It starts with the budget
There’s a saying in the fitness world that you can’t out-work a bad diet. There is a similar truth for your personal finances, and that is that you can’t out-earn bad spending habits. No matter how much money you earn, you will never become financially free if you spend all that you earn.
All financial success starts with a budget of some kind. To some people, budget is a four-letter word, but let me attempt to change the way you think about budgeting. Budgeting, traditionally, is something we think of as limiting (you can no longer spend money on X), complicated (tracking your spending, complex mathematical formulas), and shaming (you spend too much money eating out, or that new <insert item> was too expensive). But a budget should be the opposite – empowering (you now have the freedom to spend allocated money where you’d like), simple (we’ve got some ways to help simplify your budget), and freeing (your budget should align to your values, not someone else’s).
Budgeting doesn’t have to be limiting and it doesn’t have to be stressful. It doesn’t even have to be boring! It can be incredibly empowering and freeing.
In this article, we’ll cover some basic budgeting principals and then get into how to tactically approach your budget for success.
Budgeting principals
1. Live below your means
This simply means that you need to spend less money than you earn. We’ll get into the numbers later, but for now just make sure your burn rate is less than your earnings on a monthly basis.
2. Keep the lights on
In my career in Information Technology, we use the term KLO (Keeping the Lights On) for activities that are always going to come first on the priority list – activities that keep our production environments up and running. The same can be applied to your budget priorities. First, we want to make sure we’ve covered the essentials. Food, shelter, utilities (literally KLO), etc. We also want to make sure we cover expenses that can have major financial implications down the road – health and homeowners’ insurance, life insurance (we recommend term life insurance, more on that in a future post).
3. Align your spending with your values
After we’ve covered the essentials, we move on to our other needs and wants. This is where you get to really align your spending with your values. My wife really values her time, and she does not want to spend that time walking grocery store isles trying to find the best deal on items for our pantry. Rather than spending an hour or more walking around the store and comparing prices, she orders groceries online with little to no consideration for the cost of individual items. Instead, we focus on purchasing the food items that we actually need and will use – we make a weekly meal plan at the beginning of each week, and purchase our groceries based on that list.
Budgeting tacticals
1. Pay yourself first
We’ll get more into investing in a future post. For now, just move a set amount into a savings account for future expenses. We recommend starting with 10% - if you bring home $4,000/month, move $400 into a savings account at the first of the month. If that’s too much of stretch right now, just start with something - $200, $100, or even just $50 going into savings is better than nothing.
2. Track your spending
What gets measured gets improved. If you don’t know where your money is going, how will you ever be able to improve your financial situation? Tracking your spending is a key activity in any attempts at sticking to a budget and reaching any financial goals.
There are lots of great budgeting apps out there – you can choose one of those, or just track your spending in excel. Track each transaction and put it into a category. We have found that fewer, broader categories rather than numerous, narrow categories helps us feel more freedom in our budget – for example, we use a category called “Dates, activities, eating out, etc.” and put all transactions in those areas in that single category rather than separating a movie date from a trip to the aquarium with the kids.
3. Automate as much as possible
These days, most of your bills can be put on an automatic bill-pay, and we recommend doing just that. We automate as many expenses as we possibly can. Everything from our mortgage and household utilities to our monthly order of dog food is setup to be automatically debited.
As part of our automation efforts, we put all of our utilities on an equal-pay program which makes our payment the exact same each month - rather than having a high gas bill for running our furnace during the winter and a high electricity bill for running our A/C during the summer, we enroll in equal-pay and pay the monthly average each month. If your area offers this, we highly recommend it.
Keep in mind that you’ll want to occasionally review your automated payments to make sure you’re only paying for things that you actually use. You don’t want to be paying for 9 different streaming services when you only use 2 of them.
We hope you have found this article valuable. Thanks for reading!