Building A Budget
Because this post concerns financial opinions, I have to start it with a disclaimer: I’m not a certified financial professional, so take my thoughts as simply one person’s perspective on budgeting and talk to a financial professional before making any decisions about your own financial situation. The opinions expressed here are simply that, opinions. This is not financial advice specific to your situation, so please don’t take it as such.
Now that we have that out of the way, let’s talk about budgeting. Budgeting is an ongoing journey, not a state of being. Building a budget is not the same thing as building a house. Once it’s complete, you still have a lot of work to do. It’s closer to a fitness journey but we use the wrong terminology, which allows us to think that once it’s built we’re done worrying about it.
This post will be longer than most of my others, and will cover a lot of topics related to budgeting. Depending upon how it’s received, I may turn it into a series - so please send me your thoughts if you think I’ve missed a key topic. There are entire blogs dedicated to personal finance and people dedicate their lives to the topic, and since it’s a non-trivial part of success, this blog post will be some highlights and tricks I’ve used along the way.
I’m going to cover five main ideas here:
Budgeting is really hard.
The 20/50/30 rule.
How many baskets is enough?
Budgeting ain’t what it used to be.
Budget “hacks”.
First off, budgeting is really damn challenging - in that way, it’s like all things worth doing. The terminology we use about budgeting puts people at an inherent disadvantage when they’re trying to live within their means. Terms like “Budget Brand” (i.e. grocery store brand cereal instead of the fancy name brand stuff) and “Building a Budget” imply two things about it - it means you’re cheap and you can do it once and move on with your life. For me personally, I think more about financial success rather than the budget itself.
Tying budgets (and financial health) instead back to physical health - going to the gym once in early January doesn’t mean I’m any better off than I was in December after all the egg nog, treats, and general gluttony. Similarly, building a budget when you start the year doesn’t do you any good if you forget to check in and re-calibrate it as life changes throughout the year...which it will.
Life happens, and you truly can’t plan for some things. The most obvious of those is a global pandemic. Jobs and companies that had been stable for decades simply vanished and people were put into lockdown. With budgeting, you can set yourself up to be a little better prepared for the unexpected…and this is why it’s so important to keep it top of mind.
Telling yourself “I know my mortgage payment is $1,500/mo” is one thing - but “I managed to lower my mortgage payment from $1,500/mo to $1,200/mo” is even better. Nothing changed with your living situation, except you found a way to save money (generally this happens by taking advantage of interest rate changes, financing a lower amount after you’ve paid some of the balance down, or after you’ve paid off 20% of your mortgage and you’re getting rid of mortgage insurance). That’s financial fitness at it’s finest…and it “feels like” a $3,600 annual raise simply because you didn’t put it on the back-burner.
Our next topic is the 20/50/30 rule. This is my take on the “50/30/20 rule” that prioritizes saving over fixed and variable expenses. It’s my “pay yourself first” rule. In my book, Earning What You Deserve: The Guide for Building Long-term Success Starting From Graduation Day (Amazon), we unpack this concept a little bit further.
The general thought here is this:
Regardless of your salary, you need to prioritize putting money away for yourself and your family. Most budgeting says something along the lines of “plan for 50% to go to fixed expenses like rent and car payments, plan for 30% to cover variable expenses like going out, and the last 20% should be saved.” I’m a firm believer that the order you approach things determines their priority to you, so I suggest pulling the savings number to the front. If you make sure you’re taking 20% off the top rather than saving what’s left, the thing that’s most likely to suffer is your going out budget…and at the end of the day, that’s better than being one of the millions of Americans that would struggle to cover a $400 emergency.
Rest assured, as long as you have income, your taxes are going to be taken out regardless of your desire to pay your rent or mortgage, buy new shoes, travel abroad, or go to the gym…you should approach your savings goal the same way. The difference is that you’re taxing yourself to ultimately have longer term financial freedom and flexibility. If you want a deeper dive on the topic, I definitely suggest picking up my book.
Next up, you’ve heard the phrase “don’t put all your eggs in one basket” - and if you’re anything like me, you’ve asked yourself “so how many baskets are enough?” If you’re not like me and you’ve always thought that “not one basket” is the answer, let me challenge the simplicity of that answer for a moment.
Using these proverbial eggs to represent our nest egg, when you’re graduating college and entering the PCAW, your nest egg is likely represented with a very small number of eggs. Possibly few enough that you think a single basket actually covers you.
That’s how it was for me:
“I’ll put what I can afford to save into my 401(k) plan and hope it grows.” (Yes, I wish I’d had my own advice when I was graduating college…I didn’t prioritize saving in my early 20’s when my money had the most time to grow.)
The biggest issue with that mindset was that I’d prioritized everything else before my savings. Within a few years, I’d started to think about other options. I was starting to prioritize budgeting and accumulating more than just a few bucks here and there. In addition, money in your 401(k) is subject to penalties if you need to access it early - so it’s a really bad place to have all of your savings. It’s good for retirement, but bad for an emergency when you’re 27.
So, yes, I’d advocate for at least two baskets…a longer term one, and a liquid and accessible one. There are a lot of options out there, but something like a savings or money market account would likely be enough to begin with.
At this point, you might be saying, “okay, sooo you just said it…not one basket. I was right.” Temporarily, yes. But that’s not a sustainable answer. Savings accounts don’t give you enough interest to even keep up with inflation. If your main source of savings is a savings account, you’re actually losing money against the value of a dollar in the longer term. You want enough cash in a savings account to cover an emergency and a splurge, but that’s about it.
Similarly, 401(k) plans are often limited to funds that are lower risk and tend to simply follow macro market trends. Good for longer term sustainability, not great if you’re looking to see a bit more growth from your hard-earned cash. You worked hard for your money, let your money repay the favor.
Your company might offer an ESPP program. You might choose to set up a personal investing account. You may seek out other tools that align to your interests. When you feel like you’ve filled up a basket with eggs (again, keeping your finances top of mind…or at least doing a check-up when life happens if you aren’t a “finances person”) that’s the time to add a new basket. Some baskets might get longer term attention and continued focus (retirement accounts, for example), but over time as you’re earning more money you should find more baskets.
My final answer on for how many baskets you need is: At least two, but it depends how many eggs you have.
The next topic that we’ll cover is an overview of a few of the budgeting and personal finance tools you might consider as a way to help you do more with your budget than balancing your checkbook. Let’s be honest, you’re not even writing checks…let’s talk about some of the tools I’ve used and gotten some value from, either in the past or currently.
Credit Karma - It’s important to know where your credit stands. For better or worse, this single score impacts everything from the interest rates you’re eligible for on borrowed money (car, house, credit cards, etc.) to your eligibility for renting an apartment. Credit Karma’s a free tool that I’ve been using for some time now to help monitor for any changes in my scores. They’ve got a lot of other things on their site as well, but I tend to stick to just the score management.
Personal Capital - There are a lot of budget and money management tools out there, this one just happens to be the one I prefer. There’s a lot you can do with setting budgets, attaching accounts, and comparing spending over time. I’ve tried a few over the years, but I find Personal Capital’s interface and apps most enjoyable. If you’re looking for ways to do more with your money, get notices when your spending patterns change, and have access to some of those professionals I mentioned above in my disclaimer, then I’d recommend setting up an account with Personal Capital.
Turbo - Particularly if you use other Intuit products (like TurboTax), Turbo is an easy addition to your arsenal of check-up tools. It imports a bunch of data from your taxes (at least, it does if you’re using TurboTax) and credit reporting information to give you some guidance on how you’re doing on monthly obligations, credit, and a few other metrics. Good for some overall financial health metrics, as well as how you stack up against peers in your age-range if you’re interested in how you’re doing compared to the average person your age.
Fundrise - This one is a bit more specific, and focused on specialized investing in real estate for those of us that like the idea of real estate investing without all the stress (or capital) of picking properties, signing mortgages, finding tenants, etc. Essentially, Fundrise gives you the ability to buy into real estate projects through funds to use their buying and research power to achieve returns on your money beyond the stock market and without the stress of owing on a mortgage.
This is by no means an exhaustive list, and skips the categories of stock investment and auto-savings tools, but it aligns to the tools I think either provide the most foundational information in a free way, provide the most value or provide a unique way of getting value from the information. If you find yourself preferring other tools, I’d love to hear about them!
I skipped the stock tools category completely because this is completely up to your personal preference and investing style. Things like Robinhood or eTrade offer fully electronic ways to engage with the stock market. Other options like traditional brokerage accounts through something like a Schwab give you a mixed set of tools, and more options for financial advice. There’s also the fully managed route which might be beneficial as you continue to grow your (financial) worth.
The last topic of this post is a few of my personal favorite budget “hacks” that tie together many of the lessons above:
(Almost) always get the longest terms. This means spreading out your payments over the longest repayment period you can get. Often for cars this is something like 72 months, for mortgages it’s 30 years, etc. The reason for this is that you don’t have to make minimum payments. You can pay more when the money is there - but if something happens, like you lose your job due to a global pandemic, you’re actually on the hook for less money every month than you’ve been paying. It allows you to pay what you can with your budget in place (paying down your debt faster), but gives you some flexibility if things don’t go as planned for the next 30 years.
Take advantage of 0% interest offers when they come up. Don't use these offers to decide whether or not you should make a purchase, but if you're going to make a purchase and are given the option, odds are that you should probably take advantage. Many stores will do this - “Open up a store card with your purchase today and get 0% interest for 36 months on purchases over some amount” - the benefit of this is that you’re spreading out what would otherwise be a cash payment today. If you’re buying a TV with this offer for $1,000 - you can likely do one of three things:
Pay $1,000 cash today - this would be fine if you have the extra cash lying around and all you planned for this significant purchase by saving up for it.
Put the $1,000 on a credit card - by not taking advantage of the offer and using an existing credit card, you may earn points or some other gamified spending rewards system but you are also on the hook for interest. This $1,000 can easily wind up costing you nearly double that amount over the course of just three years and is generally the worst of these three decisions.
Take advantage of the offer - ideally you’ve already got the cash in some sort of account that earns interest so you can actually pay a little bit less than the $1,000 because you’re theoretically earning money on your money over three years. But even if you don’t have the money on hand, the payment amounts would likely be just under $28/mo with no interest - which is probably much better than putting it on your credit card and accumulating a bunch of interest…and you’ll wind up being fully paid back for $1,000.
Pay attention to points. This can be travel loyalty points, credit card points, store rewards, etc. - but these things can really add up over time. As an example, my wife and I did a series of touristy excursions on a trip on just points. Overall, the “value” of the excursions on this trip was about $1,200 and we splurged on a few “premier” experiences…but we wound up paying for none of them out of pocket thanks to our mountain of points we’d accumulated. Find a credit card that matches your interests and gives you points that help you take advantage of your normal spending habits. Sign up for rewards programs and get the loyalty points - even if you’re not particularly loyal to a brand. Many points don’t expire, so you can accumulate them over long periods of time.
There you have it. These are a few of the things I think about when considering my longer term financial health. For more tailored personal advice, I would absolutely recommend finding a licensed professional in your area that can help you make smart financial decisions based on your situation.
Most importantly, keep up with it! Remember a budget isn’t an achievement, but an ongoing journey and is a crucial part of achieving financial health and freedom. You got this!
