A frequent debate on the financial blogs is whether a budget is an essential requisite to succeed in your financial progression. On one hand, if you are appropriately managing your expenses and save a good chunk of your income (over 25% towards investments and retirement if you want accolades from the WinningWilliams duo), then my initial thought was that maybe you didn’t need to create one.
Not true. False. Incorrect.
I’m now on board with the idea that every individual, unique in his or her desires, quirks, and personality, can drastically improve their financial outlook via taking a look at the tangible numbers behind their spending, saving, and net worth. Accurate and discrete analysis of these items will assist in your development as a person and thus potentially improve your happiness.
Budgeting = Direction = Happiness
And this is true no matter what stage along the financial health spectrum you fall.
Stage 1: In Debt
At this stage, looking at a budget might feel depressing. Depressing does not equate to happiness and is therefore something you easily would then want to avoid! You might have more liabilities/debt than assets and a negative net worth. How would showing that in a budget make you happy? You create a budget that will give you direction. You realize that today you become accountable for your actions. Today will be the turning point to getting yourself out of debt.
- Open Excel, or if your old school: paper, pen, and calculator. Anybody still doing that?
- List all your income coming in and all of your expenses going out. This will let you know how much money you have left to paydown your debt. We’ve detailed several posts on reducing your expenses.
Note: Every dollar in expenses that you reduce can be used to paydown debt. Bonus benefit: not only do you get the benefit of permanently lowering your debt balance, you are lowering the amount of future interest you owe. This is your first step in getting money to work for you and not against you. Think of the difficulty of running up a hill, the greater your debt burden, the greater the incline. But think of what happens when you get to the top of the hill and have your debt repaid. It’s a beautiful view from the top and it gets much easier with having money work for you on the way down via investments! Therefore it is vital to identify what are your essential expenses and eliminate as much of the non-essentials as possible. Be honest.
- The next part is listing each of your debt balances by source. Listing the interest rate could help you identify your higher cost of debt to tackle first.
There are generally two schools of thought for paying down your debt: 1) focus on your highest interest rate debt first or 2) take the Dave Ramsey snowball strategy, paying off the lowest balance debt first and then rolling that into the next debt and paying that off, and so on.
- In any case, start paying it down today.
The driving force for these actions is to create a visual depiction of your progress. Create an Excel chart that shows your debt balance going down each month. How BEAUTIFUL is that? How motivating is that to see the progress based on the actions you took today? And that my friends, is why you must start a budget, even if you are in debt. After a few months of seeing that progress, you can ensure some of your “essential expenses” will be further reduced. You have learned the power of your action and the impact you can make. Both seeing your actions reduce your debt and subsequent elimination of all debt will certainly provide a feeling of pleasure.
Stage 2: Wealth Building
At this stage, you likely have no debt outside perhaps a mortgage. You have control over your finances, have a rainy day / emergency fund in place, and are saving toward retirement / financial independence.
You still need a budget.
And again, it all comes down to the visual depiction of your progress to stay on track. In our consumeristic world, hedonic adaptation reigns. The Joneses just bought a second house, added a pool, TV, car, boat, jet-ski, 50 yard-line season tickets, are traveling internationally, and purchased a miniature horse for their kids, who of course go to the most expensive private school since that how else can they grow up in this mean and crazy society? Buy hey, you are doing well, have so much more saved that your peers, why not splurge?
Because splurging and unconscious spending won’t make you happy.
The graph below takes a look at WinningWilliams invested accounts (only brokerage and retirement accounts). We’re heading down the hill and are picking up steam. You’ll just have to guess at the scale and actual numbers since you’re not getting that J This is just one representation of how we look at our numbers. But the visual representation goes to show that we are succeeding in our efforts and our “delayed gratification” will give us significant opportunities such as early retirement, freedom from financial stress, and giving back to others. Items that studies have proven to make you happy.
So maintaining a budget in Stage 2 is integral to making sure your actions align with your beliefs and interests. By continuing to track your expenses, you are holding yourself accountable. Is your spending in line with your values? After all, isn’t where we spend our time and our money one of the best indicators of what we value the most? Continue to track your expenses, continue to track your net worth, and align it properly with your values.
So, for our stage 2 readers, you basically replace the debt sequence with your goals and ambitions. Perhaps saving for a large down payment for a house, a special vacation experience, etc. etc. It still provides that visual cue that you are making progress.
At WinningWilliams, we take pride in living a lifestyle that conforms to our beliefs. We check our expenses to make sure we haven’t unconsciously picked up habits that don’t harmonize. We don’t mind if our expenses increase, as long as they are adding to our happiness.
WinningWilliams challenges you to take control today. We have to fight some inherent flaws of human nature to gain a true and long-term happiness, especially with marketing gurus telling us how inferior we are. A budget is a tool to systematically “check-in”. It doesn’t need to be an elaborate or intricate model. If you don’t understand Excel, then this is the time to learn it. Maybe you’ll turn into nerds like WinningWilliams, getting hours of satisfaction from budget review time with your significant other. Oh and that’s free too. Challenge one another or even a friend to meet your goals. Nonetheless, what you did yesterday is in the past and doesn’t matter, but what you do today does.