Episode 5 Budgeting Basics

In this show, Mike and Amy discuss the dreaded top of budgeting. Mike and Amy cover: 

1. Purpose of Budgeting (2:53)
2. Analyze Current Spending (6:22)
3. Prioritize Spending (7:39)
4. Tools to Track Current Spending (8:51)
5. Identify mandatory, discretionary, and infrequent expenses (11:37)
6. Don’t get wrapped up in someone else’s process; do what works for you (17:56)

Links:

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Transcript

 

00:00:00 Amy: Hey, Mike, how’s it going today?

00:00:02 Mike: Good. How are you, Amy?

00:00:04 Amy: Doing well. We’re well into the year now and we’ve been talking about New Year’s resolutions. Probably about half or more people have fallen off the resolution wagon. If that’s you, I don’t think it’s too late to either begin or pick up where you left off.

00:00:25 Mike: No, exactly. You’ve got a choice. You’re at that fork in the road that they talk about and you can either double down your efforts and try to get back on track or like Amy said, become one of the statistics of folks who don’t actually follow through on their resolutions. So, you know, encourage you if it’s something you really want to do to just take the time and continue those steps to make it a reality.

00:00:56 Amy: And besides, you know, even if you start a little bit late, if you wait another day to start, you’re another day behind. So go ahead and start today.

00:01:06 Amy: With that, Mike, what are we going to be talking about today?

00:01:10 Mike: Oh, my favorite subject, budgeting. You know what it is? Why it’s important and some tips, techniques, and tools that you can use to keep on track and track your finances.

00:01:25 Amy: Budgeting is one of my favorites as well. It’s probably no accident that the two of us landed in the financial planning world. But to a lot of folks, the mere mention of the word budget causes an immediate negative reaction. And I get it. And there’s no talking. Anyone who feels like that out of feeling like that. And that’s not our objective today but understanding where your money goes and setting up a plan to help keep your spending aligned with your priorities is absolutely fundamental to a successful financial situation. You can call that process anything you’d like. You can call it monthly goal setting. You can call it an annual plan. You can call it anything you want, but the process behind budgeting and the key elements of it are absolutely essential.

00:02:15 Mike: So, and I gotta be honest. I was being ironic. I really do not like budgeting. So I agree. You definitely need a plan and I agree budgeting is important and we’ll talk a little bit about what I kind of do to make sure I stay on track. But I guess I wouldn’t call it traditional budgeting, but like you said, you know the budget is a plan to help you focus on your spending, where that money is going. And really the goal is to align that with what’s most important to you.

00:02:53 Amy: I think it’s critical that you backtrack and pointed out your sarcasm about budgeting and the fact that you do it, you just do it in a way that works best for you because that’s the key to success here is using a tool using a process that works for you. Budgeting a lot of people think that it’s meant to deprive yourself. It’s like a diet you know nobody wants to be told that they shouldn’t eat some entire food group or whatever. That’s just not enjoyable. And that’s not the point of a budget, either. It’s not meant to deprive yourself of joy. In fact, it’s actually meant to facilitate the opposite; it’s meant to give purpose behind your money. Now, having said that, if your income is limited and your bills and your debt payments and things like that are consuming pretty much all your income. Then you do feel deprived of joy. But that’s not a budget problem. What that means is that you either have to increase your income or reduce your mandatory expenses, which is not a fun process. But it is reality and it is sort of outside of what is meant by a budget that might point out the issue. But it’s not the issue itself.

00:04:10 Mike: Yeah, exactly. And you know, in our last episode, we talked about debt. If you’re carrying a lot of debt, you’re paying a lot of interest expenses, especially now as rates have gone up, if you’re carrying credit card debt, you know that’s money that’s going out the door that really isn’t facilitating anything for you. It was your previous self paying for something. You know that now or not paying for something that your future self now has to come up with. So if you can pay that down, all that extra interest payments that we’re going to. You know the credit card company can now be used for things that you know do bring you joy and make you happy. Now this kind of gets to the starting point of a budget. You know, the first step is taking an inventory of all of your known expenses each month for housing, utilities, any kind of debt payments you have. All those things that recur in a set amount of time and you write all those down. One of the challenges is that they are kind of understood and you can say, OK, well, I’ve got this much in expenses and then I’m going to have this much leftover problem. A lot of people don’t do a great job of tracking everything else. These smaller things, they’re going out to lunch or dinner each day, and some of those things. And that’s what can kind of really add up.

00:06:22 Amy: Yeah. Yeah. And that’s, you know, a critical piece of the budget. So looking back at how you’re spending, you know, a lot of people know exactly what their mortgage or their rent payment is. They know about what their utilities cost. But they probably have no idea what they’re spending on going out to lunch every single day unless they have some thoughtful process behind analyzing what their rough monthly expense is for that particular thing. But so once you do collect all of your spending history, you know, at least for probably the last six or so months. Then it’s time to consider whether your spending is reflecting your priorities. As an example, let’s just pretend like 10% of your paycheck is going out to dinner and lunch or breakfast, or basically going out to eat. Are you happy spending 10% of your paycheck to do that? But. What if you don’t have money for vacation? So now you have a choice, so there’s only so many dollars that come in, you know, do you continue spending 10% of your income going out to eat and things and not getting the annual vacation that you always hope that you get to take, but then don’t have the money to take? Or would you rather cut your spending on going out to eat, As an example, in favor of aligning more money towards being able to afford the annual vacation you want? So taking that inventory of historical expenses and then determining whether the spending aligns with your priorities is sort of the first one of the first steps to creating your budget?

00:07:39 Mike:: Budgeting is 2 parts. It’s the math of where the money is going, but it’s also the art of is that really where you want your money going? The good thing is there are tools now that will allow you to track easily.

Track all of your spending so you can see it, because having that visibility is really important. I’m sure you’ve had folks come in to talk to you and you’re like, OK, where are you spending your money and you ask them to fill out a budget worksheet. There should be several $1000 a month left over, but they’re not. They don’t have that money. And it’s not ending up in savings or anything like that. But that is definitely one of the challenges if you’re not tracking stuff. Having that idea, we’re pretty bad about estimating what we really spend on a specific thing. What do you think about the tools out there that allow you to get a better handle on what you’re spending?

00:08:51 Amy:: I think there’s a ton of good tools. Some of them are free. Some people literally write down their budget on a piece of paper. Some people use their favorite spreadsheet software. Those are pretty much free. There are other free tools out there. But then there are also apps that you can use. For example, you’ve got YNAB which is short for “you need a budget”, you’ve got Every Dollar, you’ve got Monarch Money. I think some people are using mint, but mint has changed a little bit. Plenty of other options out there that are all across the spectrum in terms of price points. The bottom line is that the best tool is the one that works best for you and the one you’re going to use. There’s no point spending money on an app that you’re not going to use.

00:10:19 Mike:: Yeah, exactly. One of the other things that a lot of credit card companies, maybe like a month ago, probably sent you a hey, here’s what you spent in 2023. And those are useful because those just give you the idea of, Hey, this is where my money actually went. Figuring that out and looking at those can also be a big help but yeah, plenty of tools out there to get that in place, get a budget going and really the tracking piece and understanding is kind of the first step as we talked about and then like you said Amy aligning it with, is that where you want to be? So how do you? I guess. What are your thoughts on?

00:11:37 Amy:: Yeah, for the sake of organization, one of the things that you have to do is write down your mandatory expenses. These are things that are non-negotiable. You have to have a place to live, you have to have a way to get to work, you have to eat food, you have to pay for medical expenses. If you have children, you need to pay for childcare. So there’s all these things that you have to do and you have to make your debt payments, or else you will suffer additional financial consequences that aren’t going to help you achieve your goals. So you have to get all of those written down and then after that, now you have choices to make. Going through and deciding whether or not the remainder of your budget, which quite honestly for some folks is less than half, is left because they’ve spent over half or close to half on living expenses. You know those things that you have to spend money on. So how do you want to allocate the remaining? What are the most important things? Do you love having designer clothes? Do you love going out for nice dinners, whatever those things are, then write that down and fill that bucket first, meaning allocate money to that particular category first and then when you’re out of money but you still have categories left, then you have to do another reshuffle and figure out what you can realign and give up in other places. If you’re to put any income towards those other buckets that aren’t currently filled right now.

00:13:30 Mike: Yeah, that’s great. It’s kind of like the federal debt discussions and budget talks every year. They say, “We’re not touching Social Security, Medicare, or military spending,” leaving only a small portion open for debate. It’s the same with personal budgets. Overspending in certain categories, like housing, can throw everything off track.

00:14:35 Amy: One thing that’s often overlooked is expenses that occur infrequently, like vacations or car maintenance. You need to budget for these irregular expenses, setting aside money each month to cover them. An emergency fund is for true emergencies, not for expected costs like car repairs. So, it’s essential to plan ahead and allocate funds accordingly.

00:17:11 Mike: Yeah, that’s all great information. Once you have that budget, it really helps you get your financial health in order. It can allow you to put money into savings, investments, and other important areas.

00:17:39 Amy: So, Mike, can you summarize the key takeaways for us? What’s the best approach to thinking about, building, and tracking a budget?

00:17:56 Mike: Sure, don’t get wrapped up in the process. Pick something that works for you, capture your spending, ensure it aligns with your values, address mandatory expenses, consider discretionary spending, and don’t forget about infrequent expenses. If a tool helps, find one that suits you.

00:18:57 Mike: Personally, I do reverse budgeting, handling mandatory expenses first, then spending what’s left. I track it afterward to ensure alignment with my goals.

00:19:36 Amy: I enjoy budgeting and use an app regularly. Regardless of income, budgeting is crucial for achieving financial goals.

00:20:32 Mike: Exactly. As we wrap up, stay tuned for future episodes where we’ll delve into military retirement and ultimate retirement transitions, discussing budgeting specifics and potential challenges.

00:21:35 Amy: Sounds great. Take care, Mike.