You Need a Budget

You need a budget. No, really, you do. Have no money? You need a budget. Have more money than you know what to do with? You need a budget. Let’s break a myth right now:

Budgets are not boring. Budgets are not just for nerds or poor/rich people. Budgets are the best for everyone. I have been budgeting for 10+ years and doing so with my art-teacher wife for nearly 7 of those. I love it. She loves it.

Building a budget is the single greatest financial action I have ever done, and using it is the best action I can take. It’s better than Roth Conversions, better than HSAs, better than 3D Retirement Income! (Okay, maybe not that great…)

We’re going to discuss:

• Why Budgets are the Best
• The Budget Method Freeman Recommends
• The Four Rules of Budgeting

Next week we will cover best practices to get the most out of your budget and blunders to avoid.

Budgets are the Best

A budget is not primarily restrictive. This is the big myth of budgeting. People don’t want to budget because they believe their money will be imprisoned. Here are a few things budgeting does.

Budgeting Brings Us Awareness

Dave Ramsey is fond of saying, “A budget tells your money where to go instead of wondering where it went.” Too many of us make good money, but we have no idea where it went. An annual Cash Flow Statement shows us just how much money we really did make and save. And while a lot goes out for taxes and required expenses, we can wonder what happened to the thousands of dollars we had discretion with.

Budgeting ends the wonder. We know where that money went. And that knowledge helps us make better and more intentional decisions.

Budgeting Bolsters Our Values

“A budget tells your money where to go instead of wondering where it went.” We claim to have values, but our money doesn’t always back that up. We talked about that in Episode 36. Budgeting allows us to put our money where our mouth is and say “no” to the trivial so we can say “yes!” to the essential.

Budgeting is living intentionally with our money. Budgeting isn’t about limiting yourself – it’s about making the things that excite you possible.

Budgeting Builds Our Marriage

Do you are your spouse have the exact same values, views, and priorities around the making, spending, and saving of money? You neither? I didn’t think so. Money fights and money stress are one of the biggest contributors to divorce. Money can be hard to communicate about.

Budgeting becomes a mediator. It allows both spouses to look at the same numbers and decide together where money should be allocated. Instead of money driving you apart, it can bring you together as you work through a budget. There are specific tactics that you can use in budgeting that will really help with this, which we’ll get to next week.

Budgeting Boosts Our Goals

Do you have big dreams? Do you have those bucket-list items? Are you working toward those goals financially, or do you find money is leaking out of your back pocket? Budgeting helps us fund our goal, sometimes by saving directly for a goal and sometimes by contributing to investments to let them do the heavy lifting toward the goal. If a budget is restricting you in one area, it’s only because you are purposefully doing that to free yourself up in another area to hit some goals.

The Best Budget Method

You Need a Budget. I know I said that already, but in this case, it’s a proper noun, not a directive. You Need a Budget, or YNAB, is the best budgeting tool out there, hands down. I’ve used it for a decade or more, and I absolutely swear by it. Don’t get sucked into the “free” budgeting apps that then sell your data. Get a dedicated budgeting system.

YNAB is an online budget tool that works on desktop and has a killer mobile app. It automatically important and categorizes transactions, handles credit cards better than anything else, and makes it really easy to budget and keep up on your money. We will cover it more next week, but if you want, you can start your budgeting journey with a 34-day free trial. No credit card or commitment is required.

YNAB also has amazing education and motivation around budgeting, including their foundational four rules of budgeting.

The Four Rules of Budgeting

Let’s go through the rules.

Rule 1: Give Every Dollar a Job

We don’t do well spending out of a big pile of money. It’s why so many lottery winners go broke. When you get paid, you have a pile of money that needs to last two weeks or more. Far too often, we spend it while not accounting for everything it will need to do. We run out of money before we run out of the month. Good thing we have credit cards, right? Or maybe there just wasn’t that extra savings at the end of the money we expected. Maybe we’ll contribute to our Roth next month…

This is where Rule 1 come in. When you get paid, give every dollar a job. Right away, assign all your money to where it needs to go.

• $2,000 for the mortgage,
• $1,200 for groceries,
• $300 for gas,
• etc.

Leave no dollar unemployed. Give it a job. Most of the work will be required (fixed expenses). But you’ll have some optional overtime. If you leave those dollars unassigned, life will quickly assign them to “emergencies” or trivialities. Align your capital to your values by giving every dollar a job. This is really easy to do in YNAB, and we’ll show you how next week on the YouTube version.

Rule 2: Embrace your True Expenses

We always underestimate our expenses. Often we’ll have someone in pre-retirement planning give us an estimate of what they think they need to live on in retirement. But that estimate is always 20-40% lower than what they are actually spending. They will tally it up and perhaps come up with $5,000, even though they currently spend $8,000 per month.

Rule two teaches us to embrace our true expenses. Stop thinking you can only spend $400 on groceries. Perhaps back in the year 2003, you could. But your mortal enemy, inflation, has devoured that. It’s 2023. Eggs are $7 a dozen. $400 is one grocery trip.

Also, I know this is wild, but Christmas gifts are not an emergency. The holiday happens on December 25th every year. Your property taxes are due every year. Auto insurance renews every six months. Oil changes are required every so often.

We underestimate our monthly items and forget about our irregular or annual items. Rule 2 says to embrace those. Instead of putting $600 of Christmas gifts on a credit card, put $50/m into your “gifts” budget. Instead of your Roth IRA contribution getting stolen for a car repair, put $80/m into a “repairs” budget. It’s a total game changer when you already have the money for these “surprise” expenses.

Rule 3: Roll With the Punches

Scenario: You budgeted $50 for clothes but bought a pair of shoes for $60. You broke the budget! Oh no! Budgeting stinks!

You can’t perfectly plan all expenses. Budgets that don’t bend will break. Be flexible. When life changes, change your budget with it! No guilt necessary—it’s your money.

So you went over $10 in clothing. You haven’t spent all your “coffee” budget yet. Move $10 over to cover the shoes and skip two lattes. The budget is intact, and values are bolstered.

Rule 4: Age Your Money

What if you were paying your expenses this month… with last month’s money? How would it feel to always be ahead on your bills instead of behind? It feels amazing, that’s how.

YNAB keeps track of how long your money has been in an account using a FIFO method. First in, first out. It measures the average time it takes between when a dollar has been deposited on payday to when it is spent. That’s your money’s “Age.” People who live paycheck to paycheck generally have a money age of a week or less. It comes in and goes right back out. But when you budget and start being intentional with your money, it sticks around longer. Eventually, your money age is 30 days or longer, and you’re a month ahead on your money. It’s amazing!

Again, this is for everyone. I’ve seen plenty of high-income earners still living paycheck-to-paycheck to know that this is not just for lower-income households.

You Need a Budget Review

We covered four budgeting benefits:

1. Budgeting Brings Us Awareness
2. Budgeting Bolsters Our Values
3. Budgeting Builds Our Marriage
4. Budgeting Boosts Our Goals

We covered four budgeting rules:

1. Give Every Dollar a Job
2. Embrace your True Expenses
3. Roll With the Punches
4. Age Your Money

We also mentioned the Best Budgeting Method: Using You Need a Budget (YNAB). Start of Free 34-Day Trial to check it out. We’ll be covering it more next week. We’ll see you then!

This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are those of the people expressing them. Any performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be directly invested in.