Category: Podcast

Part 2: How to Budget

Developing a budgeting is a process,

• Track your income and expenses
• Develop income and expense parameters
• Project future income and expenses.

First develop your expense tracking skills:

1. Start with a smart phone app – automation is your enemy
2. Develop the skill of tracking your spending for 3-6 months create 1 income category and 4 expense categories: Home, Living, Transportation, Other
3. At the end of 3-6 months you should have a solid view of how you income expenses are flowing
4. Divide your 4 expense categories into 4 sub-categories (drive behavior, facilitate decisions making)

Now you can begin to develop income and expense parameters

1. Determine monthly income budget
2. Use averages to determine monthly expense budget by category
3. Zero based budget means you have to account for every dollar

Your budget has evolved to the point where you bring expense tracking and spending parameters together

1. To account for every dollar you have to reconcile to your bank account
2. Monitor your performance of your actual spending against your budget and make adjustments

You are now at the stage of financial planning where you can begin to see how you can achieve your financial goals

1. Develop a spreadsheet to mirror your income and expense categories
2. Input 12 months of historical data
3. Project monthly income and expense by month for the next calendar year (previous, current, and next year)
4. Project annual income and expenses for the next five years.

Home Budget App

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Part 1: Why have a Budget

To survive without budgeting at some point would require the use of credit or a very extremely conservative lifestyle which would mean lost opportunity.

Very High level – How to Budget

1. Tracking income and expenses – find a tool and develop the skills
2. Set spending parameters – this is where the “why” becomes important
3. Project future income and expenses – this is the real payoff to budgeting

Budgeting Myths:

1. Budgets are for “poor people”
2. Budgets are restrictive
3. Budgets are temporary
4. Budgets are “one size fits all”

Why Budgeting is important:

1. Provides a roadmap with directions to your goals
2. Budgets identifies problems before they occur
3. Makes you aware of where your money is going – automation is your enemy
4. Budgets drive behavior change – you need to review your budget regularly

Budgets are a tool for decision making

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Wants vs Needs

The problem with wants

• They do bring excitement but do not bring lasting happiness
• It becomes a unquenchable thirst of spending – there is no end it just manifests

Life is real simple but we choose to make it complicated and one of the biggest complicating factors is our desire to satisfy wants before needs, this flips the Maslow Hierarchy of needs upside down.

Should you pursue wants – yes but choose long-term long lasting wants, wants to do not continually erode your long-term wealth, avoid wants that might become unsustainable.

Early financial impendence is without question a want that I have spent a great deal of money on, but when I am retired some of that money will transition into stratifying survival needs.

Identifying a want vs need:

1. Requires justification
2. Exceeds its function utility
3. Where would this appear in your budget
4. You have buyer’s remorse
5. You buy on credit

How to control your wants:

1. Have a documented budget – have financial goals that lead to long-term wealth building
2. Be an adult – children focus on their wants adults focus on their needs
3. Adopt a life changing philosophy such as minimalism – one in one out
4. Focus – go ten feet deep rather than 10 feet wide
5. Practice gratitude – value the things you do have (we are solving 1^st world problems)

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(un)Fortunate Events

My first thought about this email and episode was that we should not wait until something bad happens to make changes in our lives, but then I reconsidered….

1. Life is not a straight line – forcing it to be straight will only bring regret
2. We naturally move toward pleasure – growth come from a place of discomfort
3. Have a plan – “No battle plan ever survives first contact with the enemy”- Hemluth von Molke
4. We learn very little from our successes in life but our failures are provide great wisdom
5. Formal education is manufactured adversity

Life is journey not a destination, it is enhanced not by the things you bring with you, but rather by the people that you meet along the way.

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How to buy a used car:

1. Realistically access your transportation needs – not a status symbol, narrow your search make/model
2. Set a budget and stick to it – maximum loan 3 years, 40% to 50% of your annual income tied up in cars
3. Do your research – become an informed buyer, know your prices & search out known problems
4. Only buy from a dealership – buy a previously leased car, don’t buy somebodies problems – know why the car is for sale
5. Test drive as many as possible – you have to drive a bad one, check the car proof, take it home and wash it
6. Beware of a deal that’s too good to be true – be willing to pay fair market value (the seller knows more than you do)

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Why buy a used car:

1. It’s not a status symbol, it’s transportation
2. Learn resourcefulness – shopping and owning (limited warranty, the warranty is not free its built into the price, if the company was losing on warranties they would go out of business)
3. Less Stress – pre-scathed, pre-dented (pre-flawed)
4. The second largest purchase you will ever make (this can make a difference)
5. This is a purchase you will repeat – get it right (every 10 years, get it wrong and it compounds)
6. Borrowing money for things that go down in value (with a new car you can be upside down on your car loan)

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How to Get Out of Debt:

1. Debt Avalanche – prioritize based on interest rate
2. Debt Snowball – prioritize smallest to largest

Why you should live a debt free life:

1. Reduced risk – your biggest financial risk is loss of income to cover your expenses
2. Freedom of choice – paying for your past actions in the future
3. Reduced stress – life has many moving pieces debt can be a very volatile piece
4. Changed how you view money

Using debt as a financial management tool will force the decisions you make today to be controlled by your actions of the yesterday. Living a debt free life means you can focus on the present and the future and leave the past behind.

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Own your Financial Decisions:

1. Stop relying on somebody else to make your decisions – but have a support system
2. Small decisions can have big impacts – always keep the end in mind
3. Don’t adopt the victim mentality – if you do you become powerless
4. Have a process but be flexible – predicable outcomes start with reliable inputs
5. Don’t keep score – your past will determine your future…..if you let it

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If you want something nobody else has you have to be willing to do something nobody else does.

That something should be financial independence early in life.

How to be different:

1. Drive an older car
2. Live in a modest home
3. Avoid home improvements
4. Vacation frugally
5. Don’t follow the masses

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The truth about credit cards:

1. credit cards are not required but are convenient
2. credit card should never be used for credit
3. credit card hacking is a hobby not a strategy
4. credit cards are not an emergency fund
5. credit cards need to managed like a bank account

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