Not the B-Word!

Not the B-Word!

New Year, New You

Sometimes when I’m trying to find a blog topic, I try to get super creative. I envision questions that people may have in relation to what’s going on in the world and I try to give some form of analysis or opinion to further educate my readers.

My most recent point of inspiration came from an article title about how businesses (mainly gyms) were scrambling with the new restrictions in place. I could go into a macroeconomic spiral of small businesses and their impact on the economy, and maybe one day I will, but it made me think about how all those employees have been going back and forth from work to laid-off, and how the most pressing financial questions they have are about day-to-day finances.

Yes, today, we’re going to discuss the B-Word: Budget.

So first off, I have only met a small (and I mean small) hand full of clients who enjoy budgeting. For most, a budget is a set of handcuffs from which they want to break free. Because, as many have experienced, you typically build a budget when money is becoming an issue. With that perspective, the goal of a budget is to eventually ditch the budget altogether!

I like to tell my clients that a budget is much less important to financial success than one may think. If the goal of budgeting is to buy yourself time until you can catch up on bills or get a pay raise at work, you end up locking yourself in a vicious cycle of never feeling at peace with your finances.

So what’s the solution? Is there an alternative, or is it all doom and gloom?

Never fear, Garrett’s super-helpful-and-wildly-inspirational blog post is here!

Let’s talk about perspective and psychology for a moment.

If we look at our spending habits in the way described above, we are always looking for a change. Intrinsically, our financial plan relies on a constant swing from a financial freedom to financial restriction. In that case, budgeting is the consequence of either reckless spending (i.e. recovering from Christmas), or bad luck (an unexpectedly large repair to your car). The goal is to choke back spending to a point where you can ditch the budget and get on with life. The only problem is that Christmas is a yearly holiday and you never know when the transmission will fall out of your car.

What if we looked at budgeting as a behavior rather than a prison sentence? When you count each individual dollar, it’s hard to imagine, but if we look at your budget as a filter, we can avoid the repeat offenses.

Here’s how I see it. There are only three types of expenses:

  1. Necessary (needs)
  2. Unnecessary (wants)
  3. Waste

Obviously this is an oversimplification, but the process of creating a behaviour starts with making things simple.

So, first step: Define your needs. Traditionally, these only include the items that are required to take care of yourself and your family. Rent, groceries (not snacks), clothing (basic, not ‘extra’), etc. At the end of the day, when you look at your list of ‘needs’, you should not be able to remove anything from that list without the risk of mortal suffering.

Wants are a bit different, but may be extensions of needs. For example, I have 10GB of data with my phone plan. Do I need 10GB? Absolutely not. I don’t really need any data. For business, I need a phone, but the additions to my plan (and the phone itself) are all wants and not needs. This would extend to designer clothing, snacks, and other items that can be removed from your life without affecting your foundational well-being.

Waste is everything that falls through the cracks. When I sit down with clients and start the discussion around budgeting, we make a list of everything they expect for monthly expenses. We then compare that to how much money they bring in monthly. Quite often, we look at the difference and see that there should be a couple hundred dollars left over.

When I ask them if that feels right, they seldom agree. Even though their ‘budget’ says they should have $500 in unallocated income, they often feel like they live paycheck to paycheck. This is where ‘waste’ comes into play. We sometimes refer to this as the “latte factor”. No one budgets for coffee, because it’s typically such a small expense. But when you get a Starbucks coffee 4 days a week, at $5 a drink, the waste adds up. Inevitably, there will almost always be some degree of waste in a budget, but the behaviour change we want to build will allow us to not sacrifice the “Needs” and “Wants” for “Waste”.

That brings us to a few general rules of thumb:

First: Pay yourself first. This seems like an obvious strategy, but it is often disregarded in practice. When you get paid, do you start by paying off your rent, putting money onto the credit card, and making a grocery run? If there’s any money left over, you take yourself our for a nice lunch? What happens at the end of the month? Most often, unless your income far exceeds your expenses, you are waiting eagerly for the next paycheck. Paying yourself first means that you put money into savings before you do anything else. This requires knowing what your needs are, because you will have to pay for those, but get some money set aside for emergencies or long term savings before you get caught up in the extra stuff. Often, the ‘savings’ portion of someone’s budget is left for the end. They say to themselves, “If there is anything left after my expenses, my lunches, and my lattes, I’ll put something away for the future”.

The problem is that there is almost never money left, because there is always something that seems to take priority. For example, debt. Getting into the habit of paying yourself first can a) change your mindset around all your other expenses, and b) allow you to not rely on debt as much.

Think about it this way: most of my clients SHOULD have a few hundred dollars in unallocated income each month. If they put that money into a savings account first, then dealt with other needs, then wants, they may still have some money left for their lattes, but they know that they can spend that extra money without sacrificing their future savings goals.

Second: Budget your waste. If drinking expensive coffee is a common occurrence for you, don’t leave it in the waste category. If it isn’t something you want to give up entirely, start to track it. Sometimes the realization of how much it burdens your expenses can give the expense new perspective. This is true whether it’s weekly coffee, multiple streaming subscriptions, or other extra purchases.

Third: Think before you spend. The point of changing your behaviour around budgeting is that it should be treated as an exercise and not a punishment. Instead of looking at cutting expenses as a consequence, think about it as an opportunity to have more options in the future. The mental shift takes time and attention.

I have heard of multiple devices that have been used successfully to help with the shift. One of them is freezing your credit card in a block of ice or putting it in the fridge. The simple act of having to go to the freezer to get your credit card before making an online purchase gives you an opportunity to rethink your purchase decision. How easy has online shopping made it to buy something without thinking? They save your credit card information, have your address saved and ready to go. All you have to do is press “Continue” and it’s at your door a few days later. Their goal is to give you as little time as possible to change your mind.

Another tactic is to put all your coffee (or other activity) money in an envelope. This forces you to see the bills before you buy, rather than being able to ‘tap’ for $5 here or there. It takes effort, and it is awkward at first, but it gives you an opportunity to question whether or not you should be buying it.

The third tactic is a simple reward system. I’ve used this successfully in the past, especially when it comes to buying coffee. If I’m craving something sweet, I’ll tell myself that I have to accomplish something first. This could be as simple as cleaning the bathrooms, doing the dishes, or running an errand I’ve put off while I’m out. Sometimes, I still get a coffee, which is perfectly fine. Other times, I finish my task and the craving has subsided. All of a sudden, I’ve transitioned my mental space from needing that coffee to something else entirely. Not only have I crossed something off my to-do list, but I’ve also distracted myself long enough to let the craving pass. I’d say this has reduced my coffee expenditures by 50%.

Here’s what I’m not saying.

I’m NOT saying that budgets are bad, or that you shouldn’t use a complex budget system to track your expenses. I have seen clients use physical (or digital) budgets with great success and failure. The element that is often missing from people when they fail at budgeting is their mindset. They define financial freedom as being able to spend however much they want and indulge every craving without needing to consider consequences. That’s quite often not the case. Financial freedom is having a process that allows you to spend without sacrificing your future. Some people achieve this by finding a profession that pays such a high income that they don’t have to put on any restraints, but many people’s reality dictates that there is some form of discipline in place.

So where do I start?

It takes time and energy to make a change. Right now, if it weren’t for lockdowns, I’m sure we’d be witnessing the New Year’s rush at the gym. People head in with the idea of cutting out all their bad habits and creating a “New Me”. The problem is that, by February, they’ve dropped the 5 pounds, feel like they were successful, and revert to their old habits. The people who are at the gym year round have built dedicated processes and habits into their lifestyle to make their physical health a priority.

It is no different with budgeting. A new years diet simply restricts you until you’ve lost weight, but the habits that you built over the rest of the year are still there when you let your guard down.

So start with the simple things. Write down what falls into your needs, wants and waste categories. Look at the ways you spend your money and start with small and manageable changes. The gym enthusiasts didn’t start out by going to the gym 5 days a week and eating super healthy. They started by cutting McDonalds out of their diet and replacing it with a home cooked meal. Consistent small changes make a long lasting difference.

There’s a 1% rule that I like to reference. If you make a 1% change to your lifestyle each week, you are 52% better off by the end of the year.

All it takes are small consistent changes to be successful.

Christmas debt – ‘Everyone’ has it

Christmas debt – ‘Everyone’ has it

Getting ready for Christmas and New Years and wondering where the money is coming from? Or are you thinking about how you’ll be paying back the debt created by the holiday season? There are creative ways to access money without racking up your credit cards and emptying your savings account. It all starts with a plan to provide access to your money when you need it.
Paying Down Debt

Paying Down Debt

“Debt repayment can be the best investment they can make. The less debt you have, the more you can save for the future.” We live in a culture that says “Live today on tomorrow’s money”. It’s a vicious cycle that puts restrictions on your financial freedom.

Read the entire article from the Financial Post (January 17, 2019) – ‘Paying down debt should be a priority for low income workers, but it’s still important to save, experts say‘.