The Personal Finance Podcast - Why Budgets Aren't Boring (Budget and Chill)

Episode Date: June 10, 2020

Episode 5: Why Budgets Aren't Boring (Budget and Chill) In this episode we cover:  Why Budgets create freedom The 4 rules to create an amazing budget  How to budget and chill  The minimalist budget The power of budgeting Resources in this episode:  YNAB M1 Finance ROTH IRA or Brokerage Personal Capital Free Budget App Learn more about your ad choices. Visit megaphone.fm/adchoices

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What's up, everybody? And welcome to the personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today we're going to be talking about why budgets aren't boring. And I think a lot of people come into budgeting thinking that budgets are fun killing machines. and a lot of people have tried to budget and fail because they come up with these complicated spreadsheets or they come up with these complicated systems that creates a way for them to fail. And a lot of times once people fail with budgeting, they give up and they never do it again

or they think it's just something that they'll never be able to do and then they go to the mall and they make it rain to make themselves feel better. There's another group of folks that say, I know where all my money goes, I don't need a budget. Why would I need a budget if I know exactly where my money is going? But those same folks, usually their account balance isn't going up. And then there's another group of people that just cannot figure out where to get started. They are intimidated by a budget. They're intimidated that they'll do it wrong.

They're scared to fail. But I'm going to break it down for you so you can understand exactly how to do it and how to prioritize your budget so that you're able to save enough money and utilize your money on your priorities. Because that's the entire purpose of a budget. The entire purpose of a budget is spending your money on your. priorities and what you want your money to do and how you want your money to work for you. It's not about restriction. It's about using your money as a tool for freedom or using your money as a tool to get exactly what you want. And it doesn't matter what those priorities are.

Only you can say what those priorities are. If you want to go fist pump on the Jersey Shore, go ahead and do that. If you want to go ball out in the mall, make a rain, go ahead and do that. But make sure you have enough funds to be able to do it and that your money is going towards exactly what you wanted to do. It allows you to live life on your terms and reduce your stress. See, I used to hate the word budget and I wanted nothing to do with it because I thought it was taking away my freedom. I wanted to eat out. I wanted to hang out with my friends. I wanted to do whatever I wanted to do with my money. And I didn't want to think about a budget. I didn't want to have the chore of having to think about my budget every single month. I wanted to buy anything I wanted.

So I'm going to get into the four rules of budgeting that I use. And these rules are a system in order to create a budget that you can become successful with. Now, if you think that these rules are too granular for you, then there is another budget that I'm going to show you that I also use at times when things get a little crazy and hectic. And I call that the minimalist budget. And we'll get into that later on in this show. So if you think that that's something you would be interested in, then stay tuned and we'll get into that budget system as well. The budget that I use specifically, I actually came across years ago and it absolutely changed my life. And this is how I got my personal finances together. It was utilizing this budget system to be able to create wealth for

myself and my family. It turned my entire finances around. And early on in my interest in personal finance, I came across a company called Wynab. And I used a lot of different budgeting tools before that and I kept failing. I used companies like mint. And that's a great tool for a lot of people. but my problem with Mint was it was overly automated for me. So I came across WNAV and WNAB is actually who created these four rules and they have rules that set up a perfect budget for you for the long term. And I wanted something that I could maintain for the long haul. And this is exactly how this system works.

And all you have to do is follow these four rules and you'll be failproof in terms of being able to weather any storm that life brings upon you. Now let's get into it. The first rule is to give every dollar a job. So every time you get paid, what you need to do with that money is figure out exactly what you want that money to do. And I mean every single dollar, down to the penny. So when you get paid, say you need that money to go ahead and cover specific expenses. So maybe it needs to cover your rent or your mortgage. Some of it needs to cover your electric bill that's coming up. Some of it needs to pay off some of your student loan. You need to

allocate that money towards exactly what it needs to do. Because giving every dollar a job, assigns each dollar a specific task. And once your dollar has an assigned task, it's going to do exactly what you need to do. It's not going to get lost and commingled with all your other funds. It's not going to disappear and then you don't have enough money for rent at the end of the month. It's going to do exactly what you need to do. So what I do when I give every dollar a job is I set categories for each expense I know I would come across. And like, open, every category gets some money. You get some money over there for groceries. You get some money over there for the mortgage. You get some money over there for car repairs. But it's also a great way to figure out what goals you have.

So if you have saving goals or you have investing goals, then you can start allocating funds towards those goals so you can see if you're going to hit them each month or not. So as your money comes in, as you get paid, you're allocating money towards your goals. Maybe you want to buy a house. Well, now you're allocating money towards buying that house. You're actually taking steps towards buying that house instead of wishing and hoping and waiting that you can actually buy a house. Or let's say you need a new car and you know that's coming up and you want to buy a new car. Well, now you're taking steps toward actually buying that car, your dream car. Let's say you want some sort of splurge like a jet ski or a boat or something like that. Well, you can start saving towards those things and now you're taking steps towards actually

attaining that goal and eventually you're going to attain that goal. And that's the beautiful thing about this is as time goes on, you're going to actually hit that goal. instead of hoping that it's going to happen someday when you get a bonus or a raise and hoping and wishing and waiting, you're actually going to attain that goal much faster. And that's the beautiful thing about allocating this money. So every dollar that comes in, you're going to allocate it to your priorities. Now, the second rule is to save for a rainy day. And we talked about this in the emergency fund episode.

We talked about how to save for a rainy day, how to build up an emergency fund, but it's not only just for your emergency fund. It's for the other specific categories that can come up. So you need to make sure that you have enough cash on hand when surprises come up. So it's for car repairs, for home repairs. If you own a house, for the zombie apocalypse, it doesn't really matter what you think's going to happen. But you need to come up with some sort of buffer to be able to take on anything that life throws at you because you're going to need this money. It's not a matter of if you're going to need this money, but it is a matter of when you're going to need this money and you need to have this buffer to be able to protect you and to be able to back you up when life throws anything that comes your way. I remember when I needed

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But another aspect of this second rule to save for a rainy day is also to prepare for those expenses that are, far away. So for example, we pay our car insurance every six months. So you need to be saving up monthly for a six month car insurance bill that's coming up later on. What do I mean by that? Say your car insurance every six months is $600. Well, you need to start allocating in your budget $100 a month so you don't get surprised six months down the line and your car insurance bill slaps you in the face and you're not ready for it and you start to go into the negative because you didn't prepare for that. See, this is why a lot of budgets, will fail because people will budget and then these type of expenses will just show up out of nowhere

and they forgot about them. It blows their budget up and then they just quit because they think they can't do it. But if you prepare for these types of expenses, then you'll be able to crush your budget. And that is the cool thing about this second rule and about saving for this rainy day fund. Another great example, and this is something we do every single year, is we start saving for Christmas in January. You know, we have large families, large extended families. We buy all of them gifts. How much did we spend last year? We divide that number by 12, and we save that amount every single month. The Christmas Fund is beautiful because you can save up enough money to buy anybody, anything they want.

It's so enjoyable to be able to do that. You don't have to stress out about Christmas presents. You don't have to stress out and worry how am I going to come up with enough money to buy people the things that they want. The money's just there. So plan for those long-term expenses. It could be your garbage pickup. It could be quarterly dues. It could be a subscription to the crazy cat lady club.

It doesn't matter what it is, but you got to break those costs up into small little chunks that you pay each month so you don't get slammed in the face. Now, the third rule is to roll with the punches. And this is one of my favorite rules because this is actually forgiving yourself if you make a mistake in your budget. Because every single person who has ever budgeted in their life has made a mistake. And I have never had a perfect month in my budget. Let's get this out now.

you're never going to have a perfect month in your budget. And if you do, you're a wizard because I've never seen anybody have a perfect month in their budget. But guess what? You've got to roll with the punches and you've got to forgive yourself. So what does that mean? Rolling with the punches means that you're going to roll over money from other categories that you may have over budgeted for into that category. So for example, let's say you budgeted $200 for food per person, okay? And let's say you budgeted $100 for gas.

well you had to take an unexpected trip and you spent $150 in gas but you only spent $175 in groceries. We'll roll over $25 from your grocery bill into your gas and then roll over another $25 from another category and you've made up that money. Now everybody's equal. All the categories are even. And this is how you forgive yourself and how you help your budget move along to the next month. Because a lot of people will blow a category and they think, it's over and they don't know what to do they panic they freak out and they quit but this allows you to move on you got to expect that you're going to blow it because you are and just move on fix it and move

on you're going to learn every single month and you're going to improve every single month and be able to create a budget that is amazing for you and your family but first you got to learn just to roll with the punches and move on now the fourth rule is to get one month ahead now this is a little more of an advanced step. But as you start to budget, you'll see that your money starts to compound a little bit and it starts to grow, but it takes a little more time than the rest of these other steps. But what you want to get to is a point where the money that you make today is going to pay for your expenses one month down the line. Say you're sitting in June as of this month, okay? Well, your money that you made in May is going to pay for your expenses in June. And you can see the power of

this and you can see if you start to compound this money and you start to accumulate more money, then maybe your expenses in June are going to be paid by your paycheck in April or your expenses in June are going to be paid by your paycheck in January as time goes on. And you can see your wealth start to accumulate. And this takes away stress. This takes away anxiety and you have nothing to worry about because you are months ahead in your budget. And so each time you get paid, you just start allocating those dollars to exactly where they need to go and then move on. And you don't have to worry if something happens in life because you have the money there ready to go for you to build you a great financial future. Now the next budget system that we're going to talk about is called the minimalist budget.

And I've talked about this in a couple episodes before. But what this is is a system for people who really, truly cannot stick to a budget but still need a way to manage their money. because budgeting is a great tactic for people who can stick with it, but if you can't stick with it, then you're just going to ruin yourself financially. So this system is going to allow you to actually still have a budget while keeping it extremely simple. And you may say, well, why would I do the four steps before if this budget exists? And the reason is that the four steps before are much more efficient. There are a much better way to run your money. And you're going to actually end up most likely with more money if you run your money that way because you know where every single dollar goes.

But if you truly cannot stick to budgeting, then this budget system is going to be just right for you. So here's how it works. Before you start this budget, figure out how much you need to save each month. And what you need to be saving for is things that grow your net worth. So paying down debt, investing, or saving for a rainy day. Those are the three things that are going to increase. your net worth. So once you have that number in mind on how much you need to save, you take it off the top every time you get paid, and then the rest of the money, you chill out about, bro. You just chill. You spend it on what you need to spend it on. You take care of your expenses, you take care of your bills, you take care of all the pinky rings you need, and you just

chill. It's called Budget and Chill. That's what I should have called this budget. Budget and Chill. I'm going to make a T-shirt that says budget and chill. But this is a stress-free way to budget for people who just cannot get the budget down. Now, when you're doing this budget, the question may come up as, how much do I need to save for the long term? And what I would say, and this is the baseline that I think everybody needs to stick to,

is you're going to hear a lot of people say 10% or 15%. I don't think that's enough. Because if you do the math, you're going to accumulate some wealth, but it's not enough for most people to live on. So what I recommend is to save at least 20% of your income. And if you want to retire early, you need to save at least 50%

of your income. Now, you may say, that's crazy. If you have specific goals, then you've got to bootstrap up and go ahead and go after those goals. Otherwise, you're never going to achieve them. If you're magically waiting for that next promotion so you can get an increased income and then go ahead and then you'll start saying for those goals, it's going to be too late. You have to start right now. And that's what too many people do with their money. They wait for the opportunity to come to them instead of going after the opportunity. They wait to invest at a later date. They're going to invest another time. Not right now. They're not ready right now. They want to invest another day. And that's not how you do it. You have to go after these opportunities because time is the true opportunity. Your time horizon is

the opportunity for you to be able to grow your wealth. And you need to start early. You need to start as early as possible. And if you waited for a long time and you're getting older now, it doesn't matter. You need to start right now. And if you think that that 20% number, sounds crazy, then work your way up to it. So what I would recommend is every single month, increase your savings rate. And so I tell a lot of people, increase your savings rate by 1% each month, and by the end of the year, you'll have increased your savings rate by 12%. So say you can only save 10% for the entire year, okay? Then increase it by 1% each month. That way you don't take a huge hit and you don't feel it as hard. And then from there, you'll slowly

begin to increase your savings rate, you'll slowly reduce your expenditures on things that you don't need or that you don't want, and then you're going to be allocating money towards the things that you want and your financial future. And it's going to grow that gap so that you're able to save for the things that matter. So what do those numbers look like? So say if you want to increase your savings rate by 1%, you make $4,000 a month, that's $40. Anybody can save an extra $40 if they really scrape and look hard enough to find it. If you earn $6,000 a month, that's $60. If you earn $8,000 a month, that's $80. And these small increases will get you to the point where you at least hit 20% of your savings rate. And then once you hit 20%, then you want to grow that number because now you're

starting to build wealth and now you're starting to compound. And you want to increase your income to be able to grow that savings percentage. You don't want to increase your lifestyle. You don't want to increase your expenses, you want to increase your income so you can increase your savings for retirement. That's how you retire early. Now, some other people may be saying, I can't save. I need every single dime. I have to have it. So what you're telling me is that you make $3,000 a month and you need every bit of that $3,000. Somehow I don't believe that. But if that is the case, then fine. If it's not the case, though, then you need to reduce your expenses and cut out the things that don't matter to you so that you can increase your savings rate. And those 1% increases

will help. If those 1% increases are too much for you, do it by a half a percent. By the end of the year, you'll at least increase your savings rate by 6%. And if you're wondering what to do with your savings, then here's a couple of things that I would do. We talked about this in how to automate your finances. In the last episode, we also talked about it in how to become a Roth IRA millionaire. But the first thing you want to do is get your 401k match with your employer. Then you want to save some money in your emergency fund. And then you want to contribute to a Roth IRA with the additional savings. And those are the three savings vehicles that will protect you and invest for your financial future so you have money in retirement that you can live on. So these are the two budget systems

that I would pursue if you're looking to work your way towards financial independence. And like I said before. The budget is not there to restrict you. It is there to increase the amount of money that you're putting towards your priorities because your priorities are all that matters when it comes to budgeting your money. It has nothing to do with restriction. It has nothing to do with cutting back. It has everything to do with working your money the way you wanted to work. Because before the budget, I actually could spend less on the things that I wanted because I was spending mindlessly on things that didn't matter to me. And my money was just disappearing.

Every single month, I would get to the end of the month and I would say, where the heck did my money go? But with the budget, it allowed me to allocate my dollars exactly where I wanted them to go so that I could start creating wealth and I could start buying things that I wanted. And that's the key here. You can buy more of the things you want if you actually track where your money's going. And it's backwards to what most people think happens. And here's a great example.

I love sneakers. And I grew up loving sneakers. I grew up playing basketball and sneaker culture was kind of within that realm. And when I wasn't budgeting, I had one, two, three pairs of sneakers max. I couldn't afford to buy more sneakers. And then once I started to budget, I probably have 75 pairs of sneakers now. My wife wants to kill me every time I walk into another sneaker store. But I'm able to do that and invest more money because I'm allocating my money exactly

where I wanted to go. And I'm allocating it towards the things that give me joy and bring me happiness. And that's why I'm able to do that. So think about what you want your money to do. And think about exactly how you want to spend your money. And what are your dreams with your money? Because the budget is the way to get there. It is the vehicle to get to that point.

And yes, maybe you think it's a little boring. Maybe you think it's something that's tedious. But it's not because it's going to get you to your goals and it's going to allow you to accomplish everything you want with your money. Thank you guys so much for listening. And if this is our first time meeting, consider subscribing so you never miss an episode. And hey, we're giving away a free one-on-one money coaching session with me. All you have to do to enter is subscribe to this podcast and leave a rating or review on Apple Podcasts.

Then send it over to Andrew at dollar after dollar.com. And you'll be instantly entered to win the one-on-one, one-hour coaching session with me. Again, thank you guys so much for listening. appreciate it, and we'll see you on the next episode. Have a great day. Instacart knows that some people go bananas about getting the perfect, well, banana. Some want them green, some want them ripe, some want them ready right when they hit their doorstep. But with Instacart's preference picker, available at most retailers, you can choose to get your groceries just the way you like. That means perfectly right bananas, deli meat

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