Bankroll Yourself

Want to beat out more than two-thirds of the population? Keep a personal budget.

A Gallup poll found that only 32% of Americans keep a budget and I’m betting that number is on the high side. Many people tell themselves they keep a budget because they have a running mental tally. Or maybe they count that one time in high school economics when they were forced to create one. Or maybe they follow the classic “I save as much as I can” and they call that a budget. Maybe you’re in one of these categories. Time to change it.

You know what type of people keep the best budgets? The rich…or the soon to be rich. It’s time to step up and join them. Welcome to the elite!

Why have a Budget in the First Place?

There are two practical reasons to have a budget. Peace of mind and big payoffs.

The peace of mind portion is pretty straightforward. Having a budget means you’re always financially covered. What happens if you lose your job? Covered. What happens if your home gets uninsured water damage? Covered. What happens if you and your spouse both get into an accident on the same day destroying both cars and putting us both in the hospital? Covered.

The big payoffs are things that you save up for that bring meaning to your life. Your dream home, a fantasy vacation, or early retirement. Big payoffs are the positive motivation to keep you moving forward. The items below are some big payoffs my wife and I have cashed in on because of our budget.

The Big Purchase Payoff:

Several years back we needed to buy a car for my wife. Her parents had graciously let us borrow their car for a year or so after graduating college, but we knew it was temporary solution and needed to get their car back to them. Having a budget allowed us to save up and buy a car she loves…in cash.

No loan, no payments. Just driving enjoyment and that amazing we-paid-for-this-shit-ourselves feeling! How long did it take? About 10 months.

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The Luxury Vacation Payoff:

We save for our vacations and when we’re there, we live it up. Last year we saved $5,000 to go to Germany and Belgium. And we lived like royalty while were there…Except one night when due to my poor planning when we ended up in a cheap motel…in the parking lot a McDonalds…right next to a freeway.

But otherwise we went for it! We rented a candy apple red Jaguar and burned it up along the Autobahn. We went out to fancy meals…every night. We went on tours, we bought luxury chocolates, and catered to our every whim. It was awesome! Thanks budget!

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The Thank-You Payoff:

Shortly after purchasing a home my wife and I took our parents out to an extravagant dinner. This may sound like a small deal, but it was a very big thing for them and for us. We had closed on our home about a month earlier and had budgeted to be able to take them out and thank them.

We thanked them for helping us through college. We thanked them for helping us to have the wedding of our dreams. And we thanked them for the guidance they gave us that enabled us to purchase a home in the first place.

This wasn’t payback for decades of incredible parenting or the immense expense that children are, but it did feel like a small passing of the baton. We had arrived. And after dropping tens of thousands of dollars for our home down payment, we could still afford the expensive dinner because we had budgeted it.

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Big payoffs are positive motivators to keep you on your budget. They provide motivation when things are tough and feel sweet when they come to fruition.

Creating Your Budget.

Now that you know why you should have a budget, you’re probably wondering how. There is a link to an excel spreadsheet at the bottom of the page, but I’d encourage you to hold off until you reach it. The next few sections talk about what to keep in mind as you make your own budget.

Keep it Fluffy.

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With everything budget related it is critical to underestimate income and overestimate expenses. Taking this route will ensure you have necessary fluff. I call fluff anything that you’ll have to pay for that is a surprise expense or that you don’t explicitly plan for. This is things like car accident repairs, unexpected travel (maybe for a death in the family), or in a happier scenario maybe you get asked to be best man in a wedding in Bora Bora!

Keeping it fluffy ensures that you’re covered for unplanned costs.

Income.

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Normally the money-coming-in list is one item, a paycheck. Additional income may be in the form of driving for Uber a couple of hours each weekend or have a rental property. Income is any money source you can rely on.

Income is not the couple of things you sell on eBay or your one-off knitted scarf on Etsy. Money like this should be directed at something specific (say you sell some unwanted video games to buy a particular pair of new shoes) or just let it get absorbed into the fluff category.

The biggest error made with income is overestimation. You may have a salary of $60,000 per year, but you will not be taking home $5,000/month. If you’re paychecks add up to $3387.54 per month, you should put $3,200 as your income. Why so much less? Again fluff!

Special Circumstances: I’ve got a good friend who works a seasonal commission based sales job. If you’re in a highly variable income position like him here’s what to do. If this is your first year of this job, assume you will perform half as well as you think. If you’ve got a few years under your belt then look at the last three years of data and estimate that you’ll underperform your worst year. Remember to always underestimate income. Fluff, fluff, fluff!

Expenses.

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These include anything you pay for in a year. I like to break things down into monthly time period, but take into account costs throughout the year. Not many people take out $40 from their paycheck in April for the holiday season, but you do! Why? Because you’re badass.

Below is a list of common things that may or may not apply to you. There are items here that you may be able to combine and others you may need to split up. If you have cable and internet from the same provider, then just combine them into one. If you’re like me and don’t have cable but have internet and Netflix, then keep them split.

Common expense items.

  • Cell Phone Bill
  • TV Bill (satellite, cable, Netflix, Hulu, etc.)
  • Internet Bill
  • Mortgage/Rent
  • Homeowners Association
  • Property Taxes
  • Homeowners Insurance
  • Home Maintenance (replacing roof, replacing appliances, water heater, etc.)
  • Car Payment
  • Car Insurance
  • Car Maintenance/Repairs (new tires, maintenance, gasoline, etc.)
  • Energy (electricity, natural gas, propane, etc.)
  • Holidays (gifts, flights, etc.)
  • Water/Trash
  • Grocery/Food
  • Subscriptions (magazines, gift boxes, dollar shave club, etc.)
  • Retirement
  • Fun money
    • Although technically this is an expense, it’s a flexible expense that you can play around with! It’s what we’ll talk about next.

Savings and Fun-Money.

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For as long as my wife and I have lived together, we have given ourselves a weekly fun-money budget. We ‘get paid’ on Friday and can do whatever we want with our fun-money. Eat out, go skydiving, or make a highly risky investment. Fun-money has no bars held. We let ourselves to go into minor fun-money debt and allow accrual of fun-money savings.

Here’s how you figure out fun-money. Take your total income (say $3000 per month), subtract your expenses (say $2000 per month) and determine how much you want/need to put into savings. In this example this person has $1000 surplus per month to divide between savings and fun-money.

Savings should be directed at a longer term goal like a home down payment, a new car, international vacation, engagement ring, etc. and fun-money is for short-term enjoyment.

For this example let’s say they want to save half ($500/mo) for a trip to Italy next summer and use half ($500/mo) for fun-money. From here simply convert monthly fun-money into weekly fun money. There are approximately 4.4 weeks in a month so simply divide: 500 ÷ 4.4 = 113.64. Then change this to a round number say $110/week and that’s it. Why round down? You guessed it…fluff!

Keeping Track of Fun-Money.

The way my wife and I do this is with a simple note on our phones. We round to the nearest dollar and subtract.

For example if I have $100 in my fun-money and buy a dinner that costs $34.69. I’d just subtract $35 and change the fun-money number in my notes to $65. Easy as that!

Credit Card Maximization.

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Another huge benefit to the budget is you can always get the benefits of using a credit card.

Since my wife and I keep track of how much fun-money is on our phones and we know we can cover all other expenses, this frees us to use a credit card for every possible transaction to get maximal benefits. This is huge!

The thought of not having funds for a credit card bill is never an issue because we’ve got our budget in order. The credit card rewards give us an average of ~$500 back each year. We usually split this reward and make half a yearly fun-money bonus and push the other half into fluff.

Using cash when you could be using a credit card is as bad as not contributing to a matched 401k. You are leaving free money on the table. Have your budget in order to reap the reward benefits.

Job Loss Safety Net.

There is a rule of thumb to have 6 months of income in savings in case you lose your job. I disagree with this rule. This rule implies that you spend 100% of your income on expenses. Having a budget means you don’t spend all of your income on expenses.

For a long time my wife and I lived on less than half of our household income. Having 6 months’ income savings would have been way too conservative. You should have 6 months’ worth of expense costs in savings in case you lose your job.

Retirement.

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Screw retirement! YOLO bitches!! Just kidding of course. This isn’t meant to be a retirement plan but a personal budget discussion would be incomplete without at least mentioning it.

If your company offers some kind of retirement matching plan (401k, pension, etc.), take it. This is the best way to get free money, get hit with minimal taxes, and it’s super easy.

If your company doesn’t offer a retirement plan then you should take action yourself. There are many resources out there to help you get on your path towards retirement. The internet, financial advisors, books, psychics (just kidding), etc. Explore your options and execute one that feels good to you!

I did include a crude retirement calculator in the budget spreadsheet, but know that it’s just that…crude. It’s not built to be a catchall for how to plan for retirement. It’s meant to give you an idea of how much money you should be saving. Once you have that idea, go explore the options mentioned above to achieve your retirement goals.

Final Notes.

Many people burn themselves by just looking at a bank statement. Your bank statement cannot predict the future like your budget can. My wife and I have had our account diminish by 3x a normal paycheck on multiple occasions because a bunch of high bills hit at once. Holiday flights, holiday gifts, mortgage payment, phone bill…the list goes on. And guess what? It was no big deal because we had planned for those expenses.

Your budget gives you freedom. I recently finished a book called Discipline Equals Freedom by Jocko Willink. It’s an amazing book. Highly recommended! Financial discipline has given my wife and I the ability to purchase a home in a hot area of town we thought was out of reach. It’s given us independence to go on life changing vacations. And it’s allowed us to give back in ways that bring us so much joy.

Know where your money is going, give yourself peace of mind, and achieve your financial goals!

The personal budget excel file can be found here: Personal Budget

 

Further reading:

Discipline Equals Freedom: Field Manual by Jocko Willink

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