The Dreaded B-Word
Are you ready to unleash the power of your paycheck? When you look back years from now you will understand the power of some well-placed budgeting tips into your daily routine. I can guarantee you that.
What does that mean? It means having a plan that eventually fits so seamlessly into your daily life that it’s painless. It will take the stress out of paying those necessary but endless monthly bills. It will help you build prepaid accounts for anything from a new appliance to the vacation that you dream about.
When most people hear the “B” word they want to run away. Are you this person? Do you bury your head in the sand like an ostrich? Prefer to look the other way?
I understand why! I’ve talked to many clients who are afraid to look at themselves in the mirror and ask the person staring back “What have I done”? Your budget has gone off the rails and is a tangled mess.
Yes, that is hard to face.
Yes, there is a better way.
A traditional budget is hard to stick with. How are you to know which budgeting tips really work?
You are dealing with the thoughts and habits you’ve subconsciously learned since you were a child. You are facing the “successful” front your friends are posting on social media and being inundated with advertisements that claim they have an item that will change your life, that will make it easier!
You have the experience that the traditional budget lacks the room for your personality to be inserted.
We are not here to talk about a budget that is flat and one dimensional. Your budget should reflect the full color of your life. It takes into account the vision you have of your future. Inside this personalized budget, your goals and dreams will be realized.
We are talking about a living budget.
The Starting Point
The budgeting tips we will share today will reflect what you want to achieve in your lifetime. The activities you take joy in pursuing.
I have years of experience working as a fee-only financial advisor. It is work that requires a high level of communication and trust. I get to know my clients on a deeper level. By the same token, they get to know me.
Based on these years of experience it has been shown that the most basic issues and questions surrounding budgeting, cash flow and a spending plan.
I’ve written a couple of blogs contain budgeting tips that may accelerate the idea of embracing the “B” word! One of them dives into the concept of how a physician can be income statement affluent but they are balance sheet poor. If you are at the end of a long work day and your brain is having trouble absorbing that last sentence–I will rephrase it!
It means as a physician you make a ton of money, but you don’t have a lot to show for it.
The blogs that correspond to these podcasts:
- How to Build a Budget That actually Makes Sense with Steve Crawford.
- The Makeup of a Physician Millionaire and How to Become One with Sarah Fallaw.
It’s very common at the beginning of your career that you are very poor and may even have a negative net worth. You have a valid reason for this temporary financial position. You’ve survived medical school, residency, and fellowship. Very good reasons.
During this time it’s okay, but you need a financial plan and some good budgeting tips to overcome the debt which includes an average of near $300k in student debt!
It is not okay to have a low or negative net worth in your late 40s or early 50s. You need a system in place and to build a financial routine.
I know that sounds arduous; however, after the initial work of setting the foundation, it will take only 15 minutes a month to maintain.
Why should you spend the time building a budget?
You will have control of your finances and be able to see exactly what is happening with your budget, which removes an enormous amount of daily stress!
We want to help you build a budget that doesn’t make you feel like you are in prison. That plan will start with actionable budgeting tips.
There are five big steps:
- Determine your goals
- Creating a budget that reflects your goals
- Creating the correct banking structure to go with your goals
- Tools that will help simplify your budget
Here we will go through the five action items to give you a clearer picture of what they mean:
#1. Determine Your Goals
When are you the happiest? What do you spend your money on that brings you joy?
This joy that we speak of is not the transitory filling of up of an empty moment or feeling. Similar to why people “comfort eats”, sometimes people “comfort spend”. We want you to avoid comfort spending in order to reap the intentional rewards of reaching your goals.
You will have short term goals. Those that you plan to reach in six months to a year.
Then there will be your long term goals. Those that take you two years or more to reach.
I think the gamers out there will understand this analogy the best. Video games have a way of training you will positive reinforcement. In the beginning, when you level up fast, you will get a reward.
As you play the game longer, it becomes harder to level up. This is similar to reaching your long term goals!
You choose: What do you consider your reward?
I know you work long hours. Sometimes you may need a reward to get yourself in the right mindframe for starting your shift. You may need something as a reward for surviving the shift.
Let’s use Starbucks as an example in this scenario.
Specifically, we will use a Caramel Cloud Macchiato as the reward.
You can choose to spend your money on Starbucks every day if that brings you happiness.
Gasp! I know. You thought we would say avoid throwing away money on a drink.
The truth is if you skip Starbucks you might save your money by not buying your favorite drink, only to blow that same money on something that doesn’t bring you as much joy.
If you spend here (Starbucks), you will need to cut your spending somewhere else.
Do you see how this works? You can choose.
This brings us to perhaps the sages of the budgeting tips: You can have something, but you can’t have everything.
It helps to divide your money up before it is put into categories. We divide money into three areas::
Do you know what you typically spend? How much you spend?
We encourage you to document how much you spend. Instead of handwriting it out you could use a software program. We use Tiller. This program ports data into a google spreadsheet and assigns them a category.
Here are the categories:
- Lifestyle spending
Yes, for our family Amazon actually has its own category. I’m sure they get a chunk of your paycheck too!
Actually, Amazon doesn’t want you to realize how much you are spending!
Do you want to know? I can tell you how to find out!
First, you open up Google
Type in: Amazon Export Orders
There is a hidden link in Amazon that will export all of your previous orders to Excel!
Going back to the category list above, you will notice that there isn’t a miscellaneous category. That is because that can become a black hole. Anything that you might consider miscellaneous should go into the lifestyle category.
You get to rank these categories in terms of necessity and happiness. For instance, paying your student loans is number one on the list.
The categories may have a subcategory. Home, for instance, may have landscaping or home renovations.
Which brings us to another budgeting tip: Spend your money where it excites you. If you are a handyman who likes to home improvement projects then you can do those yourself. If you hate them–you may choose to spend your money hiring those tasks out.
These first few weeks you are just going to observe where your money is going. You aren’t at the point of trying to change your budget. What we don’t want is for you to go on a strict diet (or budget)–because to much restriction can cause you to rebound.
You don’t need this type of negative cycle in your financial life. Slow and steady will get your budget ready.
While tracking, put down what you think you are spending–take your best guess. I am sure you won’t be right because most people are not in the ballpark!
After tracking your spending for 90 days you will start to see a clear pattern of where your money is going. Now you can see where you might add some additional categories to the list.
This is the time to look at where you could cut some costs and analyze your spending.
An area that a lot of people needlessly spend money is on their phone bill. My wife and I spend less than $60 for two phones. We use Google Fi and haven’t had any cell phone reception issues. Here is a link if you want to check it out.
I would say if you are spending more than $75 for two people, then you are spending too much!
Another category to look at is your insurance.
Are you overpaying for auto insurance? If you choose simplicity and bundle them in one place, then you may be overpaying. It may even be worth it if all your insurance is in one place. However, if you are bundling all your insurance at USAA…then you are probably overspending.
One of the yearly for bi-annual spending tips is to contact the major insurance companies and request a quote. I can give you an instance when it was worth the extra time and effort it took me to make a few calls.
This is a great place to cut fixed expenses!
My wife and I saved over 50%.
You read that right 50%!
This savings happened when we moved from Las Vegas to San Diego. I made the calls to check prices. We switched from State Farm to Geico.
Once again, you get to choose if the convenience of bundling that charges somewhere is is worth the extra cost. The point is to be aware of what you are spending and what your alternative cost would be somewhere else!
Dividing Your Income
Your money will be divided into three areas.
- 50% of your take-home pay (money after taxes, 401 (k) and other deductions) goes toward your fixed expenses (including student debt and food)
- 25% of your income will go toward variable expenses (travel, concerts. Lunches and Starbucks)
25% will go to your savings (increasing your net worth)
Now that you know how to divide your money, let’s look at how your banking structure will siphon the money into a resting (for now) place!
Out of all the budgeting tips, this may be the one that changes your life and gets little emphasis in most of the budgeting information.
It is all about automation.
This is setting up individual accounts.
These accounts will control the flow of money.
They will reflect what you have planned for your money.
My wife and I have one check personal checking account. All of our money flows into this account. Our fixed expenses and bills are paid out of this account on an automated schedule.
This takes a load off my mind. I won’t forget the due date. I don’t have to waste time every month paying bills that are due every month. I think the most important side effect is I get to spend time with my wife and children. Time that I value!
Some of the money that comes into this main checking account is then set with an auto-transfer into savings accounts marked for specific purposes.
We name them according to their meaning, so they bring up emotion and that helps prevent us from “borrowing” from the account. An example might be “Anniversary Trip” or “Family Vacation with Grandparents”.
We have emergency savings accounts that I don’t touch (and you shouldn’t touch yours either).
You want to be prepared for those events, right?
Some of the money is automated into a savings account for our yearly expenses, like insurance.
We think ahead and plan ahead.
By taking a large annual or quarterly cost and breaking it down to a monthly cost, which is then automatically sent to its own saving place–this is one of the budgeting tips that literally puts our finances ahead of the game!
All of these budgeting tips are used to help simplify and organize tending to your budget. There are some tools who can pull all the data together so you can see at a glance where you are on the road to financial freedom.
To name a few:
I am a huge fan of Tiller. It’s what I use. It allows me to see every transaction across all of my accounts (investment, checking, credit cards, savings) in a Google Spreadsheet.
Tiller is useful when I work with my clients. We compile spending habits and have a baseline of peer data. It allows our physician clients the chance to see how their spending habits stack up in percentages against their peers.
Traditional finance software won’t let the user do this sort of compiling and comparison.
However, It might not work for your needs, if say you hate spreadsheets (prefer pie charts)! It is important to create a budget that you are comfortable working around.
In the beginning, there is an investment of time, perhaps two hours a month in setting your budget up. The end result is more than worth the time and effort. You will save time by spending only a few minutes every month on maintenance. You will be able to see your money going where you planned.
I hope that our budgeting tips that emphasize budgeting, automation and banking structure will help curb your frustration and set you free!
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