Category: Budgeting

  • How to Best Optimize your Savings

    How to Best Optimize your Savings

    In our last post, we talked about the importance of fueling your savings and how savings differ from investments.

    Here, we’ll discuss how to best optimize your savings so you are protected in times of emergency and can achieve your short-term goals.

    We’ll also talk about whether you should automating your savings, and if it makes sense to start saving while you’re paying off debt.

    Let’s begin with the most important savings account we all need: an emergency savings account.

    The first savings account you need is an emergency savings account.

    The first savings account you need is commonly referred to as an emergency savings account. This is your ultimate security blanket for whatever life throws at you.

    For example, if you lose your source of income, your emergency savings will keep you afloat until you find a new source of income. The idea is to use your savings so you don’t have to pull from your long-term investments.

    Your emergency savings is not just for when you lose your job. Your emergency savings will also protect you in times of emergency (brilliant, huh?), like unexpected medical bills or expensive home repairs.

    The idea remains the same: instead of pulling from your investments, you will have cash available in your savings account to cover your needs.

    Aim for 3-6 months of Now Money saved for emergencies.

    Aim for building up 3-6 months of your Now Money saved in a dedicated emergency savings account.

    Why aim for saving enough Now Money instead of saving enough to cover your total Budget After Thinking?

    Because Now Money represents the consistent, reoccurring expenses that you need to pay every month to take care of yourself and your family. Since you will only be using this money in times of emergency, you can, and should, forego some of life’s luxuries until you get back on track.

    Man protected from the crisis because he has 3 to 6 months of emergency savings thanks to think and talk money.

    The same is true for fueling your Later Money goals. Take a pause until you sort out whatever it was that caused you to spend your emergency savings in the first place.

    Come on Matt, should I save 3 or 6 months of Now Money?

    It depends! Personal finance is personal.

    If you have no dependents, 3 months worth of savings is a good benchmark. In most circumstances, that should give you enough time to get back on your feet.

    If you have dependents, that means you are responsible for additional humans, sometimes tiny humans. These humans are counting on you for support. Targeting 6 months of savings is a good idea so you can continue to provide for them.

    You should also consider your source and consistency of income when deciding how much you’ll need saved for emergencies. If you are not paid regularly throughout the year, you should target a larger amount in your emergency savings to cover those longer gaps between pay.

    When you are part of a dual-income household, you may be able to get away with less emergency savings since two people are contributing to the monthly bills. If one of you suffers a sudden job loss, the other person’s income can still be used to keep the household afloat.

    One last thing: Building up to 3-6 months of emergency savings will take time. Don’t pressure yourself to accomplish this goal overnight. Each month, you can add to this account until you reach your target. Any and all progress is good progress.

    Do not rely on credit cards for emergencies.

    Unfortunately, many of us rely on credit cards to pay our bills. When we do this, our debt grows and cancels out any gains we’re making through our savings and investments.

    Just as you shouldn’t pull from your investments in times of emergency, you should not rely on credit cards to protect you.

    Savings is also for more fun, short-term goals.

    We just talked about the first savings account you need, an emergency savings account. I agree with you that thinking about emergency savings is not exactly fun. Job loss… medical treatment… car repairs. Yup, not fun.

    Let’s talk about more fun stuff. Savings is also for short-term goals, whatever those goals are for you. This is your Later Money in action fueling your life goals.

    Remember, we said emergency savings was your first account. Not your only account.

    Once you’ve identified your specific Later Money goals, it’s a good idea to create separate savings accounts, or buckets, for each goal. This will help you visualize the progress you’re making towards each goal. It will also help you not use your savings that was intended for one goal on something else.

    Happy wedding photography of bride and groom at wedding ceremony paid for with savings learned on Think and Talk Money

    What kind of savings buckets might you have? Before I got married, I had separate savings accounts for:

    • Engagement ring
    • Wedding
    • Down payment on a home
    • Travel
    • Cubs Season Tickets
    • Emergency Savings
    • Budget Busters

    I had a specific amount in mind for each category and would make transfers each month into those buckets. Not each account received an equal amount.

    For example, I knew how much I needed for Cubs tickets, usually payable at the end of the year, and divided that amount by 12 months.

    The amount needed to purchase something like an engagement ring was more… fluid.

    My students in recent years have suggested other savings buckets, as well. We’ve talked in class about saving for a car, saving for holiday presents, and saving for kids’ schooling.

    Whatever your savings goals are, using separate buckets will help you stay on track.

    Setting up separate savings accounts online is easy.

    It’s easy to set up separate savings accounts online with most major banks. Once you create your initial account, you can create sub-accounts that will appear on the same landing page as your primary account. Each account will have an individual account number, and you can label them however you like.

    When you do set up your savings accounts, it’s a good idea to have a different bank for your primary checking account and your savings accounts. This will help you resist the temptation to spend your savings. Out of sight, out of mind, and all that.

    I’ll soon have a post on my favorite online savings accounts. There are a number of them out there that offer good interest rates and a solid user experience.

    Automating your savings is a good idea, but I don’t personally automate.

    I automate a lot of my money tasks, like setting up automatic bill payment for every bill that comes to mind. This includes my mortgages. I also have automatic deductions taken from my paycheck for my 401k plan.

    Automating your money is a very good idea. In The Automatic Millionaire, David Bach explains how the single step of automating your finances can help you live rich and retire richer. You can learn more about Bach’s philosophy on his website.

    I don’t disagree with Bach and implement many of his strategies in my own life. The Automatic Millionaire is definitely worth a read.

    Still, I don’t automate my savings transfers.

    I automated my savings transfers in the past and learned that I prefer the emotional high of manually making savings transfers.

    Money is emotional. This is just one example.

    Happy young couple making savings transfer online in computer app and feeling an emotional high thanks to Think and Talk Money

    I like how it makes me feel to go into my checking account and transfer that month’s Later Money to my savings. It makes me feel good to see the pop up on my computer: “Your transfer is complete!”

    I like that feeling so much that I’m not worried about skipping a savings transfer. That moment gives me a lot of joy.

    Whether you choose to automate or manually transfer into your savings account, please make sure the dollars are not disappearing and are actually going towards your most important goals.

    If you have debt, should you still build up your emergency savings?

    During my money wellness class, I usually get a question like this:

    “Should I build up my savings while I’m paying off student loans or other debt?”

    My recommendation is different depending on the type of debt. That’s because interest rates are generally much lower for student loans or mortgages than for credit card debt.

    In a future post, we’ll talk about what is commonly referred to as “good debt” and “bad debt.” Student loans and mortgages, in my opinion, represent good debt. Credit card debt is almost universally considered bad debt.

    Typically, good debt has much lower interest rates than bad debt. You might be paying 20% or more on your credit cards and closer to 8% on your student loans (and probably even lower on your mortgage).

    If you have high interest credit card debt, pay that off first before you prioritize savings. It doesn’t make any sense to pay 20% interest to a credit card company just so you can earn 4% interest in a savings account.

    On the other hand, if you have student loan debt or mortgage debt, I recommend you start building your emergency savings account while you’re simultaneously paying down that debt.

    Yes, paying 8% interest is mathematically worse than earning 4% in savings account. If you are driven strictly by the math, you should pay off that 8% debt before you start saving in a 4% interest account.

    Never forget that money is emotional.

    But, money is emotional. I think it’s worth paying the interest on your good debt so you can experience your savings growing.

    Plus, if you do have an emergency that requires you to tap into your savings, you won’t have to rely on credit cards and pay the much higher penalty.

    Keep in mind that if you go this route, you still need to make your required debt payments. We are only talking about extra money that you have available that could go towards additional debt payments or to savings.

    The temptation to ignore your savings is real, especially when you have debt.

    The temptation will be there to pay off whatever debt you have as quickly as possible and forego saving altogether.

    I still feel this temptation every month. Should I contribute my next dollar to building up savings or paying down mortgages?

    For most of the past year, I was laser focused on paying down mortgage debt. More recently, I’ve reassessed and have been working to build up my savings.

    Having talked it over with my wife, we want to make sure we’re protected should something unexpected happen, even if that means temporarily slowing down our progress on our mortgages.

    This way, we won’t end up in a cycle of using credit cards to cover us in times of need.

    If you’re faced with a similar decision, know that you’re already ahead of the game by even thinking about how to use your Later Money to fuel your goals.

    Whether you are paying down debt or increasing your savings, you are heading in the right direction.

    Please drop a comment below if you have any additional tips to share!

    Do you prefer automatic savings or manual transfers?

    What are some of your favorite savings buckets you’ve used?

  • How to Stay on Budget with Two Simple Numbers

    How to Stay on Budget with Two Simple Numbers

    Most of us humans are pretty good at avoiding things we don’t like. The things I’ve done to avoid mayonnaise…

    Budgeting falls into this category of avoidance. Even though most of us can appreciate that budgeting is a crucial step in money wellness, we still avoid it.

    Some of us give it a shot, and usually quit before we notice meaningful improvements. Just as problematic, some of us obsess over our budgets in an unhealthy and unsustainable way. This was me for a while. My obsession was mint.com.

    I didn’t have a healthy relationship with budgeting apps.

    If you used mint.com like I did before it ended, do you also have nightmares about those red tracking bars? Mint.com users know exactly what I mean. Overspend $11 on groceries? Red bar. One too many lunches downtown? Red bar! A last minute Saturday morning yoga class? RED! BAR!

    It still pains me to think about how many hours of my life I wasted trying to recategorize expenditures so those red bars would turn green. If I just move this box of cereal from Groceries to Social Life, that Groceries bar will turn green. Oh wait, now Social Life is red. OK, move those movie tickets to Car Repairs.

    When my wife was still courting me, I introduced her to mint.com. You might be thinking, “Matt, why on earth would you introduce her to something that drove you crazy!?” Valid question.

    She was a good sport and gave it a shot for a little while. Thankfully, she was smart enough to realize tracking every penny wasn’t for her. The whole thing gave her more anxiety about money. Think about that. The idea was to create a plan for her next dollar so she didn’t have to worry about money. All I did was make it worse by introducing her to a budgeting app.

    There’s an alternative to tracking every penny for the rest of your life.

    That experience paved the way for my preferred budgeting method that my wife and I still use today. We discussed this method briefly in our recent Q&A post.

    Please keep in mind this method is for people who have already created a Budget After Thinking and are honestly dedicated to creating fuel for their Later Money. Only when you get to that point will you no longer need to track every penny. At that point, your money motivations will be so strong that you’ll stay on track without needing to track every expenditure.

    If you’re not there yet, don’t worry. You will be soon. Follow my top ten budgeting strategies until good habits become second nature. Then, move on to this simple plan.

    Part 3: How to Win the Budget Game

    My preferred tracking method is a version of zero-based budgeting.

    Zero-based budgeting was first introduced in the 1970s by Peter Pyhrr. (I don’t love the name, either.) The main idea is that every dollar has a job, something we already talked about in our conversation about eliminating disappearing dollars.

    In my version of zero-based budgeting, you don’t need to track every penny. You don’t need budgeting apps or complicated spreadsheets.

    You’ll only need to focus on two numbers each month to know whether you are on track or falling behind. I’ll show you those two numbers below.

    Before you get too excited, I need to reiterate this key point: if you want to succeed with zero-based budgeting, you still need to first create a Budget After Thinking. Otherwise, you won’t be able to figure out the key two numbers that you need to focus on.

    This step is for those people who have already tracked their spending for at least three months, made thoughtful adjustments so their spending is in line with their values, and now know exactly how much fuel they can generate for their Later Money every month.

    OK, so how does this all work?

    I mentioned there are only two key numbers you’ll need to focus on each month:

    1. Your checking account cushion.
    2. Your Later Money transfer amount.

    Let’s explore each number.

    1. Your checking account cushion is your safety net.

    A checking account cushion is the amount of money in your checking account that you don’t plan to spend. The purpose of the cushion is to give you a little breathing room so you can pay your bills, even if you overspend in one month.

    Without the cushion, if you have a tough spending month, you either need to skip paying certain bills or skip making your Later Money transfer. Neither option is acceptable. The first option leads you into debt. The second option halts progress on your most important life goals.

    The checking account cushion gives you protection.

    How much of a checking account cushion do you need?

    How much of a cushion do you need? It depends on whether you have consistent income (regular paychecks), or are paid inconsistently (commissions, freelance, contract, etc.)

    If you are paid with consistent paychecks, I recommend your checking account cushion equal the amount you’ve planned to spend in your Now Money category from your Budget After Thinking (don’t worry, example below). This amount should give you a comfortable safety net without leaving too much money in your checking account that could be better used elsewhere.

    If your pay is inconsistent, you’ll need a larger cushion to cover the larger gaps between pay days. I recommend you have double the amount of your Now Money. Note, you may have to tweak this amount based on your unique situation.

    In our really lost boy example, he received paychecks biweekly. A good checking account cushion was $3,600 (equal to his Now Money).

    This means that there should be $3,600 in his checking account to start each month. At the end of the month, after paying all of his bills and making his Later Money transfers, he should still have $3,600 left in his checking account. That’s his checking account cushion.

    It’s OK if your checking account cushion temporarily dips below the amount you started the month with. This could happen during the time of the month when you pay certain bills, like your rent or mortgage. Don’t worry. The amount in your account will climb back up once you receive your next paycheck.

    A final point: don’t spend this cushion. Fight the temptation to use your checking account cushion to pay off bills or debt. Without that safety net, zero-based budgeting does not work.

    2. Your Later Money transfer is the main reason you’re budgeting in the first place.

    This number reflects the whole purpose of budgeting in the first place: to create fuel for your ultimate goals in life. If you don’t know what your goals are, revisit our conversation on why you should want to be good with money. It all starts with what you truly want from your life and how you can use your money to get it.

    When you’ve created your Budget After Thinking, you’ll know exactly what this amount is. In our really lost boy example, the total Later Money transfers added up to $2,050. In future posts, we will discuss where to transfer and what to do with this Later Money. No matter what, the goal is to put this money to work for you to progress towards your goals.

    By focusing on just these two numbers, (1) your checking account cushion and (2) your Later Money transfer amount, you don’t have to track every penny. You’ll know if you are hitting your goals or falling behind just by looking at these numbers.

    Now that we know the two key numbers to focus on, let’s see how this all works.

    How to ensure you are on track with your money goals with just two numbers.

    Sticking with our really lost boy, he predetermined that his checking account cushion is $3,600 and his Later Money transfer amount is $2,050.

    At the start of the month, that means he had $3,600 in his checking account. Throughout the month, his checking account balance increased when he got paid (our really lost boy earned $7,500 per month). His checking account balance decreased whenever he paid for things like rent ($2,200) and any other bills.

    The checking account cushion ensured that he had enough to cover all of his expenditures throughout the month. For example, if his rent was due on Wednesday, and he wasn’t getting paid until Friday, his checking account cushion ensured that he had enough in his account to pay the rent on time. His cushion might fall temporarily below $3,600, but his next paycheck would soon replenish his account.

    As the month went on, various bills came due. Utilities may be due on the 7th of the month. Credit card bills on the 15th. These payments can all be automated so he didn’t have to actively worry about them. Again, his checking account cushion guaranteed he had enough in his checking account to pay them.

    Towards the end of the month, in a perfect world, our really lost boy would have exactly $5,650 left after paying all of his bills. He could then transfer the predetermined $2,050 of Later Money to his various Later Money accounts. He’s then left with a checking account cushion of $3,600 and is ready to begin the next month.

    This is not a “set it and forget it” budgeting method.

    This is not a “set it and forget it” budgeting method. Think and Talk Money is all about exerting a little bit of mental energy on your money every week. This budgeting method is a good illustration of what that means. You don’t need to track every penny, but you still need to pay attention to your money choices.

    To help you with that, I suggest that you glance at your banking or credit cards apps once a week to monitor your spending. If you use credit cards or electronic payments for most expenditures, it is quick and simple.

    The reason it’s a good idea to glance at your banking apps is to make sure you are relatively close to your spending targets. If you notice that you’re overspending in the first half of the month, you can make the appropriate adjustments before the month ends.

    This small amount of effort throughout the month is worth it. Every time you make that Later Money transfer at the end of the month, you’ll feel exactly what I mean.

    Don’t strive for perfection.

    I said above “in a perfect world” to highlight that we’re not striving for perfection. That’s an impossible standard. One month, our really lost boy might have only had $3,300 left after making his Later Money transfer. That’s fine. It’s a temporary blip that he could easily fix, if he’s honestly dedicated to his life goals. He had a couple of options.

    His first option was to course correct the next month by spending $300 less. That could mean temporary adjustments in his Now Money or Life Money, such as skipping a couple dinners out, doing yoga at home, and buying chicken instead of steak at the grocery store.

    His second option was to replenish his checking account cushion from his specific budget busters savings account. What is that, you ask? It’s a separate savings account to cover you if you have one of these higher-spending months so you can keep your money plan progressing.

    In some months, you will actually underspend.

    Where do you get the funds for such an account? Believe it or not, in some months, your spending will come in under budget. Let’s say our really lost boy had one of these good spending months in January. Maybe he did Dry January and ate all his meals at home for health reasons to compensate for all the holiday celebrations.

    In this example, the result was he spent $500 less in January than he had budgeted for. Instead of leaving that $500 in his checking account (bringing his cushion up to $4,100) where it turns into disappearing dollars, he transferred it to his budget busters savings account.

    Then, when he had a high spending month, he could make a transfer back into his checking account to keep his cushion at $3,600. All while continuing to make his Later Money transfers every month.

    If you constantly run out of money before making your Later Money transfers, this method is not for you, yet.

    Always remember the goal of your Budget After Thinking is to generate fuel for your life goals. If you’re not making these Later Money transfers, you’ve defeated the purpose of having a budget in the first place.

    Don’t feel embarrassed or sad if that happens to you. Take it as a sign that you need to explore your Now Money and Life Money spending to see what adjustments you can make. Once you’ve found those adjustments, you can come right back to my version of zero-based budgeting.

    If you want this plan to work, where you only need to focus on two numbers instead of tracking every penny, you need to be honest with yourself that you’re ready for this.

    Decide for yourself what budgeting method works best for you.

    If you’ve been successful tracking your spending in a spreadsheet or a budgeting app, and enjoy the process, you should continue to do so. If it ain’t broke, don’t fix it, right?

    On the other hand, if you’ve created a Budget After Thinking and consistently hit your Later Money goals, you’re probably ready to stop tracking every penny, if you’d like.

    To recap, my version of zero-based budgeting is for those people who want to continue to fuel their Later Money goals without the anxiety of the spreadsheet. Instead, focus on those two numbers: (1) your checking account cushion and (2) your Later Money transfers. This is what I’ve been doing for years and it has worked.

    Happy boy with a bundle of money dollars cash who has a checking account cushion and Later Money.

    If your cushion falls short one month, that’s OK. We are not striving for perfection. Make up for it the next month or use your budget buster savings account to replenish your checking account. And, keep making your Later Money transfers.

    Has anyone else experienced mint.com anxiety? Are you currently using a budgeting app? How do you like it? Has any tried zero-based budgeting?

    Let us know in the comments below.

  • 10 Tips to Win the Budget Game

    10 Tips to Win the Budget Game

    In Part 1 of our series on budgeting, we learned how to eliminate disappearing dollars by creating a plan for Now Money, Life Money, and Later Money.

    In Part 2, we used a real life example to work through the budgeting process together. We learned that even seemingly minor adjustments can add major fuel to your Later Money bucket.

    Here in Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments so we can consistently win the budget game.

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    1. See the ball go through the hoop.

    When I was playing basketball growing up, I learned the concept of “seeing the ball go through the hoop.” When I was struggling to make a shot, my coach encouraged me to drive to the basket and make an easy shot. Once I saw that I could make an easy shot, I had my confidence back.

    By seeing the ball go through the hoop, I subconsciously reminded myself that I could do it. There was nothing wrong with me. I was ready for more challenging shots.

    Anyone who has been around young kids has witnessed this same phenomenon. My son is learning to swim. When he proudly drifted (with a life vest on) two feet from me on his own, he proudly exclaimed, “I’m swimming! I’m swimming!” It didn’t matter that neither his arms nor his legs were moving.

    Once he saw that he could enjoy the pool without holding onto dad for dear life, he wanted nothing to do with me. He knew for himself that he could do it.

    This concept works in a lot of different money situations, especially when making thoughtful adjustments to your budget. In our really lost boy example, we made small adjustments to our grocery budget, phone and internet bills, and social life spending.

    These adjustments were easy to implement and added major fuel to our Later Money. Just as importantly, there was an additional psychological benefit in proving to ourselves that we could make improvements.

    Start small. See the ball go through the hoop.

    2. Don’t cancel your social life.

    The point of starting small is to identify beneficial adjustments that are relatively painless. Focus on the “relatively painless” part. Canceling your social life will not be relatively painless. Your social life consists of ongoing experiences that bring you happiness. We always should strive for more of those experiences, not less. So, don’t cancel your social life.

    Looking again to our really lost boy, you probably noticed that I made small adjustments to my Life Money. However, even those small adjustments did not result in less time with my friends.

    This is a key point: I didn’t spend any less time with my friends than I did before. Instead, I thought and talked about alternatives so I could still see them without spending a lot of money.

    In recent years, my students have thought and talked about some great examples of this concept in action. For example, say your friends are going out to dinner on Friday night. You know it’s going to be more expensive than what your Life Money permits.

    Instead of going to the dinner (and wrecking your budget), or not going to the dinner (and being sad at home), what alternatives can you think of?

    One student suggested you can meet your friends beforehand for happy hour. Another student suggested you take a pass on dinner and invite your friends over to your place later that weekend for coffee and bagels.

    If you don’t want to spend your Life Money to go see Taylor Swift in concert, invite your friends over to watch the documentary on Netflix.

    The common theme is that you still get to spend time with your friends, while keeping more money in your pocket.

    3. Talk to your friends about Life Money.

    Surprise, surprise! More talking! I recommend you talk to your friends about the thoughtful adjustments you’re implementing with your Life Money. Like in most life situations, communication is key.

    Once your friends know that you are working on thoughtful choices in your Budget After Thinking, they will happily support you. They’ll know that you aren’t blowing them off. In the rare instance that they don’t support you in striving for your dreams? You may need to question if these are the right friends for you.

    The art of budgeting is not about cutting, especially when it comes to things you love. Budgeting is about thinking and talking to find solutions or alternatives.

    You can keep doing the things that bring you happiness at the same time you’re making progress on your life goals. It just takes a little bit of mental effort.

    4. Keep on traveling.

    Making small adjustments works in all areas of your budget, not just your social life. Let’s look at travel, a major expense, but also one of the best sources of life experiences for a lot of people.

    For our really lost boy, cutting out travel completely was a nonstarter. My sister lived in Los Angeles, one brother lived in Washington D.C., and the other brother studied abroad in Spain. My best friends from college lived in New York and Virginia. My grandma was in South Carolina.

    If I wanted to see my people, traveling was part of the deal.

    Traveling was also a huge expense, and paying for all that travel brought me a lot of stress. I needed to think and talk about a solution so I could travel for less money. You know where this is going, don’t you?

    Instead of exerting mental energy worrying about how to pay to travel, I exerted mental energy to master the game of frequent flyer miles and credit card points. I researched the best credit cards for travel points and how to best use those points for free flights and hotels.

    I learned the most affordable days of the week to fly and the best times of the year to visit certain places. Yes, this took mental effort. But, this was more preferable mental effort than worrying about money.

    Even if you don’t want to take these steps, you can still make thoughtful decisions about cutting back on even one or two trips a year, which I also did. I spent less money, but the added benefit was that I appreciated each trip even more.

    I had more time to look forward to that trip and more time to remember it before another trip distracted me.

    Fun, friends, travel and tourism concept. Beautiful girls looking for direction in the city because they've followed these 10 budgeting strategies.

    Do not use credit cards just to earn points.

    This is not a recommendation. It’s a requirement. Stay tuned for a future post on responsibly using credit cards to earn free vacations.

    For now, the only rule that matters is to not overly spend on your credit cards just to earn points. That is a recipe for disaster.

    Using credit cards to travel only works to your advantage if you can pay your bills, in full and on time, each month.

    “Triple points!!!”

    Years ago, my friend and I were out to dinner with our wives at a nice neighborhood spot in Chicago. When the check came, I pulled out my credit card. He pulled out a debit card. I nearly fell out of my chair.

    It’s not that using a debit card is a bad choice. It’s a great choice for a lot of people. In this instance, however, I was shocked because I knew this guy very well.

    We had travelled all over Europe together. We had just spent most of dinner talking about trips we had taken and trips we wanted to take. This friend is also one of the smartest guys I know, a statement that I will forever deny and insist that I was hacked, if he ever reads this.

    I was shocked he wasn’t using a credit card to earn points so he could travel for free.

    I couldn’t help myself and had to ask my friend about the debit card. (What do you want from me, I like to talk about money.) Turns out he just never really thought about using a credit card. He wasn’t actively avoiding credit cards, he just didn’t know there were advantages to go along with the potential negatives (if you don’t pay your bills).

    My friend was an instant convert. He was thrilled (maybe an understatement) to learn about how he could travel for free with credit card points. He began responsibly using credit cards and never looked back.

    To this day, he won’t leave me alone any time he earns “TRIPLE POINTS!!!” or books a free vacation for his family. I love it.

    5. Spark and cut.

    Another one of my favorite tricks was inspired by Marie Kondo, famous for helping people de-clutter their houses by asking a simple question, “Does this item spark joy?” If it does, keep it. If it doesn’t, get rid of it. So simple, and so powerful.

    Marie Kondo is an inspiration. In my opinion, there is no clearer display of brilliance than taking a complex matter (like organizing your house) and distilling into a simple, understandable idea.

    We can apply the same strategy to any area of our spending. Does this subscription bring me joy? If yes, keep it. If not, cut it. Does this health club membership bring me joy? This expensive clothing store? What about attending concerts? Sporting events?

    If these things don’t honestly bring you joy, cut them from your life and your budget. Italian beef or unagi? Either one is fine, if you’ve determined for yourself that it brings you joy.

    When you spark and cut, you’ll create more money to fuel your Later Money goals. Just as important, you’ll likely find that you don’t miss those things or activities.

    You’ll value your newfound time and freedom to pursue those remaining parts of your life with more dedication.

    6. It’s OK if you occasionally exceed your spending.

    What should you do if you overspend one month? Don’t get discouraged and give up. Before all your hard work goes to waste, take the next month to course correct. If you overspent by $300 in your Life Money in December, make it a priority to underspend by $300 in January.

    Is this easier said than done? Well, sure. It’s always easier to say you’re going to do something. The hard part is following through. It will take discipline to get back on track. What will drive that discipline?

    Once again, it’s your ultimate life motivations that we’ve talked so much about (and will always continue to talk about). Without that clear vision of your ideal life in front of you, no budget will ever last.

    Don’t panic. Course correct. Stay on track.

    7. Make a game out of it, like the $500 Challenge.

    When I veer off track and have a bad spending month, I try to not get down on myself. I’m human. It happens. So, lemons to lemonade. I make a game out of it called “The $500 Challenge.”

    My wife and I started playing The $500 Challenge years ago. The game was simple. Each of us had to limit our Life Money for the month to just $500. Whoever spent the least that month, won the game.

    I’ve never won the game. My wife is… competitive. I cope by lying to myself that she wins because I enjoy paying on date nights.

    We’ve played this game several times to course correct after a high spending month. January is the perfect time of year for this game since the holidays in December often result in overspending.

    The $500 Challenge has many benefits. When we succeeded, we’d be right back on track for our goals. Even if we couldn’t quite stay under $500 (never an issue for my wife), this game still reminded us to to prioritize the experiences and things in life that truly mattered to us.

    Get creative with nights out.

    My favorite part of the game was it forced us to get creative with our nights out. One of my favorite date nights was a product of the $500 challenge.

    We had just moved to our new neighborhood. It was a Friday night. People were out and the city was bumping, per usual in summertime Chicago. We set out for a walk to explore with only one rule: we had $20 to spend or less on dinner for two.

    Young couple with glasses of wine having romantic candlelight dinner at table, closeup because they budgeted after learning about think and talk money.

    We weren’t going to waste that money on an Uber, so we just started walking. A couple miles later, having learned all about our new surroundings, we ended up at a casual restaurant we had never been to.

    We ordered a plate of nachos to share off the happy hour menu. We even had enough money left for one of us to wash it down with a cold beer. The nachos were great and the vibe was perfect. The check, with tip? 19 bucks.

    We walked home, which helped digest our dinner, and went to bed feeling light in the belly and heavy in the wallet.

    8. Buy it if you want it, but not right away.

    About 10 years ago, my mom bought me a jacket for a birthday present. It was the exact jacket I wanted. How did she know, I asked her. “You mentioned it when we were downtown four months ago.” Four months ago!

    I shouldn’t have been surprised. My mom has one of those steel trap memories. If you only met her for five minutes and then saw her again two years later, don’t be surprised when she asks about your consulting gig, your trip to New Orleans, and that blue dress that she really liked.

    I learned from my mom’s gift strategy and modified it to help myself resist the temptation to make impromptu purchases. I don’t have her memory, but I do have a phone with a notes function.

    When I see something that I might want to buy, I do my best to resist the temptation of buying it immediately and make a note in my phone. After a couple weeks, if I still want that thing, I buy it.

    More times than not, I no longer want whatever it was that tempted me in the moment.

    9. You don’t have to go big or go home.

    We’ve been focusing on smaller adjustments, but of course, bigger adjustments can have a bigger impact on your overall budget. Making bigger adjustments means examining your biggest expenditures, which for most people is housing and transportation.

    If your life situation allows for big changes in these areas, you should by all means consider them. After all, reducing your housing costs by $500 by switching to a less expensive apartment opens up a lot of dollars to deploy as fuel elsewhere. That one decision can make a big impact.

    The challenge that I have personally experienced with big adjustments and continue to observe in my students today? Making big adjustments is not realistic for everyone.

    Let’s talk about switching up your housing situation. By going big in this scenario, you are giving up your home. This may be a realistic and intelligent decision for someone in their 20s, with no dependents, and living somewhere with ample housing units available.

    On the other hand, moving to a new home may not be realistic for someone with children in school and strong roots in a particular community.

    To advise that family to pack up their home and move away could be counterproductive. While they’ll save money, they’re giving up a part of their lives that may be very important to their overall happiness. That tradeoff might not be worth it.

    The same rationale applies to transportation costs. Like our really lost boy, if you live in a city with public transportation, you probably don’t need a car (or an expensive parking spot).

    If you have kids and regularly drive them to dance class, swimming, soccer, gymnastics, piano, music class, ski lessons, and grandma’s house (yes, this is my life right now), giving up your car is not realistic.

    How can I adjust my rising housing costs without giving up my home?

    It’s because of these complicated tradeoffs that I encourage everyone to start with small adjustments while you’re thinking about bigger adjustments. As you think and talk about the bigger adjustments, you may unlock other solutions that don’t require you to move.

    For example, if you’re renting an apartment, you could negotiate with your landlord about locking in a longer term lease at a fixed rent. That way, you keep your largest Now Money expense consistent and avoid paying more each year as your lease renews.

    I employed this strategy with great success when I rented an apartment in Chicago, generating a lot of fuel for my Later Money by staying in the same apartment for seven years.

    This strategy works for families, too. A buddy recently moved to a new state with his wife and two kids. Instead of buying a house right away, he signed a four-year lease on the perfect home for his family. He has a wonderful place to live and his costs are fixed for the near future.

    What can I do if I’m a homeowner?

    If you’re a homeowner, what can you do to reduce your expenses without giving up your home? You may not want to re-finance your mortgage in today’s environment, but could you address other rising home ownership costs?

    As an example, I recently re-caulked and re-grouted my shower. I had never done that before, but I watched a lot of YouTube videos like this one. The project took me a while, in small bursts, but doing so saved me close to $1,000.00.

    I also felt satisfaction for learning something new and getting a job done despite my many frustrations along the way.

    In the long run, is $1,000 saved going to pay off my mortgage? Of course not. This is just one example to illustrate that we can all use our mental energy to think about solutions, without giving up our homes.

    This thought process can be repeated endless times, and does not only apply to DIY projects. From your couch, you can work on lowering costs related to home insurance, maintenance, and utilities by making phone calls or sending emails.

    When you’ve trained yourself to exert mental energy to solve your rising home ownership costs, those savings will add up. You can lower your expenditures without giving up your house.

    10. Plan ahead for budget busters.

    Budget busters are any inconsistent expenditures, good or bad, that can derail your planning. Good budget busters might include trips, weddings, and holiday/birthday gift shopping. Bad budget busters include unexpected car repairs, home repairs, or medical expenses.

    Note, budget busters are inconsistent; they are not unexpected. These expenditures are 100% predictable every year, we just don’t always know when they will surface. Planning ahead for budget busters is crucial to staying on track.

    To do so, open up a savings account, preferably at a different bank than your checking account. This helps isolate those funds so those dollars don’t disappear.

    As part of our really lost boy’s Budget After Thinking, you’ll recall that we had a separate line item for budget busters in both our Now Money (bad budget busters) and Life Money (good budget busters).

    I encourage you to do the same. Each month that you don’t spend your budget buster money, transfer it to your savings account so it’s there when you need it.

    One more bonus tip for dealing with budget busters. We talked above about how to course correct when you exceed your budget in one month. On the flip side, what should you do when you’ve had a great month and underspent?

    I recommend you transfer the amount you underspent to your budget busters savings account. Don’t let that hard-earned money sit in your checking account. Those dollars will disappear. By transferring them to savings, those dollars will be at your disposal when needed.

    We’ve covered a lot of ground here to help generate fuel for your Later Money. To recap:

    My Top 10 strategies for adjusting your Budget After Thinking:

    1. See the ball go through the hoop.
    2. Don’t cancel your social life.
    3. Talk to your friends about your life money.
    4. Keep on traveling.
    5. Spark and cut.
    6. It’s OK if you occasionally exceed your spending.
    7. Make a game out of it, like the $500 challenge.
    8. Buy it if you want it, but not right away.
    9. You don’t have to go big or go home.
    10. Plan ahead for budget busters.

    These are the strategies that have worked for me in the past and continue to work for me today. I hope you’ve see than budgeting does not have to be hard and nasty. It just takes a little mental energy, exerted ahead of time.

    Whether these specific tips work for your personal situation isn’t the point. I promised you before that I won’t tell you what to do with your money. Review my tips and focus on the thought process to identify solutions that might work for you.

    Have you used any of these strategies? What about other strategies that worked for you?

    Drop a comment below or on the socials to keep the conversation going.

  • How to Budget with a Real Life, Really Lost, Boy

    How to Budget with a Real Life, Really Lost, Boy

    In Part 1 of our series on budgeting, we learned that the art of budgeting is having a plan for your next dollar before you earn it. That way, you avoid having disappearing dollars. It’s not a good feeling to work hard all month and then realize you have nothing to show for it.

    We also learned the three steps to get started with a realistic budget based off your current personal situation:

    • Step 1: Track your spending for at least 3 months.
    • Step 2: Separate your spending into 3 main categories.
    • Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.

    Here, in Part 2 of our series on budgeting, we’ll use a real life example to work through the budgeting process together. Through this example, you’ll see how even seemingly minor adjustments can make a big impact to your budget.

    In Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments to our budgets so we can add more fuel to our financial and life goals.

    Before we get ahead of ourselves, let’s meet a real life, really lost, boy.

    Learning from a real life, really lost, boy.

    In today’s budgeting example, we’ll look at real numbers from a real life, really lost, boy: 26-year-old Me. Remember when I told you I started a money journal in 2010? The dollar amounts below are what my actual income and spending looked like back then, adjusted for today’s dollars and rounded for easier math.

    For some context, I was 26-years-old, living by myself in Chicago (no dependents, no pets), and working as a slasher. Not a joke, that was my actual job title. I worked for a judge with the Appellate Court of Illinois, and as the junior member of the team, my responsibilities included lawyer duties and secretarial duties. I was a judicial law clerk “slash” secretary. Hence, slasher. Lawyers are funny, huh?

    In today’s dollars, I earned an annual salary of $90,000.00. That means I earned $7,500.00 per month. We did not have bonuses at the courthouse, so the $90,000.00 salary was my full compensation.

    How to benefit from this budgeting example.

    The benefit of going through an example like this is not to compare your situation to mine. Your income might be much higher or much lower. Same with your expenses. Instead of the numbers, focus on the thought process so you can start to think about adjustments that suit your current life.

    Below, you’ll see charts showing that I completed each of our three budgeting steps:

    • Step 1: I tracked my spending for 3 months and reflected the average monthly amount for each expenditure in the column labeled “Baseline Budget.”
    • Step 2: I created a separate chart for each of the three main categories: Now Money, Life Money, and Later Money.
    • Step 3: I made thoughtful adjustments to better align my spending with my true motivations in life. I illustrated my decisions in the third column labeled “Budget After Thinking.”

    Now Money

    Now Money is what you need to pay for basic life expenses. These are expenses that you can’t avoid and should be relatively fixed each month. If you have expenses for kids, pets, and other fixed life expenses, be sure to include them in your Now Money category.

    Now MoneyBaseline BudgetBudget After Thinking
    Apartment rent$2,200$2,200
    Renter’s Insurance$20$20
    Parking spot$430$0
    Gas for car$40$40
    Car Insurance$50$30
    Car Maintenance$150$150
    Utilities$120$120
    Internet$60$30
    Cell Phone$55$35
    Groceries$300$240
    Personal upkeep(wardrobe, haircuts, etc.)$100$75
    Gym Membership$360$360
    Budget Busters$300$300
    Now Money Total$4,185$3,600

    What I learned tracking Now Money.

    Now Money is pretty easy to track. There is not a whole lot of variance from month to month.

    You’ll notice immediately that I had one major expenditure that needed immediate adjustment. That parking spot for $430? Definitely did not need that. I lived 2 miles from work in one of the best cities for public transportation in the country. It was frustrating at times to look for street parking, but I didn’t use my car enough to justify the cost of a parking spot.

    The other adjustments resulted in more minor savings, but don’t ignore these. Each adjustment took relatively no effort to make, just a little bit of thought beforehand. When I say relatively no effort, I mean three phone calls and three reductions for car insurance, internet, and cell phone. That’s $70 saved per month, or $840 saved per year, for about 30 minutes of effort.

    Otherwise, I decided to show a bit more restraint when grocery shopping and found a cheaper place to get my haircut.

    All told, I reduced my Now Money Budget After Thinking by $585 per month with a little bit of thought and hardly any effort. That’s $7,020 per year of fuel for my Later Money.

    Life Money

    Two happy girlfriends looking on the shopwindow while standing with shopping bags near the mall because they created a budget with think and talk money

    Life Money is what you spend every month on things and experiences in life that you love.

    Life MoneyBaseline BudgetBudget After Thinking
    Social Life (dining out, concerts, ball games, etc.)$800$700
    Purchases (books, fun clothes, gifts, etc.)$200$150
    Travel$500/mo ($6,000/yr)$400
    Cubs Season Tickets$400/mo ($4,800/yr)$400
    Budget Busters$200$200
    Life Money Total$2,100$1,850

    What I learned tracking Life Money.

    When you’re reviewing your Life Money expenses, don’t be overly aggressive in cutting here. These are the things and experiences that make your life enjoyable. Even modest adjustments can make a big difference in the long run.

    In Part 3 of our series on budgeting, I’ll show you my favorite strategies for adjusting your Life Money without sacrificing the things and experiences you love.

    As we saw with Now Money, with some thought and very little effort, I reduced my Life Money Budget After Thinking by $250 per month. That’s another $3,000 of fuel for my Later Money.

    Some bonus tips for tracking Life Money

    Life Money is the most annoying category to accurately track. These expenses vary month-to-month. You may buy concert tickets or have a trip planned some months, but not every month. So, how do we get an accurate picture of our Life Money?

    This is why I recommend you track your spending for at least three months. You’ll get a more accurate picture because you can average your Life Money spending over those 3 months and balance out any inconsistencies. Of course, if you have the patience to track your spending for even longer, you’ll get an even more accurate picture.

    Fortunately, it is easier to track our spending today with the availability of apps and online banking platforms that can automatically track your spending. We’ll review some of these tracking options in a future post.

    Keep it simple when tracking your Life Money.

    I highly recommend you keep it simple when tracking your Life Money. Many of my students give up on budgeting because they make this category more complicated than it needs to be. I really struggled with this at first because I was so concerned about doing it right.

    What I learned was that it doesn’t matter. If you go to happy hour with friends, don’t agonize over whether that goes into your “Dining Out” category or your “Drinks” category? It doesn’t matter. Make it easy on yourself. Have one category called “Social Life” and move on.

    Don’t forget that the point of budgeting is to learn your current habits so that you can make thoughtful adjustments. Don’t let yourself become so obsessed with the details that you get stressed and give up on budgeting.

    Break down large, annual expenses on a monthly basis.

    One last tip, when you have large expenses, like season tickets or a big vacation, it’s helpful to break down those expenses on a monthly basis. That way, you can see how much those individual purchases are impacting your overall monthly goals.

    I’m not suggesting you actually pay for that trip over 12 months (like on a credit card), or that you can only spend that much on travel in a certain month. Think of it this way: you likely will not take a trip every month of the year.

    Using my Budget After Thinking figures, let’s say I did not take a trip in January, February or March. That would mean that for my planned April trip, I now have $1,600 available that I can use, assuming you didn’t let those dollars disappear. In Part 3, we’ll talk about what to do with the money you didn’t spend in the first three months to make sure they don’t disappear when April rolls around.

    Later Money

    happy family mother father and children dancing at home in their home they bought by budgeting with think and talk money.

    Later Money is what you are saving, investing, or using to pay off debt. This is the fuel for your most important goals.

    Later MoneyBaseline BudgetBudget After Thinking
    Student Loans$1,100$1,100
    Credit Card Debt$150$900
    Savings$0$50
    Pretax Retirement (401k)$300*$300*
    Other Investments$0$0
    Total Later Money$1,250$2,050
    *This was pretax money to my employer’s retirement plan. For budgeting purposes, it’s easier not to count the amount here.

    What I learned tracking Later Money.

    This is where all your efforts in tracking your spending and making thoughtful adjustments starts to pay off, IF you have a plan for your next dollar before you earn it.

    In my baseline budget, I was very good about paying my student loan debt in full every month. I knew enough not to mess with student loans. The consequence was my credit card bills were the last to get paid each month. This usually meant only paying the required minimum since I had run out of money by this point. It also meant no money for savings or investments.

    In my Later Money Budget After Thinking, because of the thoughtful choices I made with my Now Money and Life Money, I created $800 of fuel.

    With that fuel, I had committed myself to paying off my credit card debt as quickly as possible. I also wanted to start the habit of saving each month. So, I added $750 of fuel to my credit card bills and $50 of fuel to my savings. I stayed true to my plan and put that money to work. Otherwise, what was the point of budgeting?

    Some bonus tips for tracking Later Money.

    When I run through this exercise with my students, I usually get a question along the lines of, “I’m aiming to save 20% of my income each month. Should I count the pretax money I’m saving for retirement towards that 20%?”

    It’s a sneaky question. Think about it: the rest of your budget relates to your take-home paycheck, meaning your after-tax money that hits your checking account. Your retirement savings are typically withdrawn from your paycheck before taxes and before you ever see the money.

    How to account for your pretax retirement savings can be another one of those tricky areas when you start budgeting. In my example, you may have noticed that I contributed $300 of pretax money through my employer’s retirement plan, but I did not count that money in my budget calculations.

    Should you count that money if you’re aiming to save a certain percentage each month? Setting aside that this question demonstrates how a standardized framework, like 50-30-20, can be very confusing…

    Yes! Give yourself credit where credit is due! Contributing to your retirement plan is a good choice. If you are aiming to save 5% or 10% or 20% each month in Later Money, count your pretax money towards that goal.

    Make budgeting as easy as possible for yourself.

    That said, I want to encourage you to make budgeting as easy as possible for yourself so you stick with it. In my example, I excluded the $300 pretax retirement savings because I am creating a plan for the $7,500.00 that hit my checking account each month. These are the dollars in jeopardy of disappearing.

    The entire point of your budget is to create a plan for your next dollar before you earn it. You already wisely chose to save your pretax dollars by enrolling in your employer’s retirement plan. Those dollars are already accounted for and working for you. They are not disappearing dollars. You did your job!

    Like in my example above, you can exclude the amount you’re saving for retirement in pretax dollars from your budget calculations. Feel good knowing that you’re saving that money. It’s icing on the cake. No need to worry about it when budgeting.

    The real life, really lost, boy was starting to figure it out.

    Let’s look at the complete picture before and after I started the budgeting process:

    Baseline BudgetBudget After Thinking
    Now Money$4,185$3,600
    Life Money$2,100$1,850
    Later Money$1,250$2,050
    Total$7,535*$7,500
    Income of $7,500

    With some thought and relatively little effort, I was able to stop the disappearing dollars and start making progress towards my ultimate life goals.

    In my baseline budget, I was spending more than I earned each month. That meant I had no money to pay my credit card bills, which kept getting bigger because I kept spending. In my Budget After Thinking, I broke my habit of living above my means and generated $9,600 of fuel in one year for my Later Money goals.

    Taking these first steps may seem like minor steps on the way to financial independence, but they were the most important steps I ever took on my personal financial journey.

    The real life, really lost, boy was starting to figure it out. The spark was lit. There was no turning back.

  • How to Make a Budget After Thinking

    How to Make a Budget After Thinking

    In Part 1 of our series on budgeting, we’re going to learn that the art of budgeting is having a plan for your next dollar before you earn it. That way, you avoid having disappearing dollars.

    Here, we’ll learn how to create our baseline budget based off of our current personal situation. Wherever you currently are in life, you can then make adjustments to your spending based on what you truly want.

    In Part 2 of our series on budgeting, we’ll use a real life example to work through the budgeting process together. Through this example, you’ll see how even seemingly minor adjustments can make a big impact to your budget.

    In Part 3, we’ll take a deep dive into my top 10 strategies for making thoughtful adjustments to our budgets so we can add more fuel to our financial and life goals.

    In the end, I’ll show you how to use the information you’ve learned about yourself to create a lasting money plan that does not require you to track every penny. What I mean is that if you can practice these budgeting tips for just a little while, you actually won’t need to budget anymore. That’s when thinking and talking about money starts to be a lot of fun.

    Let’s start with a question:

    What would you do right now with $20,000.00?

    What would you do right now with a $20,000.00 bonus that was unexpectedly deposited into your checking account?

    No strings attached. It’s your money to do anything with.

    Answering this question should be fun. It’s a free $20,000.00!

    But, my guess is that if you thought seriously about it, you didn’t have much fun at all.

    Many of us likely struggled with what to do. We want to do the right thing, but we don’t know what that right thing is. Should we pay down debt? Should we invest? Take a vacation? Do nothing?

    Do you have a plan for where your next dollar is going?

    The reason we struggle with decisions like this is because most of us don’t have a plan for where our next dollar is going. What ends up happening is we do nothing. Our money hits our checking account, we spend it on this or that, and pretty soon that money has disappeared. We haven’t used the money to advance any of our priorities. It’s just gone.

    To me, this is one of the most important money mistakes that we need to fix right away. Having a plan for our money, before we earn it, is essential if we want to reach our goals. With a plan, we can eliminate the disappearing dollars with confidence that our money is being used to serve our purposes.

    Budgeting is about having a plan ahead of time where your next dollar is going.

    And, that leads us to budgeting. The word “budget” is synonymous with “plan”. The art of budgeting is to know what you want to do with your money before it hits your checking account. Otherwise, it’s too late. Those dollars will disappear.

    I teach my students that to create a budget, you need to first study your own personal situation to figure out where your dollars are currently going. Then, you can figure out a plan for how to use your next dollar before you earn it. This applies not just to bonuses or other unexpected dollars, it applies to every dollar you earn.

    When you put the time in to study your own habits, you can then create a realistic budget. When you have a realistic budget, you will have confidence that your dollars are working for you.

    Some dollars will be used to pay your ordinary life expenses, some dollars will be used for all the things in life you love, and some dollars will go to your financial goals.

    That’s all there is to it.

    Let’s take a look at three steps to take when first creating a budget.

    Step 1: Track your spending for at least 3 months.

    I recommend everyone, regardless of where you are in life, start with this first step of tracking your spending for at least three months. Without knowing where your money is currently going, you won’t be able to think about adjustments.

    I won’t lie to you. This step can be hard and you probably won’t like it. This is the step that makes people think budgeting is a nasty word. I get it and don’t blame you for having that reaction.

    Still, there’s no getting around this first step. Remember, you don’t have to budget forever, just long enough to learn your own behaviors towards money.

    Please know that many of us struggle with this first step. You might not like what you learn by tracking your spending. When I first started budgeting, I learned that I was $20,000.00 in debt and was spending way more than I earned. That wasn’t fun, but I’m happy that I put in the effort to find my blindspots and make adjustments.

    I often think to myself, “Where would I be today if I didn’t go through this process 15 years ago? How much further into debt would I have fallen?”

    Talk to your people as you go through the budgeting process.

    One last thing, budgeting is one of those areas where it can really help to talk with our people along the way for support and encouragement. You don’t have to budget in secret. We’re all in this together. Put the mental energy into this step, so you can stop wasting mental energy worrying about money and start getting energized thinking about money.

    In Part 2 of our budgeting series, we’ll talk about the different ways you can track your spending. I’ve used apps, spreadsheets, and even the notes function on my phone. The good news is, tracking your spending is easier today than it’s ever been.

    Regardless of how you track your spending, be honest with yourself. If you intentionally or mistakenly leave out certain expenditures, you won’t learn where your money is actually going. A budget, which is just a plan, is only as good as the data it’s built off of. Be honest about your data.

    One quick note: Budgets are usually done monthly, so you’ll want to create a separate accounting for each month you tracked. The reason we track three months of spending is so you’ll be able to identify any patterns or inconsistencies in your spending from month-to-month. This helps ensure you’re making decisions based off the best data possible.

    Step 2: Separate your spending into three three main categories.

    Great work completing the first step! That wasn’t easy, but you did it.

    Now that you have tracked your spending for three months, you can assign each expense into separate categories. Most personal finance experts agree, though we have different names for each category, that you should divide your money into three main buckets. I refer to these buckets as:

    1. Now Money
    2. Life Money
    3. Later Money

    1. Now Money

    Now Money is what you need to pay for basic life expenses. These expenses include housing, transportation, groceries, utilities (like internet and electricity), household goods (like toilet paper), and insurance. These are expenses that you can’t avoid and should be relatively fixed each month.

    2. Life Money

    Life Money is what you are going to spend every month on things and experiences in life that you love. This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy.

    We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting. The key is to think and talk so you are spending this money consistently on things that matter to you.

    3. Later Money

    Later Money is what you are saving, investing, or using to pay off debt. This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt. This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house.

    Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.

    You’ve probably guessed it already. Later Money is the key category that fuels your ultimate life goals, like financial independence. The more you fuel this category, the faster you can reach your goals.

    Don’t worry about assigning a percentage to each category.

    I have intentionally not recommended target amounts or percentages to allocate to each of your three categories. The reason is because of what I’ve learned from my students over the years. I’ll lay out my full reasoning in a separate post.

    The short version is that in my experience working with law students, assigning target percentages for each category is counterproductive. When I used to teach my students to aim for certain percentages in each category, I could tell that they would get discouraged as soon as I put the numbers on the slideshow. I completely understand why.

    Each of us is starting in a different place. If you are currently spending 80% of your monthly income on Now Money, it’s not helpful to have someone tell you to create a budget that automatically drops that level to 50%. My students would tune me out as soon as I put those numbers on the board.

    Now, I teach my students to think and talk about their current personal realities and aim for steady and lasting improvements. I want my students to create a plan that will last, not an unrealistic plan that they give up on after a few months.

    So, whatever amount you’re currently spending in each bucket, that’s what we’re going to work with as we move on to step 3.

    One other thing before you move on to step 3: don’t get hung up stressing about what type of expense goes into each category. Sometimes, it gets tricky. Do clothes you buy for work count as Now Money or Life Money? Don’t stress. It doesn’t really matter. It’s not worth the mental energy thinking about it. Just stay consistent and move on.

    If you still want a target, aim for 20% of your income added to your Later Money each month.

    All that said, I know that some of us operate better if we have a specific target in mind. If that’s you, the conventional wisdom is to aim for 20% of your income added to your Later Money each month.

    Targeting 20% savings each month was popularized in Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan, first published in 2005 (before she was Senator Warren, she was a law professor and author). Senator Warren advocated for a 50-30-20 budget framework with 50% going to fixed costs (what I call “Now Money”), 30% going to wants (“Life Money”), and 20% going to financial goals (“Later Money”).

    Most personal finance experts agree that the 50-30-20 framework is a solid plan for your budget.

    In theory, I agree.

    In reality, I’ve become convinced through working with my law students that the 50-30-20 framework does not cut it in today’s environment. Like me, some experts have also recognized a 60-30-10 framework may be more appropriate today.

    While I agree the 60-30-10 framework is more realistic, my experience has taught me that assigning rigid percentages is just not a practical framework for most people at the beginning of budgeting process.

    Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.

    OK, so now that you have assigned your spending to each of the three categories, the next step is to think and talk about your current habits and whether you’re spending matches your true motivations and desires in life.

    If you decide that your spending does not match your life values, then it’s time to make some adjustments. What kind of adjustments?

    We’ll talk much more about how to make those adjustments in Part 2 of our budgeting series. In essence, my budgeting philosophy is to aim for steady and lasting improvements based on your current reality and your ultimate motivations. What does that mean?

    Your budget is really just about finding fuel for the best things in life.

    small tree growing with sunshine in garden like small money choices before big.

    This is where we circle back to the importance of having a clear understanding of what we want out of our money. Money is a tool. Ask yourself:

    “Is your current spending aligned with how you want to use your money to fuel your goals and ambitions?”

    If not, you can make incremental adjustments as you progress towards your ideal spending alignment.

    The idea will be to continuously add more fuel to our Life Money and Later Money, the buckets that represent the things we love the most (Life Money) and our most important life goals (Later Money).

    You can make small adjustments, which are usually easier and faster to put in place. These adjustments might include dining out a bit less, cutting out a concert, or cancelling a gym membership or subscription you don’t use.

    You can also make big adjustments, like moving to a cheaper part of town or getting rid of you car.

    Small or big, the key is that when you make these adjustments, you repurpose that money in a thoughtful and intentional way. You’re now starting to align your budget with your money motivations.

    With each thoughtful decision, you’re progressing towards your best money life. Most importantly, you’re learning about yourself and developing lasting habits. You won’t get discouraged and give up on budgeting.

    As we wrap up Part 1 in our budgeting series, keep the three initial steps in mind.

    • Step 1: Track your spending for at least 3 months.
    • Step 2: Separate your spending into 3 main categories.
    • Step 3: Make adjustments so your spending better aligns with your true motivations and desires in life.

    As you start to implement these steps, you’ll start to have a clearer picture of how your money can work for you.

    And, the next time you’re asked what you would do with $20,000.00, you’ll know the answer ahead of time because you have a plan in place.

    Answering the $20,000.00 question will be fun. No more anxiety-inducing, disappearing dollars.

  • You Should Want to be Good with Money

    You Should Want to be Good with Money

    So far, we’ve talked about why we need to think about money, why we need to talk about money, and Italian beef. Before we dive deep into budgeting, saving, paying off debt, and investing, we need to make sure our money mindset is locked in.

    I hope you’ve started thinking about why you want to be good with money. This will be personal for all of us and may change with time. The more you think and talk about why you want to be good with money, the clearer your motivations will become.

    Three powerful reasons why I want to be good with money:

    1. Money can give you choices.
    2. Money can give you personal power.
    3. Money can give you time.

    1. Money can give you choices.

    This may seem obvious, but when you have money, you have choices. You can choose where to live. You can choose who you work for, or can work for yourself. You can choose how you eat, exercise, relax, and travel.

    This holds true whether you make $50,000 or $250,000. Of course, your options may be different. The point is that when you’ve made good money choices, you’ll at least have options.

    2. Money can give you personal power.

    This is another way to say that money gives you control of your life situation. If you are in a bad relationship, a bad job, or just need a change, money gives you the personal power to do something about it.

    3. Money can give you time.

    When you have enough money to be truly financially independent, you have earned the freedom to do whatever you want with your time. You can spend your working hours at a job that is meaningful to you. You can spend more time with people who are meaningful to you.

    It’s been said many times, “time is our most precious resource.” When you have money, you can buy your time back.

    an hour glass running empty can be fixed because money gives you time back
    Photo by Aron Visuals on Unsplash

    The most important part of talking is listening.

    From the time we’re in diapers, we start learning by observing people older than us. As my family prepares to leave the house, my son has recently started chanting “Let’s roll! Let’s roll! Let’s roll!” Yup, that one’s on me.

    The same idea applies when it comes to life and money. I’ve mentioned before how much I’ve learned about life from listening to my clients suffering with mesothelioma. I’ve learned even more by listening to my family, friends, and mentors.

    When you listen to enough people with more years behind them than you, certain themes continue to surface, like the importance of family. You’ll hear about creating experiences and memories, usually involving vacations or time with friends.

    One thing I’ve never heard? Someone saying “I wish I spent less money on doing the things I loved.”

    You don’t have to agree with everything you hear, but the act of listening will start turning the wheels in your own mind. And when your wheels start turning, you can’t be afraid to spend money on the things that make you happy.

    Why do we need to actively think about the things that make us happy?

    A sneak peak of how I look at budgeting.

    I said we weren’t going to discuss budgeting yet, and we won’t. “Budgeting” is kind of a nasty word. Nobody likes to say it out loud, let alone aggressively do it each month. This is why we spend so much time in the beginning talking about our money mindset.

    A budget is worthless if you are not motivated to stick to it. Sure, you may stick to your budget plan for a month or two, but you’ll fall back into old habits if you haven’t prioritized what matters most to you.

    We’ll save the particulars for another day. A sneak peak at how I teach my students:

    Like it or not, everyone needs a budget… for a little while. Once we’ve identified what we spend money on and made some thoughtful choices, most of us don’t need a rigid budget.

    If you’ve thought and talked enough about your true motivations, you won’t need a budget either. Each month, you will take care of your obligations, grow your net worth, and use the rest of your money to buy things you love and to create experiences.

    Talking money should be emotional.

    If you’re being honest with yourself, talking money should be emotional. Remember, most of us exert mental energy pretending we’re not worried about money. My challenge to you is to exert that same energy into figuring out why we behave in certain ways when it comes to money.

    The reason it matters is because we’re soon going to be talking in detail about budgeting, which is just the process of making thoughtful choices about how we spend our money. If we don’t know why we choose to spend in certain ways, we won’t be able to make lasting adjustments to our budget.

    Have you ever thought about why you dine out?

    people sitting beside brown wooden table thinking and talking about if this was money well spent.
    Photo by Kevin Curtis on Unsplash

    Let’s look at an example to start prepping ourselves for the budgeting process. This is a good time to revisit one of the main principles when talking money with your people: no judgments allowed. We’re not looking to shame ourselves or each other. We are aiming for understanding so we can make thoughtful decisions.

    Say you’ve looked at your monthly spending and realize that you’re spending a lot of money dining out. The key to creating a budget you will actually stick to is actively thinking about why you spend so much money dining out. You might learn that dining out is an essential part of your best life. You might learn it’s really not.

    Ask yourself these questions:

    Is there an emotional reason you dine out frequently, like it makes you feel successful? Or, you like spending time with friends? Do you get joy out of trying new dishes?

    Maybe it’s something else entirely and unrelated to your emotions. Maybe you don’t have time to cook at home because of your work schedule? Maybe it’s just laziness?

    It might have nothing to do with how often you eat out, but where you choose to eat and what you choose to order. Do you order a bottle of wine with dinner? Could you have drinks at home beforehand instead?

    When you honestly think about and answer these questions for yourself, you can start to make thoughtful decisions on whether that spending matches your priorities. If it doesn’t, then it’s an area for adjustment.

    And, that’s really all that budgeting is. Not so nasty, right?