting conversation with a friend of mine who just received some money. He did not have a steady income and he was not a very good money manager either. So I volunteered to help him look at his finances in a different way than he does now. He came and consulted me about how he should spend his money. He received $200 which is a lot of money in a third world country. His ‘goal’ was to try and live on that $200 until the end of the month. He had to pay bills that added up to $60 and had to use the rest of the money to live for another 14 days.

The day that he came to me, he had not touched the $200 at all. I suggested to put aside $60 to pay for his bills and urged him to just pay them that same day. The sooner the better. This would leave him $140 to live for 14 days until the end of the month. My friend is single and therefore can easily live on $10 a day for 14 days.

But the same day, later in the evening we met again. All happy, smiling and proud he shared with me how he bought a suite, a pair of shoes and sunglasses to “look cool”. He spent $27 on those and had not paid his bills that was $60 all together. So I asked him to sit down with me and think about the financial consequences of his action. As I had suggested to him earlier, he put the money into the bank so he would not carry a lot of cash with him everyday. If he did carry all that money with him, I was sure that he would easily blow it in a few hours. He had $160 in the bank and carried with him $13. The remaining spendible income he had now after he went shopping was only $113. Because he had to live only on $113 for 16 days until the end of the month, his daily budget was now down to only about $7 per day.

When we came up with this number, it was as if the heavens opened and a fresh new revelation was just given to him. He asked whether that was including internet costs at the internet cafe and meals. Of course it was. It simply included all expenses for one day. So we agreed that the $13 was to last until Saturday, which was two days from then. He could not use any money in the bank except the $60 that was meant to pay his bills.

He thought for a while and wondered if he could live only on $13 until Saturday. He said, “But I need to buy a new pillow and a bed sheet tomorrow. That would be about $6.” I said, that would be fine but then that means he will have to live on $7 only until Saturday. Of course he could use the money in the bank too but he will have to face the consequence of being without any money before the end of the month. I told him to live within (if not below) his means. He had no credit card (thank God for that) and he had no choice to just live on $7 until Saturday. So he agreed.

While I was still talking with him, he asked, “Can I get just a can of beer?” I was amused to see that he thought that the way he saw this consultation was that  I was restricting him from doing what he wants, which was not the case. I said of course that he could buy beer or do what he wanted with the $13 he had left until Saturday if he thought he could afford it but if he couldn’t, he would have to consider whether he could live with the consequence of buying that can of beer.

I said, “Ask yourself this:  does a can of beer fit in your $13 budget? You have to live only on $13 until tomorrow night and you said you needed to buy a new pillow and a bed sheet.”

My friend said, “I never tried that before.”

Not sure what he was talking about I asked, “Never tried what?”

His response was interesting, “Never tried thinking before spending.”

He thought for a while and then decided, “I will get one can.”

I asked, “Are you sure you can afford that and at the same time not sacrifice your pillow and sheet and food for tomorrow and also not sacrifice transport to go to the meeting you have in your schedule?”

His eyes grew bigger and he only said, “Oh! Hmmm…”

This is probably the major problem in our society today. People receive their paycheck and just live from one day to the next without thinking and planning their expenses. Even before they reach the end of the month, they’re out of money and start using their credit card or take up a personal loan or one of those high interest cash advance loans.

The case with my friend involves only a little bit of money compared to the huge transactions that first world countries have everyday. In the case of my friend it was only about managing $200 for 14 days. Most average people in the western world have bigger responsibilities to themselves and their families by having to handle probably 5 times or even 7 times as much in monthly income. Imagine how much money is lost if they don’t think before spending.

The key to living within (if not below) your means lies in the process “thinking before spending”. As soon as you get paid, before you even spend one dime of your monthly income, sit down with your family and “think”. Plan your monthly budget. Plan what you are going to buy that month. Plan how you and your family are going to survive that month.

Here is a great tool for you to plan your monthly budget. Download this spreadsheet for free here.

In my next post I will be showing you how to use the spreadsheet to budget your monthly spending.

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