Wealth-Building Power Math: The B.A.S.E. Method (Part 3)
How to Organize Your Money, Control Your Spending, Control Your Money, Achieve Your Personal Budget and Build Mountains of Wealth, While You Sleep!
One of the best ways to build wealth is to organize your money, organize your finances, track your money, save more money and make continuous progress toward your financial plan.
In effect, you want to control your money. Make sure that you use your dollars wisely and put them to the best possible use to balance enjoying life – spending money – and achieving your financial goals!
In Part 1 of this wealth-building series, we explained Compound Interest and Compound Returns and explored how you can capture their its power and….
In Part 2, we covered the Rule of 72. These two techniques offer great ways to manage your money, track your money and build wealth smartly and efficiently.
Today, we’ll dive into an often-overlooked way to get control over your money:
The B.A.S.E. Method of Money Management
Truth be told, I learned this system when I studied Accounting in college and then became a CPA. As an auditor, we had to ‘tie in’ and review transactions and reconcile account balances.
In fact, you may be using this money management technique now without realizing it.
Simply put, B.A.S.E. means:
Beginning Account Balance plus
Additions (Deposits) to the Account minus
Subtractions (Withdrawals) from the Account equals the
Ending Account Balance.
Example #1 – Tracking Your Checking Account Balance or Savings Account Balance:
Suppose that on January 1, your beginning checking account balance or opening checking account balance equals $5,000. That’s ‘B’ for Beginning.
I’m using the words ‘checking account’ and ‘savings account’ as concepts. The B.A.S.E. Method works for any type of account.
On January 5th, you deposit your paycheck of $2,000 into your account. That’s ‘A’ for Additions – money you add to or deposit into your checking account (or savings account).
On January 10th, you make a withdrawal (withdraw) of $150. That’s ‘S’ for Subtractions – money you remove or withdraw from your checking account.
On January 31, the end of the month (month-end), your ending account balance would equal $6,850.
Date | Category | Amount |
---|---|---|
January 1 | Beginning Balance: | $5,000 |
January 5 | Deposit Paycheck: | + $2,000 |
January 10 | Cash Withdrawl: | - $150 |
January 31 | End Account Balance: | = $6,850 |
$5,000 plus $2,000 minus $150 equals $6,850.
Using the B.A.S.E. Method of Money Management, you can analyze your account balances and get a more realistic sense of where you stand vs. your financial plan.
For example, how much money can you spend and still fall inside your personal budget and meet your financial plan?
Or, how much money can you spend without exceeding your spending budget, running out of money or incurring costly credit card debt?
You can use this technique to track any account balance.
Examples include your Health Savings Account (HSA); your Flexible Spending Allowance (FSA); and estimated taxes.
For example, how much estimated tax payments have you made year-to-date compared to your annual required estimated tax payments?
In the table above, please notice that the $150 entry is underlined with a single underline. Putting on my accounting, CPA hat for a moment, a single underline means that you want to sum (total) the numbers above the line.
And the $6,850 ending account balance is double-underlined. Accountants and CPAs use a double underline to show that the number (amount of money) is the total or sum of the numbers (amounts) above.
Let’s look at another example.
Example #2 Managing Your Discretionary Spending Budget:
Suppose you make a personal budget and allocate $500 a month for discretionary spending – fun money.
Categories typically include entertainment, dining out, clothing, coffee at Starbucks or McDonald’s, etc. and so on. And vacations too.
You might want to create a fund to cover your upcoming vacation too. I do! The B.A.S.E Method works especially well for saving money for your vacation and can help you avoid incurring costly credit card debt.
This technique gives you a metric, a way to measure how much money you have available to spend on your vacation. Or any other spending category for that matter.
Example #3: Modify Your Spending Habits:
At the beginning of last year, I wanted to save money for some new furniture. I started setting aside money for the furniture. I had also set aside some money for my vacations for the year.
Buying the furniture was more important to me than going on a lavish vacation.
As summer was approaching, I realized that my furniture savings were a bit light. I transferred money from the vacation spending reserve to beef up my furniture savings, my reserve.
Instead of flying to The Caribbean for vacation, I decided to take a ‘staycation’. . . which actually turned out to be very relaxing and fun too!
I purchased the furniture without incurring credit card debt.
Saving money in advance is similar to Christmas Club Accounts and Holiday Club Accounts where we explained a handy, effective way to save money for these expenses throughout the year and how to set up a reserve to fund your spending in advance.
Using B.A.S.E., you can track your spending in real time. B.A.S.E. can give you an early warning sign of when you’re about to hit your spending limit. In this example, for discretionary spending.
You can also use B.A.S.E. to provide an early warning sign that you may be heading for financial trouble.
Date | Category | Amount |
---|---|---|
March 1 | Beginning Balance: | $500 |
March 3 | Dinner at Romeo's: | - $75 |
March 8 | Starbucks: | - $9 |
March 11 | Breakfast with Betty: | - $18 |
March 16 | Movies & Popcorn: | - $30 |
Remaining Money Available for Spending: | = $368 |
In this example, if your monthly spending allowance – monthly allowance – for discretionary spending is $500, and between March 1 and March 16 you spent $132 (month-to-date), if you spend $368 or less for the rest of the month, you will stay within your spending allowance and meet your discretionary spending budget!
You might be saying that implementing the B.A.S.E. Method takes work.
Well to be candid, it just might! At least a little. . .
BUT, it’s a great way to meet your personal budget, stick with your financial plan, free up money, free up cash, for debt reduction, savings or investment.
Use these four techniques to implement The B.A.S.E. Method and make it easier to manage:
1. Set text alerts in your checking account, savings account and credit card accounts that send you a text message when your total spending to date reaches your limit.
Give yourself a cushion, breathing room, and advance notice.
For example, if your spending budget is $500, set your text alert when your total spending for the period reaches say $450.
Set a minimum checking account balance and minimum savings account balance. When your account balances reach the minimum balance you have set, the bank or credit card company will send you a text message alert.
Since account balances, especially checking account balances, tend to fluctuate from month to month, be sure to analyze whether this metric is useful.
Or you can adjust your threshold (minimum) accordingly.
2. Pay with cash.
Withdraw cash from your checking account or set aside cash from your paycheck to fund your spending in a particular category. In fact, for each spending category in your personal budget.
By using cash for spending, and withdrawing in this example $500 at the beginning of the month, you know physically – you have a visual – how much money you have left to spend and when you’re running out of money.
I don’t like to carry cash, which is part of the reason I use credit cards. Credit cards are convenient and offer loyalty rewards points which add up and save you money. Assuming you don’t have any credit card debt.
3. Get a Dedicated Credit Card.
If practical, get another, separate credit card to use to track your spending in a particular category, for example discretionary spending.
This makes it easy to track your spending if you use a particular credit card for all your spending in the spending category that you want to track.
Be sure to use ‘that’ particular credit card whenever you make purchases in ‘that’ spending category.
But of course, Don’t spend money on credit cards if you have an outstanding balance because you’ll incur costly credit card interest expense.
When you hit your spending limit or start coming close to your spending limit, STOP!
Put the brakes on your spending.
4. Save money in advance – ahead of time.
Another way to get ahead of the savings curve, manage your spending and avoid credit card debt and running out of money is to set up a reserve – money in the bank. Set aside money in advance of your anticipated spending. In other words, prefund your expenses.
You can use this money – your reserve – when your actual spending in one month or in a particular spending category exceeds your budget, exceeds your financial plan. You can use your reserve, the extra money, you set aside in advance, to cover your overspending.
This is a terrific money management technique that helps you avoid credit card debt.
In fact, I have utilized this money management technique for decades. It works!
Example #4: Where You Stand vs. Your Savings Goal
Suppose you decide to save $5,000 for a down payment on a new car. That’s your savings goal or financial goal.
On February 6, you set aside or deposit $350 towards the down payment on your new car.
Now you have to save only $4,650 in order to accumulate the $5,000 down payment [$5,000 minus $350] to buy the car.
Using the B.A.S.E. Method:
Date | Category | Amount |
---|---|---|
February 1 | Savings Goal: | $5,000 |
February 6 | Deposit: | - $350 |
February 9 | Withdrawl: | + $20 |
February 11 | Deposit: | - $100 |
February 20 | Deposit: | - $150 |
Remaining Savings Needed for the Down Payment: | = $4,420 |
Notice that the $20 withdrawal (which means you spent money) from your reserve or savings account is shown (reported) as a positive number. This is because the reduction (withdrawal) means you reduced the money you have on hand and you need to save more money or set aside more money in order to reach your financial goal.
The deposits are shown as negative numbers because this means you added money to your reserve or savings account. And you have to set aside or save Less money in order to achieve your financial goal. In other words, you’re one step closer to achieving your financial goals.
In accounting, money management, personal budgeting and so on, to be accurate, plusses and minuses count. Otherwise, your financial calculations and money balances will be off, inaccurate. And you won’t gain a complete and accurate picture of where you stand vs. your financial goals.
With The B.A.S.E. Method, you can see where you stand at any point in time and you can decide whether to take action, whether to modify your spending behavior.
For example, if you are overspending, you can cut back.
Or if you want to reach your financial goals sooner, you might decide to get a second job or start a side hustle to earn extra money. . .
Or if you spend less than your financial plan, you have some breathing room. Perhaps you might even buy yourself a treat!
Perhaps a Starbucks or McDonald’s iced coffee.
Or save more money for retirement (retirement savings) or pay down debt.
Summing up. . .
Don’t worry. You don’t have to study Accounting or become a CPA to benefit from The B.A.S.E. Method of Money Management.
Just put it to work. It’s Easy.
You’ll Keep Better Track of Your Money, Save More Money, and Get on the Road to Achieve Your Financial Plan!
While The B.A.S.E. Method is straightforward and relatively EASY to use, it’s powerful. This tool can help you track your spending, monitor your finances, manage your money, control your money, meet your personal budget, and achieve your financial goals.
Wishing you speedy wealth-building and great wealth accumulation! Mountains of wealth in fact!
While you’re at it, to free up more money (cash) for investing to help you reach your financial goals bigger, better, and faster, take these easy steps to save more money on groceries. Click here.
See you next week,
Arthur V.
Budget and Grow Rich® is the original e-book guide to easy budgeting and wealth-building. Gain financial freedom and pour money into your pockets today and for years to come.
Finally, the proven roadmap to building wealth – how to make a personal budget that really works. Explained in plain English – easy to follow, practical steps. Since 1974, personal finance expert and author Arthur VanDam has used this system to organize his finances, manage his money and amass wealth. Now you can too. This straightforward guide tells all! Handy spending plan worksheet includes 14 categories that does it all. Practical tips and ways on how to create a financial plan and put your financial plan on auto pilot. Budgeting At Your Finger Tips will help You save more money, build more wealth, gain peace of mind and enjoy financial freedom.