Budgeting is the heart of financial planning. Achieving your goals starts by being aware of how you use your money, so you can make changes that align your money choices with your goals. Learn how you can create a budget and how to make it a central piece of your financial planning process.
Last month we proposed our 30-day spending challenge. We suggested, as a way to get most of the benefits of a budget without actually doing one, to track your spending for thirty days. I know some people did it and told me about the benefits of going through the challenge. Tracking your spending really goes to the heart of financial planning, which is making the best use of the resources available to you to achieve your life goals. Monitoring your spending for a while creates awareness of how you are using your resources now, and what you can do going forward.
So if you haven’t started it yet, there is no better time than the Holiday Season to track your spending. Whether you have done it or not, what are the benefits of the challenge, and what comes next?
Why do it?
You need to know where your resources are going to be able to make the best of them. After paying taxes, some of our money is used to cover basic needs, including shelter, food, and basic social interactions. After that we have what is called discretionary spending, which is spending on our wants rather than needs. What’s left after spending on today’s needs and wants can be saved towards future goals. By tracking our spending, we can create awareness about the relationship between our resources and our goals.
Night guy, morning guy
For most of us, there is a tension between our discretionary spending today and the savings required to achieve our long term goals. It’s what economists call a tradeoff. Many times, the way we make this tradeoff is exemplified by Jerry Seinfeld in his night guy, morning guy piece. We spend on things that yield instant gratification and we don’t think about our future selves. When you track your spending, even for just 30 days, you will start to make the connection between the two.
Small spending adds up
Ever go to the Home Depot, Ikea, Target, Pottery Barns, [you name it] wanting to get one thing? What happens next? You find ten other items on sale and all of a sudden you need a cart to carry them. We think we saved on great deals, but did we really? How much did we spend on things that don’t really make a dent in increasing our overall life satisfaction? If you write it down, you will see how much.
It’s quite likely that a few days after your excursion to one of the above places, you need to go to another one in the list. Do you remember what you did the previous time? Not really. If you tried our challenge you know this. As you write it down, you see that you have done it a few times in the past month. Small spending here, small spending there. And it adds up to an amount larger than you expected. Tracking helps you remember what you spent on and how much. After a while, you may realize that a sales sign does not necessarily means saving.
How does it feel?
We often desire shiny new things like jewelry, new clothes, expensive bikes, big SUVs, etc. Sometimes we even reason how the purchase will be valuable to us for years to come. How does it feel when we get the new thing? Remember that one of the things we suggested writing down along with the purchase was your feelings about it. Usually, we feel pretty happy right off the bat. Then what happens? That good feeling of happiness does not last very long. We get used to it, and move on to the next thing we desire. Why is that? Unless a purchase is aligned to our values and long term goals, happiness does not last. Go back to your notes. How many of the purchases are truly aligned to your goals? Be honest. I like to spend on cycling gear. I do ride a fair amount, and spending time outdoors riding is one of my values. But do I need the lightest, carbon-made bottle holders available?
Awareness, not judgment
Don’t get me wrong, tracking isn’t about judging or feeling bad about your spending habits. It’s just about creating awareness of your habits. If you see a pattern that is not fully consistent with your values, you have just found an opportunity to make a change that will make you feel better.
Your spending habits may also reveal something about your values. How we spend our money, and our time, may reveal what we really care about. If I consistently spend on cycling, maybe I should direct my efforts to cycling more, reaping greater benefits from my purchases, and at the same time reduce my spending on wines or movies.
Take it to the next level
If you haven’t started our challenge, the best time to do it is now! But whether or not you have been tracking your spending, here are some of the things you can do to make the most of your resources.
Work on your values
Read our blog on identifying your own values. Values are the why of our plan; they act as a motivator to work on your life goals. Combined with our spending records, values can help us identify areas that we can work on to save more or to get more value out of our money. Clear values will come to mind the next time you are flirting with bad habits, like overspending on something you don’t need just because it’s on sale. Reviewing something we believe in during tough times can appeal to our aspirational nature, and help us find the strength to overcome setbacks. Research in behavioral economics and psychology backs this up.
Try budgeting
We used the 30-day spending idea to get the most out of budgeting without actually doing it. Realizing how valuable this awareness can be, why not give budgeting a try? Here are a couple of ways to get started. Continue for another 30 days, or even 60. This will give you a total of 90 days if you have done our 30-day challenge. Three months is a good amount of time to be representative of what your spending looks like on average. Then group your expenses into
- Fixed necessities (rent, loan payments, health insurance premiums, etc.)
- Variable necessities (utilities, taxes, food, home or car repairs)
- Fixed discretionary (club dues, various subscription services)
- Variable discretionary (entertainment, vacations, eating out, most wants purchased as lump sum)
Why these groups? Necessities cover your needs, so there isn’t much you can do to reduce them in the short term. Knowing how much of your spending is variable can help you understand how much your needs may vary month over month. Discretionary items are ones you can work on to reduce or control your spending. Discretionary isn’t just an expense that you don’t necessarily need. It also includes spending on a good or service more than what is strictly necessary. Everything in the fixed category is a financial commitment. It may take longer to change those spending items than changing variable discretionary spending. Consider this the next time you make a purchase that requires a long commitment.
Budgeting as a guide
Once you have divided your spending and identified your values and goals, you have great information to take the next steps. What do you need to change? What are you willing to change? Plan to make the changes for the next 30 to 90 days. Use an app, like our complimentary budgeting tool, to monitor your spending and stay within your goals. The budget will give you a yardstick to measure your progress towards your long term goals. Stay within your budget and celebrate progress at the end of your 30 days!
Life and Money, the two sides of planning
At DESMO, we emphasize the importance of planning, and not the plan itself. You can create the most detailed plan, only to put it in a drawer and never follow it. Planning is a dynamic process where we link your money choices with your life choices over time (Desmo is a Greek word that means link). The process we offered through our challenge is an example of that.
Start by setting your values and goals. Monitor your spending. Review your goals, and revise if needed based on your spending habits. Review your spending, categorize expenses. Set spending goals. Follow your budget guidelines. Celebrate progress, you are getting closer to what really matters for you. Set goals, monitor, review, revise, and repeat!
Happy Thanksgiving from all of us at DESMO Wealth Advisors, LLC!
Until next time!
Massi De Santis is an Austin, TX fee-only financial planner. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
