What Do I Want My Money to Do For Me?

Sometimes branding is everything in life.

Life insurance didn’t take off until they changed the name from death insurance.

Escargot sounds more appealing than eating snails.

Global warming might be more concerning to more people if they called it planetary destruction or something that’s not so warm and fuzzy.

Budgeting probably has the worst branding of any topic in the personal finance realm.

Most people HATE budgeting.

They hate the idea because it feels restrictive. They hate the process because it makes them afraid to admit where are their money is actually going. And they probably hate the word because budgeting doesn’t sound like something that’s fun to try.

It’s also a topic that doesn’t get enough play in the financial advice arena.

There is plenty of advice out there about markets and investing.

There are plenty of blogs about paying down debt and saving money.

There are very few people who give advice about how to spend money.

Most people assume budgeting is about saving money but it’s really about how you choose to spend your money. One of the better books I’ve come across on the topic is You Need a Budget by Jesse Meachum. Jesse does a wonderful job of re-framing the budgeting conversation.

He made three points worth highlighting:

Design your financial life around your priorities. There’s an old adage that personal finance people use that goes something like this: if you want to know where your priorities lie, take a look at your checkbook and your calendar. We might have to update this to say banking app instead of checkbook but you get the idea.

Meachum rightly talks about the importance of prioritizing your spending:

Without a budget you have no way to prioritize your spending. You often don’t even know where your money is truly going. You may stress about not being able to afford what’s important to you while you simultaneously spend on things you’d willingly nix if you could see the trade-offs. That’s the beauty of a (good) budget: it lets you see exactly how your spending affects the rest of your life.

The goal isn’t necessarily to track every expense down to the last penny. But you should have some sort of spending plan that takes into account your priorities, needs, and current financial circumstances.

Try to make your “emergency fund” obsolete. An emergency fund can often morph into a catch-all savings account that pays for expenses people know are coming, they just don’t know when. Most of the time these are not actual emergencies, but infrequent expenses you can plan ahead for.

Meachum breaks things down by your true expenses:

Embrace Your True Expenses, combines the power of thinking ahead with taking action here and now. Whether expenses happen like clockwork (rent), feel impossible to predict (car repairs), or are just far-off dreams (cash for a wedding), they are all part of your true expenses. The key is to prepare a bit at a time by treating them all like monthly expenses.

By breaking large, infrequent expenses into smaller, frequent milestones, you’re getting rid of “surprise” bills that tend to blindside us. Suddenly, they aren’t surprises.

Some of these expenses are predictable (annual insurance premiums, Christmas gifts, vacations) that you can reasonably plan for while others are unpredictable (car repairs, weddings, bachelor/bachelorette parties, housing repairs/upgrades) in the sense you don’t know exactly when they will hit or how much they will cost.

He recommends adding line items into your monthly budget for these infrequent expenses so you can break them up into more digestible pieces. You may not pay for these items on a monthly basis as you would with your gym or Netflix membership, but that’s the way you should think about them.

This turns it from an emergency fund into a more well-thought-out spending plan.

Budgeting is personal. Rules of thumb can help with the decision-making process when there are too many choices but you have to pick your spots with these things, especially with your finances. I’ve heard of financial rules of thumb like the 50/30/20 rule that says you should allocate 50% of your money to necessities, 30% to wants, and 20% to savings or debt payments.

The problem is the percentage approach fails to take into account personal circumstances. Here’s Meachum:

I’m especially wary of financial advice based on percentages: housing should be X% of your income, food Y%, retirement Z%. Geography alone makes most of these generalities useless (hello, Iowa versus San Francisco rent). They’re also blind to so many connected life choices. Maybe you spend more than the “recommended percentage” on rent, but you also don’t own a car and you bike to work. Boom: car insurance, car payments, fuel, and gym memberships have no place in your budget.

Spending your money in a conscientious way will always require trade-offs. Many of those trade-offs are determined by variables like where you live, your chosen profession, your family situation, your level of savings, and your burn rate.

I don’t personally have a stringent budget. I follow the save first and spend what’s leftover approach which requires relatively stable lifestyle inflation. But I also save for big expenses in small chunks to avoid having to scramble when infrequent expenses inevitably pop up.

Meachum says, “The point is to decide what your priorities are, and then make a plan to meet them.”

You Need a Budget

Further Reading:
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