A Fresh Perspective on Budgeting
Almost two months, I wrote a simplified article to my peers on how to begin investing. It was not an all-conclusive, final statement on the minutiae of investing, but I hope it gave insight for some readers to begin thinking about the right path. In the same vein, the next common theme I see with my peers, and a prequel to investments, is “how should I budget?” I do not think I will be able to offer the world of answers that fits all scenarios, but hopefully I can offer some budgeting perspective.
As a disclaimer, just because I work in the financial industry does not mean I have supernatural abilities of budgeting; just like your doctor not having perfect health. As opposed to investments, budgeting falls more into the category of life skills than technical skills, and the mechanic down the road may whip my tail in a budgeting competition. Although, as it is more of a life skill than technical, the challenge is not knowing more about budgeting, but knowing more about yourself. So, as I, and my peers, and even the 55-year-old family man embark to better budget, may we stumble upon bettering ourselves holistically. Which brings me to my first point.
First Tip: You must know your scenario. Begin to accumulate all the financial information you can get. Are you starting a job, and moving soon? Do you have immediate one-time expenses, or can you save consistently for a long period? The budgeting process for a salary worker will look completely different than a contract worker, and so forth. You must gather the basic information like when you get paid, how frequently, how much? These basic assumptions are the practical foundation to predicting your future expenses. A budget is a roadmap, a forecast, of future expenses, so it is imperative to know the basics of your cashflow. If you are still in college (many of my friends), and you do not really have an income at all – budgeting is still a useful practice, trust me.
Secondly, have reasonable expectations. It does me no good to budget as frugally, and strictly as possible. You and I both know; I cannot make it a week without going out to eat at least once; so, I allow for that. Just like dieting, if you restrict yourself to so little calories, eventually you will give up and stop pursuing the process. Allow for comfort.
Third part of knowing your scenario is defining your goals. Do you need to pay off debt, want to start investing, or saving for a down payment? These, besides basic and reoccurring bills, should be the first thing that get sucked out from your cashflow. Once those are decided upon, written down, and planned for, you can better understand your window of comfort. The window of comfort is a wildly incentivizing segment. I will touch on that a bit more later. Yet, knowing the basics of your cashflow scenario, your goals, and your consistent habits will help carve out the realistic plan you have needed.
Second Tip: Find a method, stick to the method. You can google “budgeting programs” and a flurry of apps pop up. Considering your scenario as described above, certain programs may work better for you. I have friends who have advanced excel sheets that use formulas I did not know existed. A good friend of mine used the “envelope system”. Burkholder Wealth Management offers advanced budgeting software to clients that can connect directly to your bank and investment accounts. College students have a free subscription to YNAB. I keep everything in my phone notes. I cannot tell you what is best for you. Sure, there are some features others have, and some do not, but at the end of the day what is best for you is what you will use and stick to. Like a gym, what good is it to sign up to a gym and never go? A budget works the same. Be self-aware and know what you are inclined to stick with, and what programs you will use for a day and never again. I do recommend staying away from those retail apps that take fees to help you do basic tasks. Do not pay someone else to do the work you can easily do. Yet, if it is the one program that helps you budget it may be worth the small fee. Essentially, a good plan practiced all the time will always beat a perfect plan practiced some of the time.
Third Tip: Feel every transaction. Yep, you heard me. Look at, or write down every single card swipe, Venmo, cash payment, everything. I write down every transaction down in my phone notes. Am I insane? Maybe, but it works for me. Maybe writing down every transaction is a bit much for all people, but I recommend at least reviewing all your transactions. It is too easy to shut your mind off and let those little $10-$20 purchases eat away at your wallet. This goes back to that window of comfort I spoke about. If you are not thinking, it is easy to spend $50 on random things. Money just flies away. Instead you can spend that $50 on a much more meaningful purchase that satisfies that endorphin rush we crave. Either way, you spend that $50, but the latter is a bit more quenching than the first and often does not end in a purchasing binge. Then, when you track every expense, you may find yourself evaluating every purchase, and your mind thinks twice before you swipe that Starbucks drink. You may never think you will become a frugal person, but when you force yourself to realize the compounding effects of small transactions and how they chip away at the bigger things, you may surprise yourself. So, feel the pain from every transaction, it puts in perspective the power of your dollars.
Conclusion: When you stack all three tips together, knowing your scenario, sticking to a method, and understanding your transactions, you cross a bridge; the bridge on how you view spending, and finances in relationship to your wellbeing. One side of the bridge is ignorance, and while it may seem blissful in the meantime, angst and struggle soon follow. The far side of the bridge, albeit difficult, produces peace and freedom to better wield your finances. The consistent analogies to fitness express that financial health is no different than any other facet of personal health. Although somedays we never want to go to the gym, or go on that walk, we encourage ourselves to embrace that resistant path; no good thing ever comes with ease. Budgeting is no exception!