The Foundation of Savings = Budgeting

Personal Finance

The most critical step in achieving your life goals is your ability to sacrifice current consumption for your future self.  Unfortunately one’s ability to consistently save is rooted in the most overlooked aspect of financial planning – budgeting.

Budgeting isn’t sexy, plain and simple. In fact, when a significant other or spouse is added to the process it can often prove to be downright painful. But why is such an important piece of quality financial planning so dreaded and frequently overlooked?

It is unlikely there is one root cause for our hatred of budgeting; however, there are likely a few culprits.

Investments are considered to be more important

It has been said that “a good saver will beat a good investor any day,” but yet the first thing people usually (including most advisors) want to discuss is their investments.  Many people think that picking the next Apple or Google is more critical to their financial success than sticking to an appropriate budget, unfortunately they’re wrong. Sure, actually picking the next Apple or Google would help immensely, but the odds are nearly impossible of doing that. The odds of a quality budget helping you on your journey to financial freedom are instead very high.

Budgeting forces you to take a look in the mirror which isn’t always fun

The other thing budgeting does is force you to become more self-aware about your spending habits. Until you create a budget, monitor it, and refine it even for just 30 days, you likely have no idea how much you’re spending on eating out, new clothes, or insert your other vice here. In fact, the only true way to align your spending with what you value in life is to have some idea of how you’re spending in the first place. A look in the “spending” mirror can oftentimes be the first step in better aligning your finances with what you love and enjoy.

So what are some critical budgeting tips or tools that can be used to get started?

Pay Yourself First

The only guarantee to save is to do it first. By automating a 401k deduction or by having the money automatically transferred to your savings account once it is deposited into your checking you essentially never have access to the money and subsequently can never spend it. By saving first, aka paying yourself first, you only have whatever money is leftover to spend, so you can’t possibly spend more than you should. This will help you avoid the “I’ll save whatever is left-over-at-the-end-of-the-month” strategy. Note: whatever is left at the end of the month is usually nothing.

The 50% / 30% / 20% Rule

Simple is usually better when it comes to budgeting and the 50/30/20 rule fits that mold. This rule suggests that you only spend 50% of your paycheck, pay roughly 30% in taxes, while saving 20%. For example, if you’re a 35-year old attorney making $150k you should be saving $30,000, can expect to pay roughly $45,000 in taxes, and leaving you with the remaining $75,000  to spend on anything your heart desires. Using these benchmarks for spending/taxes/savings is even more effective if implemented.

Start, Monitor, Refine Your Budget

The value of a budget is not perfectly estimating every future expense and then painstakingly making sure that every penny spent aligns perfectly with that budget. Instead, budgeting is the act of estimating how much you have available to spend after you have saved an appropriate amount. By beginning to budget you become increasingly self-aware of how you are actually spending your money which helps lead to more informed decisions around what you can spend, what you value, and more importantly what you can’t spend and what you don’t value. Once you’ve started refining the numbers (i.e. increase budgeting amount for groceries) and your behavior (i.e. only eat out twice per week, instead of four times) you will begin to see your spending habits more closely align with what you value.

Don’t Steal From Your Future Self

Having trouble cutting back on certain areas of your budget? Think of your future self. Researchers have found that when someone sees a rendering of their future self they tend to save more money than those who do not. Why? Because they are able to better empathize with the needs of their future self. So next time you are having trouble putting your visa back in your wallet, think about the money you’re about to spend not as yours, but as money that you are stealing from your future self.

Ultimately budgeting comes down to self-awareness and will power. To get a clear understanding of how much you’re spending you must begin; once you’ve begun you will become intimately familiar with the money you’re spending in every facet of your life. This awareness is only the beginning as it will empower your decisions around how much you can spend, areas that you need to be cutting back, etc. As you continue to refine your budget you’ll increasingly need will power to stick to the spending targets you’ve set for yourself until it becomes habit to align your spending with what you value.

About Matt Cosgriff, CFP(®)

Minneapolis Financial Planner | Intrapreneur | Young Professional | Millennial Guru | Tech Aficionado | Traveler | Food Lover | Minnesota Wild Fan | Movie Quoter | Follow on Twitter| LinkedIn

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