Let’s be honest, nobody likes budgeting – and those that do are a very unique breed. Statistics have shown that approximately 30% of households have a detailed budget.
Polls can sometimes be misleading though because of our desire to look responsible when we are answering these types of questions. That being said I believe it is even lower than 30% of households that budget.
And it may come as a surprise to you, I don’t budget – at least not in the traditional sense.
Why Do We Hate Budgeting?
If you asked the same group of people in the survey if they feel like it is important to know where their money is being spent, most individuals – if not all- would say yes!
One of the factors that leads to a failed budget is the disconnect between actually having one and knowing why one is necessary.
This applies to any area of life. Without a proper understanding of why something is important it is less likely that we will make a significant impact – especially for the more difficult areas like: health, money, career, spiritual, etc.
Understand the WHY of What You Are Doing
Your first step must be understanding why you are doing something. Why are you trying to be better with your money?
When it comes to financial goals I have three main reasons for why I do what I do.
First, I don’t want to have the stress associated with being broke or in debt– it’s not worth it.
Second, I understand the more insecure my finances are the more likely I am to be tied to a 9-5 JOB (Which I have heard it said that job really stands for: Just Over Broke).
Third, I want to have meaningful experiences with those I care about the most – without money restrictions.
For me, these three points are major motivators when it comes to practicing sounds financial principles. When I am faced with a financial decision I evaluate it based upon these three goals – and if it doesn’t meet those criteria I don’t do it.
Your WHY will be different than mine – but having it defined is absolutely necessary. Otherwise, when you are faced with a tough decision, what will you use to help guide your path forward?
And we all know the decisions will be tough. Anyone who is being honest will admit there are real struggles when it comes to money discipline. There is always a competing force when it comes to how you spend your money.
Budgets are a Scarcity Mindset
I have always wondered why so many financial experts focus more on budgeting than on income growth and investing. By its very nature budgeting feels like a scarcity mindset to me.
I relate it back to 2008. During the onset of the Great Recession public companies were frantically cutting every possible expense to appear profitable to their shareholders.
While this was likely necessary for many of them to say alive; what I found interesting is that they were often cutting the growth producing “expenses” like marketing and product development.
In the end producing income was taking the back seat to cutting cost – this is common for both businesses and individuals.
When our first instinct is to cut expenses to appear profitable or wealthy, we are neglecting one of the most important aspects of money management, which is income growth.
There is no doubt budgeting is 100% necessary when it comes to building wealth, but it’s not the only answer.
If we make it our only focus we will likely limit what we are able to accomplish in other areas.
I have always felt like income growth is tied to my personal development. When I am expanding my abilities and skills, I have usually seen an increase in my income.
If budgeting is our sole focus we may get distracted from this other important area of progress.
If we believe our only path to prosperity is by going without, our mindset is that of scarcity. This is no way to go about life.
This brings us back to the budget. So many individuals see budgeting as a restriction imposed on them and believe it will zap any and all of the enjoyment out of life. So, what happens? They end up quitting before they get started – which I can’t say I blame them.
So, this is why I don’t follow a typical budget. At its core, it trains us to think from a position of scarcity.
I don’t view my money management or budgeting (which I hate to even refer to it as) as a restriction. I know the reality is that having it under control allows me to prosper in the areas that matter.
Spending Reviews Instead of a Budget
Because budgets bring about a scarcity mindset for so many, I prefer to call it spending reviews.
The first step when it comes to money management is doing a weekly, bi-monthly or monthly review of your spending.
Ideally a weekly review is best for keeping it front-of-mind, but for most people twice a month or monthly is probably more practical.
When conducting a spending review, first separate each expense into a category, ie…housing, food, gas, utilities, clothing, entertainment, kids schooling and activities, eating out, etc.
As you separate these into categories you will be able to determine where each dollar was spent. This part can be especially hard because you now know exactly where your money is going – whereas previously you could claim ignorance.
This first step of accountability and clarity – as painful as it can be – is a vital first step to money management. How can you start making progress without knowing the details? You can’t!
Separate Your Expenses into Necessities and Wants
Once you have categorized your expense you can then determine if they are needs or wants. A need is something that is necessary to live, whereas a want is a luxury.
To effectively do you this you have to be honest with yourself. What expenses are absolutely necessary and which can you get by without?
Some of the necessities include: food, housing, gas, paying on debt obligations, phone plans, utilities, etc.
Classifying the wants is less pleasant. This is where being honest comes into play. Remember, the mindset of cutting all of the fun out of your life to save money is a scarcity mindset.
This is not the long-term goal. These spending reviews are simply a way to determine where you are at so you can make a proper financial plan.
If you are in a very poor position financially, you may have to be more aggressive with what you cut out. Remember this should be a temporary mindset until you are in a better position.
When I started doing this I realized how much money I was spending eating out for lunch each day with my colleagues – it also helped me realized how much time I was wasting.
My wife and I also explored how much was being spent on cell phone plans and cable/internet packages. Once we knew exactly what was being spent, my wife and I were able to contact our providers to see how we could save money without cutting it out completely.
We were surprised to find that we were over paying for channels we didn’t even care to have – saving us hundreds of dollars a year.
I soon came to realize that there are a lot of expenses we could eliminate without altering the way we live. This was a great first step.
My wife and I also decided we would be selective when we eat out. This not only saved money but also helped us to eat healthier. It now seems like more of an event when we take our kids out to eat – as they are not expecting it.
For many this may feel like no fun, but for us it didn’t have an impact on our enjoyment – and saved quite a bit of money.
For many this may also seem like a scarcity mindset, but when you weigh the health benefits and more quality time with your children, it was beneficial in more ways than just financial.
Again, I tried to tie my spending back to my three main areas of focus: not having the stress of being broke, being tied to a 9-5 JOB (Just Over Broke), and spending time with those I care about – without being restricted by money.
I realized not only was I wasting money on things I didn’t care about, but it was potentially taking away from things I did care about.
This was a motivator because I was then replacing the drudgery and scarcity mindset of budgeting with proper spending reviews and the benefits I would see from utilizing them.
Once you have gone through and nailed down exactly how much you need to survive, compare this to your monthly income – your net income that actually hits your bank account.
If the number is negative you are in trouble. This means you are likely spending on your credit cards to fill the gap of your over spending.
This is negative traction and is really hurting your ability to gain financial momentum.
If this is your situation you will need to be very aggressive with your expense cutting. Your main goal should be to get to a positive end-of-month cash situation as soon as possible.
Focus first on frivolous spending, once that is done look toward your debt to see what can be paid off to help improve your monthly cash situation.
Investing for Retirement Should be a Priority
If the money you have left over at the end of the month is positive it is important to look toward your savings and retirement.
Many people wait until their debt is completely paid off to start investing. Waiting too long to start investing will really hurt your ability to compound growth and build your wealth.
An excellent first step should be maxing out your employer 401(K) if it is available. How much should you be investing towards retirement? A general rule of thumb is between 10-12% of your total income.
If there is not enough money left over – after you’ve completed your spending review and implemented it – to contribute this amount toward retirement, focus on eliminating debt that has a high monthly payment.
This will free up cash that can then be applied to other debts or towards retirement. There is a delicate balance that must be found when deciding if you should invest or pay off debt. Here is a guide that may help.
Every situation is unique and should be consider by evaluating your WHY – which is your reason for building wealth. Weight your decisions based upon what you want from your finances.
You will be surprised how much unnecessary spending can be easily eliminated from your monthly expense. As you get better at it, you will be training yourself how to have the same experiences while using less money.
The financial discipline you learn while managing expenses will provide a foundation for later wealth building principles.
Not only is watching your expense important, but I cannot stress enough the importance of income. I will be writing about this in more detail on a future post. This should be an integral part of how you build wealth.
It will give you more fuel for getting out of debt, saving money, and starting your investments.
Look closely at your current profession and consider how you can become more valuable and make more money. This part of the process cannot be overstated.
Conclusion to Budgeting
Having a grip on your spending is a vital first step for building wealth.
Until you know where your money is going it is likely to bleed from many unknown areas. Take that first step of accountability by knowing the reality of your situation.
Balance your goals against what you want to accomplish. If you are doing it out of drudgery it will not work – I promise!
Our minds are more powerful than we give them credit for. If we are not showing ourselves the benefit that will follow our hard work, it is unlikely we will make progress.
This is why I like doing a weekly review of my finances. It is much harder to ignore during the week when I know it will be reviewed each Monday.
Focus on your WHY. What is that reward you will get to enjoy when you have reached your goal? Use this as motivation – especially when it gets challenging, which it will.
The great news is that these spending reviews are not as difficult as they may seem. It is all about knowing what you have to work with, so you can start making progress towards your goals.
The clarity and peace of mind that will come when you look at your situation and get to work is priceless!