Hate Budgeting? Try This Instead!
- Adam Herod
- Dec 29, 2018
- 4 min read
Updated: Jan 2, 2019
A recent article from CNBC interviewed a 39 year-old retiree who promoted the idea of skipping the budget. Here's my spin on his philosophy. #budget #wealth #moneyblog #money
The premise of the no budget philosophy
Ask anyone adhering to a strict diet how things are going and you're likely to get an uninspiring response.
You're not shocked, right?
What about someone on a budget?
You think they are going to be ecstatic?
Probably not.
That's the idea behind Chris Reining's belief that people don't stick to budgets, just like they don't stick to diets.
In Reining's mind, people end up on an endless loop of trying new diet regimens without any eventual success.
He may not be all that off. In fact, if you conduct a brief search you will find that "1 in 100 people keep the weight off," and one article that proclaims diets fail people and not that people are failing in their diet practices.
Before we move on, let's remember that a budget is a predetermined allocation of funds to specific expenses, i.e. groceries, gas and spending.
If we skip out on budgeting, as this 39-year old millionaire suggests, then what should we do instead?
A Shift in Focus
Reining suggests tracking what is going in and out, instead.
Far too often we overspend our budget or lose out on fun, minor expenses because we have to adhere to our budget.
I suggest flipping your mindset, entirely.
Instead of focusing on what to do after your receive your paycheck (income --> spend mindset), focus on what you do before your paycheck crosses the bank line (income --> invest --> spend mindset).
"Don't save what is left after spending; spend what is left after saving." Warren Buffett
Since we don't learn a great deal about money in the public education system, most of us end up on a financial treadmill of earning - spending, earning - spending and cannot get off.
We cannot wait until Fridays, especially pay day/happy hour Fridays, and then we spend all weekend only to feel like we have to go back to work to make it all up again.
It takes a good amount of energy, at first, to set your saving habits; however, once you set these habits you can stick to a steady diet of earning, saving and then spending what is left.
Fill Up Your Buckets
Take the advice of identifying all of your cash going in and going out, and determine the total percentage for each one of the buckets below.
The standard buckets include all of your major life expenditures, while providing the recommended 15% in investments for your future retirement.
These are the standard recommendations from industry professionals. Some will recommend socking away up to 20% of your income in order to prepare for the unknowns of the social security system.
For those looking to really hedge their bets, and plan for more financial security, I like to throw in an extra bucket and skew the percentages even further.
With the right fine tuning, 35% of your money can be put into action. And if you can pinch yourself in other facets you'll be on a path to better financial confidence.
Honestly, once you've reached a level of 30%+ in your investment buckets, you can play around with the other categories more freely without financial worry.
The first move in playing around would be to take an allotment from your high interest savings and erase more debt.
Ideally, you want to see that bucket drop to 0%.
That's a great move, especially since you will decrease your erasable debt percentage and can add more to your investments or savings.
The key here is to keep your mortgage debt less than 30% of your total monthly income.
Some banks and loan agents will allow for greater percentages, or even less money down on a house with variable interest rates or 401(k) borrowing.
DON'T!
In The Next Millionaire Next Door, a comprehensive study on millionaires in America today, it was surprising to learn that most millionaires were not found in what some would imagine to be affluent neighborhoods.
Those in larger homes were more likely strapped for cash on a monthly basis, even living paycheck to paycheck, because they had leveraged all their future earning power on maintaining the appearance of wealth.
Instead, most average millionaires are not entirely flashy - instead driving cars valued at less than $35,000 and living in modest homes.
Just remember that 5% less in costs for your mortgage means you can put that 5% to use in killing debt or investing for your child's education.
Assets and Liabilities
In order to really get a hold on your finances and build wealth, it is important to identify your assets and liabilities.
When you first start out, it is more likely that your liabilities will outweigh your assets. You will have student loans, car payments and rent or mortgage due each month.
It is important that you use your 20s and early 30s to really chip away at your liabilities so that you can increase your assets.
Work a side hustle and read "The Side Hustle, Ways to Use Your Extra Money."
Once you get control of your liabilities, you can start to accumulate assets any way you see fit.
According to Dr. Thomas Stanley, author of The Millionaire Next Door, here are some of the top assets owned by millionaires.
Investment real estate
Closely held stocks
Publicly traded stock
Retirement assets
Personal residence
Insurance
Cash assets
Limited partnerships
Tax-exempt bonds
Farms
Imagine each one of these assets as a layer of financial security surrounding your daily income. Regardless of what happens in the outside world, you will be protected by each layer.
Most of us are conditioned to work, earn a paycheck, spend and repeat.
Instead, those that know how to make money work for them are building assets that generate returns instead of buying material possessions that won't hold any true value over the long term.
If you want to build your assets it's a great idea to list all of your liabilities from smallest to largest.
Using the snowball method, you can chip away at your liabilities and gain financial and psychological wins that will provide you flexibility in your monthly cash flow.
If you can stave off frivolous purchases and faulty signals of wealth, you can head toward the financial freedom Reining has already begun to enjoy!
For more follow @thewealthmap on Instagram and Facebook.
You can message Adam at wealthmapblog@gmail.com.
For more on the original article, visit "39 year-old retired millionaire: Budgets don't work, so do this instead."
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