Have you seen this video?
Almost everyone knows their annual salary. 8 out of 10 people don’t know how much money they spend. 81% of people don’t know what they spend on a daily, weekly or monthly basis; we’re impulse and accidental spenders. So 8 out of 10 people play offense and play no defense. Once you think about it, that’s incredible. This level of unconscious spending (as opposed to mindful spending) is the reason so many people live in financial fragility today.
Make a monthly budget.
Here’s a quick 10 minute budget:
Pay Yourself First - what’s your savings rate? Budget for that first. Tip for bad asses: Direct deposit your wages/income into your investment account first, and withdraw enough money from that for your consumption expenses.
Needs - housing, food, transportation, health care. This is your minimum monthly consumption you need to survive. In other words, this is your “squeak-by” budget; if things go really bad for you, this is the minimum amount you and your family need per month to live. Are there ways to reduce the amount you spend here? Guideline: if needs are over 50% of your budget, you’re probably living in financial fragility.
Wants - Stuff that brings enjoyment and pleasure into your life. Dining, travel, lattes. The key to your wants budget: you can have whatever you want, but you can’t have it all. Create a budget for your desires and realize it’s impossible and emotionally immature to get all your desires. CHOOSE which desires you want to satiate, which ones make you most happy. You can choose 20 $5 lattes or one $100 splurge dinner. They are literally the same thing and money don’t care, so do small frequent purchases make you happier or fewer larger purchases? Buying everything is mindless and makes everything you get less important. This becomes an exercise in mindfulness: what you choose intentionally, you get to savor. Remember, what you spend here reduces your savings rate, meaning more time away from financial freedom. But don’t make it so hard that you give up on your long term financial goals. Balance the present and the future. Guideline: a “wants budget” should be no more than 30% of your monthly budget. If you want more motivation to reduce your wants, read this article about how capitalism get us to use purchasing to cover up our real problems 12 (i.e. what’s the REAL problem?).
Bullshit - Money you’re spending that gives you no actual enjoyment in relation to the money spent on it. Money that you’re thoughtlessly throwing away. Alcohol, subscriptions to magazines, gyms, and services you don’t use. Things you buy on Amazon because you desired it for a day and then used a couple of times. Again, an exercise in mindful spending: is this purchase going to make you happy, compared to the amount of hours you spent earning it? A colossal waste. You need to get rid of these. A partial list here.
The whole point of making a budget is to spend it on the things that are important to you. This is what Quakers call “integrity.” Is your financial life full of integrity? How can you change your money scripts to do so?
GOING DEEPER: The “cash envelope system” is a system that helps people stick to their budgets. The theory is based on the real-life observation that it hurts more to spend cash than it does to spend on a credit card or bank payment. I would never use it myself because, being money vigilant, it would mean I would never spend money on anything. But if you need discipline to keep to your budget, a lot of people swear by this.
After this, you make a yearly budget, which includes things you didn’t think of: emergencies, vacations, etc. Then you go back and pro-rate that into your monthly budget.
In budgeting, be pessimistic, not optimistic.Things seldom work out the way they should. The more conservative you are about your assumptions, the more leeway you have if something goes wrong (job loss, business failure, stock market crash, ill parents, etc). (Deeper dive: Elizabeth Warren’s 50/30/20 rule 6)
Why budgeting often fails:
It is too complicated.
It doesn’t reflect your values
It feels like a chore.
What are you willing to do in order to be what you want to be?
Budgeting for a saving rate is what buys your financial freedom. Pay attention specifically to eliminating the bullshit. That’s free money that you’re throwing away that’s costing you precious hours of your life. Yuval Noah Harari, author of Sapiens, describes the “first and most sacred commandment (of capitalism as): The profits of production must be reinvested in increasing production.” As the CFO of life, take your profits and reinvest it into increasing future profits. Don’t throw it away on needless consumption.