What if you had zero debt? No car payments, credit card balances, maybe even no mortgage payment. What would you do with your income? You could save up and buy a pre-owned car with hundred-dollar bills. If you’re a renter, you could start saving a down payment for a home. Perhaps you could save for your kids’ education. In retirement, you could travel to see family and afford healthcare expenses. Maybe you could even fund a trust for your church that abundantly blesses future generations.
Having a budget – a spending plan – is the cornerstone of financial independence. It gains you traction, accelerates debt payoffs, and can turn dreams into realities. A wise airline captain once said, “it’s not what you earn, it’s what you keep.” Spending money without aim is like departing Seattle in an airplane with no navigation strategy, pointing the nose of the jet west over the Pacific Ocean, and hoping we find Hawaii. Spoiler alert: odds are not in our favor.
Too often I hear, “No, I don’t need a budget.” Yes, you do! Millionaires have budgets (super secret pro tip: that’s usually why they’re millionaires). If you want financial security, do things financially secure people do. But don’t be misled; merely having more money will never truly fulfill you, and it will amplify bad habits. About one out of five people earning over $100,000 per year still lives paycheck to paycheck, a 2019 Willis Towers Watson survey concluded. More money will not solve all problems or afford you all things, but having some margin by budgeting does help reduce stress and break the paycheck to paycheck cycle.
After a decade of experience, I can confidently say budgeting works. My wife says it’s liberating to top off the car with gas, because we’ve budgeted for it. I even did this in college, making minimum wage, because “my budget said I could”. We must make choices with our money; we obviously can’t do everything. But budgeted spending can be guilt-free, no matter the income. Just like other areas of life, living within healthy boundaries produces true freedom.
Actions you can take today, right now: Make a budget! Choose the medium you’ll use, such as Mint.com, EveryDollar, YNAB, etc. If you prefer a low-tech approach, even a yellow paper pad with two columns on it, “income” and “expenses”, will work to start. Another option is the “envelope system”: use a physical envelope for each month’s budget category, fill it with the budgeted amount of cash, use it wisely, and when it’s gone, it’s gone until next month. Personally, I’ve found digital tools make budgeting tremendously easier. Instead of regularly totaling receipts and manually recalculating your budget, most of the work is done automatically.
Next, gather recent pay stubs, bank statements, bills, receipts, and other income/expenses. Determine your monthly net (“take-home”) pay after all taxes (income tax, Social Security, Medicare) and deductions (health insurance, 401k or HSA, union dues, etc.). Determine your true, necessary expenses each month, creating categories like groceries, insurance, mortgage/rent, utilities, etc. Our goal is to “give every dollar a job”: all money coming in performs some purpose, nothing is left sitting around. After necessary expenses are covered, leftover discretionary income can fund things like paying off debt, creating an emergency fund, saving to buy a home, investing for retirement, and more. In accordance with these goals, this discretionary income also provides for fun spending without stress or guilt.
Next, automate everything. Mortgage or rent payments, bills, transfers – imagine knowing expenses are budgeted for, then seeing you’ve paid them, automatically. Create a simple system that runs reliably in the background, then go live your life. Check in regularly, making necessary improvements. Money comes in, money goes out, on schedule. You might even forget when payday is (or maybe not!). Still, it begins to matter less, because payday is not permission to spend, your budget is.
What if you don’t have enough income to cover basic expenses? The only solution is increasing income or decreasing expenses. A temporary second job or even a career shift could dramatically improve quality of life. Finance advisor Ramit Sethi also recommends cutting costs “mercilessly” on unwanted expenses to free up income. Small costs add up fast, hindering your goals. A study by the bill pay service doxo found over half of American households pay late fees each year, averaging $132 annually. One third of households pay bank overdraft fees annually, with an average of $117. Rather than “it’s only a $25 fee”, imagine what you gave up to pay it: Fees totaling $249 each year over 30 years would cost $7,470. However, avoiding fees and overdrafts and instead investing that $249 annually over 30 years with 8 percent return would earn you $28,207. Many banks offer options to decline purchases rather than allowing overdrafts, and automatic payments can help avoid late fees.
What if you exceed a budget category despite disciplined spending? Life happens, so wisely adjust your budget. Decrease one category, then move that amount to the category that needs it. For large or semi-annual expenses, try a “sinking fund”: divide the estimated cost, then create a budget category to save for that item each month. A $600 insurance bill due every six months becomes $100 per month, much more manageable!
Lastly, with an irregular income, take your lowest net income month within the last year, and use that for your monthly budget income estimate. If you earn more in the current month, put it towards your financial goals.
To maximize the efficiency of your spending, examine categories like food, fitness, and entertainment. The average household spends $300-600 per month on groceries, a 2017-2018 Bureau of Labor Statistics report shows. To stretch your food budget, make a weekly meal plan and grocery list, only visiting the store 1-2 times per week. Refrigerate or freeze leftovers, take them to work, and pack healthy snacks. My wife and I dine out far less than we did five years ago. We’ve found cooking delicious, healthy meals at home frees up money for other goals. Next, if your fitness membership goes unused, consider obtaining a set of dumbbells and exercising at home instead. Try FitnessBlender.com, a fantastic resource operated by a personal trainer husband and wife from Seattle; they offer free workout videos with millions of views. Lastly, consider the trend of “cable-cutting”. A report released by firm eMarketer predicts more than one fifth of American households will cut cable or satellite TV by 2021. Using a simpler, less-expensive option such as Prime Video (already free for Amazon Prime members), Apple TV, or Disney+ could save you a bundle annually.
For our budget, my wife and I use Mint.com along with a master calendar showing unique expenses for each specific month, like HOA dues or vehicle registrations. We check Mint most days to categorize and split recent transactions, ensuring our budget is accurate. To plan for a recurring expense or task in the future, we calendar it. Each new month, we take a few minutes to build our monthly Mint budget, referencing the calendar. All our finances are combined since we’re married, and we meet often to talk about our plans, purchases, and goals. It’s simple and gets better and more accurate with age. Don’t be discouraged if it takes several months to get familiar with budgeting and your expenses, that’s very normal.
Allow me to recommend a fantastic resource if you’re not familiar: Dave Ramsey and his Seven Baby Steps. The podcasts, articles, and books by the folks at Ramsey Solutions are solid advice on money and life. They’ve helped millions of people in America pay off debt and build financial stability. Consider checking them out, and never stop learning.
Make a new habit of asking “What budget category will this come from? Is there enough in there to cover it?” before you spend. Even if your budget says yes, maturely consider if your purchase is wise, in line with your goals and values. If so, spend guilt-free!
Luke Miller is passionate about helping others succeed in their finances, careers, and lives. A fourth-generation aviator, he is a pilot for a Seattle-based major airline. Luke and his wife live locally in Enumclaw. This article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice.
