Yesterday, we took a look at our living expenses and tried to find places where we
could easily make some reductions. The goal was not to make hard cuts, but to
find ways to reduce spending that fit within our lifestyles.

Today, we want to see how this revised personal expense balance fits within our
overall life plan. Pull out the overall plan you built a few days ago along
with the estimates you calculated yesterday. You’ll notice that your older
plan is calculated in terms of hours, which is a great way to see what your
expenses are really costing you, so let’s do the same conversion for your expenses.

Take out a fresh sheet of paper and make three columns on it, with the
left one taking up about half of the page and the two on the right taking up about
a quarter of the page each. In the first column, write each expense down from
your sheet from yesterday, then in the second column, write the amount per
week that you calculated yesterday. If you skipped that part, just take your annual
estimate for each item and divide it by 52.

Got that? Now, in the third column, divide each second column number
by the true hourly wage that you calculated earlier. This is the number of
hours that you spend working each week to pay for that expense.

For me, this exercise really opened my eyes. I found lots of places where I
felt almost guilty for what I was doing - things such as working eleven hours a
week just for my entertainment expenses. I was working a lot every week just for
silly little things, when that time could be spent working for something bigger,
something that reaffirms my life.

Once you’ve converted all of these dollar amounts to hours, total them up.
Unless you have some major spending problems, this total should be less than
your total hours you spend working in a given week (which you figured up earlier
in the week). Ideally, it’s around 60% of the total hours in a week (mine is about
55% right now, but when I first did this, it was at about 92%), but you don’t really
need to worry unless it’s pushing 95% or so. If it’s over 100%, you need to make
some cuts in your spending or you will never get ahead, as your spending will
grow as your income grows.

At this point, it might be useful to start a “real” balance sheet. Take the overall
plan and recopy it with the same items as before, but don’t move the
numbers over. Instead, just put in the total number of hours in a week and the
total number of hours you spend on living expenses. The difference between the
two is what you will use to begin building your future.

What if I’m left with only a 10% sliver? How can I “build my dreams”
with that? First of all, even a small amount of money can get you started and,
with the power of compound interest, can build up quite well over time. Second,
this process of evaluation is not a one-time process. It’s useful to go through this
on an annual basis, just to re-evaluate where you’re at and where you’re headed.
Once you get started and watch things begin to build to fulfill your dreams, the
feeling is often so powerful that you find new places to trim your spending - you
pay off debts, cut down on your nonessential purchases, and so on.

Tomorrow, we’ll look at what to do with that remaining fraction.