Updated: Mar 3
One of the things that we like to talk about on this podcast are the hidden pieces to personal finance that people do not think about or don’t know about. Last week in Podcast #47 we talked about how receiving a tax return may actually result in you losing money down the road.
This week we’re going to talk about the budget. Now according to many different surveys and from people we’ve encountered over the past, around ⅔ of people do not follow a budget or if they have one, they do not maintain it.
Lack of Budgeting is a Hidden Epidemic
According to Motley Fool from October of 2019, 75% of people have a budget; however, 79% have difficulty sticking to it. That survey goes on to say that people overspend by $7,500 each year.
Ugh! This is something that also always sticks in our craw. It is easy too easy not to look at what you spend and all it does is hurt most people. If you go out to dinner or buy groceries, how do you know how much that you can afford? What if the dishwasher breaks? We’ve had over $4,000 in unforeseen/rainy day fund expenses in the last six month alone.
This is a common survey that was posted that 40% of people do not have $400 in the bank for to tap into the emergency fund. So that means that people probably have little-to-no savings at all. Oftentimes people make their mortgage or rent payments as well as child care, student loans, cable, and credit cards etc. because these are monthly and come out automatically from their accounts.
At some point the bills accumulate and that money ends up on credit cards as the money needed to pay for bills has to come from somewhere. So this can be like an abyss and this is why many people can’t afford to retire down the road as their retirement nest eggs are not sufficient.
Needless to say, if you want to be successful you have to budget - even if you are considered as “rich” no one is impervious to managing their money. Taken from a Forbes.com article from 2015, Sports Illustrated estimated that 80% of retired NFL players go broke in their first three years out of the League. Back in 2009 they said 60% of NBA go broke within five years.
So what’s the problem? Personal financial education! Next comes discipline with your money! Now to some degree we do need to be fair and say that there are many tools with the personal finance websites, social media, videos and apps out there that people can make use of.
Nevertheless, I consistently say that this has been an epidemic in America for many years.
How Do I Start a Budget?
A monthly budget is the way most expenses are calculated. So to get started, the key is start with your bank accounts and credit cards and begin tracking all of the things that you spend money on.
In conjunction, you need to list of the recurring expenses such as:
-mortgage payments or rent
-automobile and life insurance
-cable tv/streaming services
-dining/eating out/food delivery
-transportation costs: Uber/Lift, gasoline, tolls, subway etc. -basic auto maintenance such as oil changes, brakes and new tires
-gifting throughout the year
So when you compare the cost of these items against the credit cards and the bank accounts, this will be an eye-opening experience. Without a doubt, if you don’t track your bills and services, in most cases you will spend more than what you think that you do.
Just as we previously discussed American’s on average waste $7,500 per year. Okay, so that means it is time for the compound interest calculation.
If we take that $7,500 divided by 12 that comes to $625 per month. Now take a 7% interest gain over 10 years and that comes to just over $103,000. If we take 30 years that’s $708,000 and at 40 years it comes to $1,497,000. That’s crazy how your money can grow for a nice retirement regardless of turmoil in the stock market such as the Finanial Crisis or the Coronavirus where people panic sold.
Turning Each Budget Item into a Fixed Amount
This may be the biggest key to personal finance that we have yet to see in our careers; and it may exist out there; however, the problem with budgeting is that they have too much variability.
Some months, bills are higher or they are lower as not all bills are due on a monthly basis and there are unexpected items that cannot be predicted such as the roof leaking or hot water heater breaking.
So this is why each bill even if it is not due every month, needs to be accounted for as if it is due each month. Hence, by doing this each month you should be able to have the same bills for your entire household; and by doing this you eliminate the highs and lows with your expenses. Then every budget item is just like paying a car or a mortgage payment.
Let’s take an example: If you pay for trash services that are due quarterly at $60, then you need to put $20 per month away in savings or a side bank account to have the money stored. Then when the bill comes due, that money is there to pay the bill. So what this means is that you eliminate having an unaccounted $60 cost due four times per year.
This also works the same way for bills that are due yearly such as paying for Amazon Prime that is $119 plus tax. So roughly, you’d need to put away $10 each month to account for this.
Accounting for the Variable Bills
Now when it comes to costs that fluctuate such as food or daycare, then this takes more work. So when it comes to eating, you’ll need to take the average for all costs including groceries, dining out and food and home delivery services. This requires you to go back to your bank statements and retrace six months to find the mean number. Then from there you can decide if you like what you’ve spent and pick a number to budget against each month.
When it comes to day care, you need to calculate the number of days and/or weeks that you’ll be going and come up with that total cost and divide that number by 12. For example, if you find that the cost is $6,000 then you’d need to have $500 in your budget each month. Now if you find that in some months the cost is lower than $500, then the extra money needs to be put away in a separate account.
Let’s say in December the childcare cost is $400 is lower due to the holidays. Then $100 needs to be put aside. Then in January the cost is $450. So this means you’d need to take $50 from the side savings account to cover that additional money.
Budget Predictability Creates Stability
When you have a fixed budget every month this allows you to have reliability. When you know what you have to pay for each month, it allows you to curb the ebb and flow of increases or decreases in your budget. This allows you to plan your life and have stability with your finances.
When you have control with your life choices, it allows for doors to be opened up so that you can have a clear head to make future decisions with less obstruction. Money management should be considered as one of the major pillars in life along with your career, religious choice, family and friends and so on.
Let’s Do The Recap
Budgeting is one of the most important and is often the most overlooked thing in life. It the best method to stay out of debt especially with credit cards. Unfortunately, money makes the world go around and for most people that do not manage their money, they end up spending more than they think
When people do not budget, they often end up owning things that they cannot afford or don’t realize it until they’re underwater. This is commonly associated with large mortgage payments, credit card debt and car loans to name a few. When this happens the end result is poor retirement planning which often leads to lacking a proper nest egg to retire at a desired age; if at all.
As we’ve covered what happens without a budget, you can get control of your finances starting with obtaining your bank statements for six months while writing or logging all of the things that you’ve spent money on.
The key to success with budgeting is to make every bill into a fixed amount meaning outside of consistent payments such as a fixed mortgage, you need to account for all expenses that are variable by checking your previous bank and credit card statements to come up with a number that you are comfortable with. In addition, it is important to account for money that is due at different intervals such such as quarterly, bi-annualy and yearly.
For example, If you have a subscription that is due once a year, then you need to put money aside each month into a savings account so that money is in escrow and can be accessed when a payment is due. If you have varying costs such as childcare then you need to predict the cost for the entire and divide that by 12 to create a monthly average.
Then when months are below the average you take the underage and add to supplemental account and when the amount is above the average you take money from the supplemental account to pay the bill that month.
To sum everything up, when you have control of life and money it allows you to be educated and be a decision maker. This means that you have options and confidence and intelligence. Believe us; when we say that money doesn’t make you happy that isn’t quite correct. It certainly can make your life easier. So spend the time to create and manage your budget and one day down the road you may be the person that can get up and decide what they feel like doing today rather than someone else dictating what you have to do.