In a previous life I worked in finance, trading stocks on Wall Street for a hedge fund and, later, a mutual fund company. The highlight of owning stocks was when companies reported quarterly earnings, since traders placed large bets on a company’s earnings report.
Money was made, money was lost. But the most interesting piece of the earnings call was when the CFO detailed how much revenue the company made vs. various Wall Street analyst estimates, as well as how much money the company earned after all of its expenses were paid out.
Careers were made and lost after each earnings report, and I can tell you from personal experience, there’s no better feeling than picking a stock and watching the company report earnings that exceeded expectations. After the earnings report, the stock’s price would increase. As a trader, two things happened: you made serious money from that particular bet, and you felt unreasonably smart for correctly predicting the future.
The front page of every major news source usually has some reference to the Dow Jones or some company that is reporting earnings, but the majority of the population, while informed about the markets, are not invested. If only 20% of the population is personally invested in the stock market, then what’s the other 80% of us supposed to do? Earnings reports are all over the news, but they don’t apply to most of us.
How can we make this concept relevant to the rest of us?
You care about your job and how your company is performing, but why don’t you care as much about your own personal spending and saving?
Sure everyone thinks they do a good job of saving money and watching their spending, but how often do you really dedicate your time to it? When is the last time you sat down and balanced your checkbook?
How often do you login to your credit card account and go through your transactions and look for incorrect charges, or dispute a charge that you just weren’t that happy with? Sure everyone likes to think they do this often, but are we really doing it often enough? Credit cards and electronic payments are quickly replacing cash as most consumer’s preference for paying for transactions, but the average consumer only checks their credit card transaction history every couple of months.
My Solution — What if we created our very own personal earnings seasonwithout even having to go near the stock market? As an informed consumer, you work hard for your money and you are meticulous with your spending, so lets protect that hard earned cash. So how do we do that? The good news is the answer is actually pretty simple. Lets break it down into more manageable parts:
Personal Income — This is the easy part. You work hard for your money. Lets make sure we aren’t wasting of that hard earned cash that you take in every month.
Personal Earnings Target — The first part of your personal earnings report is setting a savings or earnings target. The target is another way of asking yourself, “How much money do I want to save?”
This may seem like an arbitrary number, but it helps you break it down into something more manageable. Think to yourself: “how much money do I need to get through each week?” After you have paid your mortgage or rent payment, how much money do you have left over? A solid rule of thumb is to make sure that your mortgage or rent is only 25%-30% of your after tax income.
For argument’s sake and because we’re conservative with our money, let’s pick 25% as the monthly expense for mortgage/rent, which leaves you with 75% of your monthly earnings.
A lot of people would just stop there and just assume that they are going to have enough money at the end of the month, but we’re not going to. If 35% of your income gets allocated to monthly living expenses including your groceries, car payments, and utility bills, that leaves you with 40% of your income.
Throw in the fact that no one wants to feel like they are prohibited from doing things because they are too expensive, let’s split the difference and say that 20% of your remaining income is going to go to savings, and the other 20% you have to spend freely on whatever you want. Congrats, you now have your own personal earnings target of 20%!
Personal Expenses — So now we have our personal income and we have our personal earnings target, and now comes the fun part, beating that earnings target. Trust me, there’s no better feeling than beating the earnings estimate, so lets transfer that experience to your own personal bank accounts.
The best way to beat that earnings target is by focusing on your personal expenses. Using the allocations above, you can either track those expenses in a spreadsheet to see how your are doing, or you can use an app.
Chances are if you are forgetting to check your credit card transactions online, you aren’t going to take the time to track your spending in a spreadsheet. So lets use an app, because lets be honest, apps are great and they’re easy to use.
There are several budgeting apps out there, but our personal favorite is our own Swish app (swish.com). Swish lets you hook your bank account up so that you can control your personal spending by easily reviewing your daily spending in less than a minute a day. You can get daily spending alerts and can even put in your savings target so you can see on a daily basis how much money you have left to spend.
Weekly Earnings Reporting — Companies typically report their earnings on a quarterly basis but that’s too long to wait when it comes to personal finance.
There’s no reason to wait to check how you are doing against your earnings target every quarter, and frankly, checking more frequently provides more opportunity either for a personal reward, or for making adjustments to get your spending back on track.
I typically choose Friday as my personal reporting date because I want to have something to look forward to and I like to feel the sense of accomplishment for the end of my week.
I also give myself an added incentive of the option of getting Starbucks that day if I beat my personal earnings target for the week, or if I don’t, I go back to relying on the coffee that’s in the office. It may sound silly but it works because it gives me a goal to work towards and there’s a small monetary reward once a week that won’t break the bank or throw my weekly saving off track for the next week.
It doesn’t need to be monetary either. You can pick whatever incentive you want but the point is that you set your goal, you stuck to it, you beat it, and the best part is you saved yourself a good chunk of money that you can put towards a future trip, buying your holiday gifts, or putting it towards your retirement!
Saving money can be hard but it’s not impossible and it doesn’t mean you can’t feel good about what you are doing. Everyone wants to know that they are doing everything they can to control their spending, and actually saving more money. Give the personal earnings season a try and let us know what you think. With a simple tool and a little effort when it comes to budgeting, you’ll be off and running and beating those earnings targets, just like a seasoned Wall Street trader.