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David Fulton is a Colorado Springs, CO fee-only financial planner providing Hourly and On-Going Financial Planning and Investment Management. While he works with a broad range of clients, David specializes in working with Active and Retired Military, Federal Employees, and Families with Special Needs Children.
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If you’re like most people, the idea of budgeting has become an exercise in futility. Maybe you’ve never had a budget but recognize that to be intentional with your life, understanding where your money is going is a necessary evil. Perhaps you already have a budget and are the type of person who enjoys tracking expenses, and building spreadsheets, but it takes up too much time, and wish you could find an easier solution. In either scenario, mastering your budget is a must if you want to be intentional with your finances.
Living with intention means being deliberate with how we create our lives. Intention is about knowing what we want and doing the best we can to focus on it. How you spend your finances is an indicator of what is important in your life, and a snapshot of your value system. Getting a handle on your expenditures and aligning your spending to what’s important is what being intentional is about. There are five steps you can take today, to get control of your spending and build an intentional life.
Step 1: Figure out Your Baseline
Before you can make changes to your spending habits, you must analyze what those habits entail. Fundamentally, you must track what money is coming in, and what is going out. The good news is there are plenty of tools available to help you in this endeavor. Mint.com makes this easy, as does any number of banking apps that help you categorize and track your spending history. No matter the tool you use, ensure to use at least a 90-day snapshot to get a good monthly average spent on each of the expense categories. Once you have an idea of where the money is going, you can make informed choices on how to fund your goals.
Step 2: Define Your Goals
Perhaps the most important aspect of good budget techniques is to have clearly defined saving and spending goals that are aligned with your purpose and end state. This is the fundamental basis of intentional planning. Most people don’t stumble into wealth building. It is an intentional and deliberate process executed over time. Aligning your saving and investments with clearly articulated goals provide the focus and intensity required over long periods.
Step 3: Align Your Resources
Once you know where your money is going, you can better categorize and prioritize your expenses. Getting the order right is important. Most people fail at this step, often putting off saving and investing until the end. I am sure you would not be surprised to learn that very little goes into savings when left to the end of the month. This is unfortunate because saving and investing is fundamentally what enables the attainment of your goals and allows the achievement of your desired end state.
The following are recommended savings priorities, and will coincide with the buckets we create later:
- Priority 1: Saving and Investing
- Priority 2: Fixed Expenses
- Priority 3: Variable Expenses
- Priority 4: Everything Else
Step 4: Automate as Much as Possible.
I have found this step to be critical for most people. Most banks will allow you to set up auto payments directly from your checking account and many vendors and utility companies will allow auto drafts for reoccurring payments as well. Automating them makes sure that they are always paid on time and in full without you even having to think about it.
Many bills can also be paid automatically by credit card. If you like to use credit cards for your spending, you can probably handle most of your bills this way. However, If you are using a credit card make sure to set it up to auto-pay the full balance every month.
Even more important is to automate your contributions for your saving and investing goals. You should set up automated transactions that move that money from your checking account to your various savings accounts on the same day(s) every single month. Schedule these transactions to happen right after you deposit your paycheck each month before your other spending has happened. Transferring money out of your checking account into a dedicated savings or investment account will ensure you are funding your goals. This is perhaps the most important step in budgeting. You’ve likely heard the mantra of “pay yourself first”. This is precisely how you grow your savings and build wealth over time.
A secondary benefit to automatically moving your money and physically separating it into different accounts is the powerful effect it has on the human brain. This is an essential mind hack, called mental accounting. While mental accounting has many negative impacts when developing investment strategies, deciding how to apply a windfall, or trying to pay down debt, it can help ensure savings are separated and left alone for future use.
Step 5: Harness the Power of Habit
Budgeting gets a negative rap because it is fundamentally about limiting your desires. It is not normal for people to choose to forgo pleasure today for the hope of attaining pleasure in the future. The problem with these limitations is that they are inherently disappointing. Month after month you’re setting yourself up to be disappointed between your choice to save or spend. Neither feels good when put in the context of the other.
Develop the willpower needed to win your daily spending battle. Willpower is like a muscle, it gets tired as it is used but can be strengthened and conditioned over time. If you are like most people, you will begin the day with plenty of willpower, but as you are forced to make decisions throughout the day you will likely lose more and more of it. The development of routines helps you to positively respond when willpower is weak. Even investing small amounts of money over a long period takes an immense amount of willpower. The decision to forgo a pleasure in the present for a hypothetical need in the future is often very difficult to rationalize. This is where the power of habits come into play.
Our habits are the things we do every day without thinking, which means that every habit is either effortlessly helping us towards our goals or effortlessly working against them. The more you can align your daily habits with your long-term goals, the easier it becomes to budget. Eventually, your habits can keep you in line with your plan without you even thinking about it.
Setting up Buckets to Align Your Priorities
I like the use of buckets. I think they are a simple concept for most people to rationalize and visualize. Using buckets help you compartmentalize your spending and ensures that you are funding your priorities in the right order. Imagine a contraption with four buckets. Each bucket is suspended over the top of another. A water spigot fills the top bucket. When the bucket is full, it overflows into the bucket below. In turn, that bucket overflows and fills the bucket below it, and so on. At some point, you either run out of water, or all four buckets are filled. This is how you should view your cashflow. Funds should be dedicated to the first bucket, then the second, then the third, and finally the fourth. If the money runs out, then your most important priorities will have been funded.
Bucket 1: Saving and Investing
- Emergency Fund
- Retirement Savings (IRA/401k)
- Down payment (Car/House)
- Other Goals
Bucket 2: Required Fixed Expenses
- Insurance Premiums
- Gift Giving
Bucket 3: Variable/Flexible Expenses
- Home and Car Repairs
- Medical Expenses
- Fuel and Transportation
- Cable Bill/Netflix/Hulu/Etc.
Bucket 4: Spend What you Like
- Shopping (clothes, electronics, household items, etc)
- Restaurants and bars
By using this bucket system all the biggest and most important items will already be accounted for and the only decision you have to make each month is how to spend the money that’s remaining in the last bucket. The best part is that since you’ve already saved and paid all your bills, you can spend that money guilt-free! There’s no more worrying about making sure there’s money left over at the end of the month to save or put towards debt, or to fund your most important savings and investing goals. You will also know exactly how much money you have available to spend after all your obligations are handled thereby making the mental accounting a lot easier. The leftover money is yours to spend as you please.