I love numbers but I hate budgeting I know how important it is but the traditional methods of budgeting don't work for me and I know for many of you they don't work either here's a secret though budgeting does not have to be complicated nor does it have to take much time to actually Implement effectively in this video I'll walk you through the simple system my wife and I actually use and I'll show you how anyone can implement this the best part is once you have the system in place it doesn't take any more than 10 to 15 minutes each month to actually track and ensure you're staying with so to start let's actually talk about why people fail at budgeting because in order to implement the right solution it's really important that we understand the reason that most budgeting systems actually fail and once we walk through why most budgeting systems fail I'm going to show you step by step what my wife and I do every single month to ensure that our budget is number one easy to maintain but number two effective and keeps us on track for what we want to do so here's why budgeting fails do you remember back in high school or college when you'd be assigned an essay to write and it was due at the end of the semester well when did you actually get that essay done if you're like most of us that essay was completed the night before is actually due or maybe even the early morning of when it was actually due now what if that essay had been assigned and due in one week what would you have done well you still would have got it done the night before but it would have been 6 days from now as opposed to the entire semester now what if that same essay that was assigned at the end of the semester or doe at the end of the semester was actually due tomorrow well you'd get it done right away this is called Parkinson's law Park Parkinson's law is a law that says that work expands to the time allotted to it if you have a leaky faucet that you know you need to repair within 2 weeks before family comes to visit you're probably going to wait two weeks to get it done versus same principle if you know family's coming tomorrow you're going to get that leaky faucet fixed today so if Parkinson's law says that work expands time allotted to it it can be translated to finance to say money available is money spent whatever time is available is time spent whatever money available is money spent so here's an example to show you what I mean let's assume that your income each month is $10,000 just use a nice simple example so $10,000 after taxes after any 401K contributions you have $10,000 per month coming in now your brain tricks you your brain says James you have $10,000 to spend and you may even be thinking as you're watching well yeah James you just said you have $10,000 to spend well not really and here's why let's assume that I have a mortgage payment and it's $2,500 a month and let's assume I have a car payment that's $500 a month let's assume I have some subscriptions and gym memberships and whatever it might be and those all a total to $11,000 per month well if that $10,000 per month come in in if my mind tells me I can spend it my mind is lying to me because so much of that has already been spent it's already been accounted for because of these monthly recurring expenses that I have so when you start to understand that it starts to make a lot of sense of Your Mind Is Telling You there's $10,000 per month to spend but reality is after you back out all those expenses that are already accounted for there's often times times a fraction of that $110,000 actually left over for you to spend so in many cases that's the core of the problem our mind is telling us there's more to spend than there actually is so there's two things that we need to do in order to solve this number one we need to create Clarity and number two we need to create constraints let me show you what I mean when I say create Clarity what I'm really meaning is we need to understand where our money is actually going we need to understand that whatever is coming in how much of that is actually already accounted for so we actually created a spreadsheet and if you want it you can download it from the comments below and this is exactly what it will look like when you click on that link if you click on that link below we'll send this to you and you'll see that you'll get a link that says this make a copy if you click on Mon make a copy it will take you to this spreadsheet and I have a little video that walks you through how to use it I've already filled in some of these numbers the actual spreadsheet you get will be blank but you could start to follow along even as we go through this video so that you can start to implement the system if you feel it works for you too so let's go through this spreadsheet together and if you want to follow along and start filling out your own spreadsheet by downloading that link go ahead and do so but these numbers are already filled in just in preparation for this video but what you can see is this is broken down into a few different sections we have fixed monthly expenses here we have non-fixed monthly expenses and then we have discretionary expenses so I made these numbers up just acting as if this was my wife and I's budget so you can follow along but what you can see here is fixed monthly expenses is any of these expenses that have already been spent now technically the money has been drawn from our account we've already committed to spending them so in this case let's assume mortgage or rent is $2,600 then there's Gas and Electric that's about $100 a month then there's water and Landscaping and trash and car insurance and all these different expenses that you might have now as you go through all these things you'll notice in this example the total of that is $4,650 a month now if my income is $10,000 a month what that means is that almost half of it has already been spent before I've even made a decision to spend it these are all things that are just on autopay they're going to come out they're the regular amount every single month and that's already committed so what I know is that I have 10,000 minus this 4650 left to spend on other things so what's actually left after that well $5,350 that still seems like a lot of money well that doesn't mean that we've covered everything yet these fixed monthly expenses are just the things that are already accounted for the next category is a pretty big category too these are things like groceries these are things like gas so things that I do need every single month but I haven't already committed to exactly how much I'm going to spend on groceries or I haven't already committed how much I'm going to spend on gas so they are monthly regular expenses but they're not fixed and I'll show you why that matters in just a little bit non-fixed monthly expenses I'm plugging in some numbers here obviously you might have your own numbers but what this comes out to here in this example is $150 per month so when I've gone through fixed monthly expenses and I've gone through non-fixed monthly expenses I've covered most of the essentials that I need to live on what comes next is discretionary expenses so these are the things that you don't have to spend but if you want to be able to do something fun if you want to have a date night with your spouse if you want to go see a movie if you want to go out to eat these are those expenses and here's how we do it we have kind of like joint expenses we just have an entertainment fund I'm calling it dining out in entertainment here this is things if my wife and I are going to go on a date night if we're going to go see a movie if we're going to go spend time the two of us this is the money that we've set aside to do that in addition to that my wife and I also have our own fund money if Ashton wants to go purchase something she doesn't need to ask me for permission if I want to go purchase something I don't need to ask her for permission this is money that each of us can do whatever we want with it whereas all these other decisions we're making these together how much are we going to spend on housing how much do we want to spend on food how much do we want to spend on these other categories that's very much a joint decision what I do with my allowance rash does with her allowance is only our decision and what that creates is a sense that we don't feel like we have to get each other's approval for every little expense that we buy especially if it's just a personal expense all right so that looks good so far right well you would think so but how many of you created the perfect budet you created the spreadsheet you tracked everything all the numbers lined up and then there was that oneoff expense your friend from college got married and you wanted to buy a wedding gift or it's Christmas and you had to go buy pres or the car needed new tires or whatever it was there was this oneoff expense and the thing about those oneoff expenses is they're really never that one off they seem to always be happening so if we go back here you notice the categor skipped from one to three and what's in the middle that I have hidden here is those non-monthly expenses and this is what we need to come back to you see here I've put some examples we have gifts so it seems like every single month someone's having a birthday or a baby shower just someone that you want to get a gift for and that can break the budget if it's not accounted for or you have property taxes if your property taxes aren't impounded as part of your mortgage payment it might seem like your monthly expenses are lower until there two months a year that you have a significant Property Tax Bill du now that can break the budget if you haven't prepared for it same with life insurance if it's not paid monthly or Vacations or auto registration or car repair and savings you can create whatever categories align best to your life but what this is are these are things that are easier to think about on an annual basis vacations for example you might have 10 months a year where you spend nothing on vacations and then two months where you spend quite a bit so how do we think about that well what you want to do is you want to think about the entire year how much might we spend on vacations this year and what the spreadsheet does is instead of plugging in a monthly number like we would for these categories because we know the exact monthly amount plug in an annual number so you can see here I plugged in $112,000 for the year what this is going to do is divide that by 12 and say here's the monthly amount now what this doesn't mean is it doesn't mean that you're actually going to spend $1,000 a month on travel you're going to save that amount and then every few months or every several months you're going to actually spend it so what we do is for every single one of these accounts these non-monthly expenses we have a separate high yield savings account every single month we put money in for gifts every single month we put money in for vacations every single month we might put money in for car savings so when it comes to take that vacation and we need to spend 5,000 10,000 whatever the amount is yes we have to spend that but it's not breaking this month's budget we're simply pulling money from what's already been saved and using that for vacation a big one for those of you that have children is you say hey James this works great if you don't have kids what about those kids expenses I don't know when gymnastic bills are going to come where there's summer camp or there's some major expense that they have I don't either but what you could do is you could change one of these just to Children's expense and what you do is you could say okay on an annual basis maybe this isn't perfect but maybe I need to have $6,000 for summer camps and music lessons and sports and whatever else they might be getting into well if you plug in that annual amount it's going to say here's how much you need to be saving on an annual basis to make this work now here's the bottom line on all of this pluging numbers in alone doesn't do you any good you need to make sure these numbers you're plugging in align with the income you have coming in so if I plug these numbers in that's $10,500 per month I told you before I only have $10,000 per month coming in in this hypothetical income that I'm talking about something's got to give so what this is doing this Clarity is saying okay where do I have room to give what am I willing to sacrifice here well I just made up this kids one here so I'm just going to take that out real quick but if we go back to this now I'm at 10,000 well this is really powerful because maybe I run a retirement projection that retirement projection says James you got to really be saving money than you already are well if I'm only saving $330 a month and by the way this is after 401K because the $10,000 per month coming in that I have that's after my 401k contributions have already been deferred so if I run my financial projections and realize even in addition to my 401k I need to be saving closer to say $830 a month if I plug that in what it tells me is I need to find $500 to trim somewhere else and so this is where it can be very powerful to say what are those tradeoffs I'm willing to make but this is that first step of creating Clarity of where is money actually going and then we can start the process of creating constraints so step number two is creating constraints and step number two is the essential part of all this because my guess is all of you have probably created a budget before but what does that look like well it looks like you write on a piece of paper how much you want to spend or you have an Excel spreadsheet that says how much you want to spend or maybe you do this through an app but how much you want to spend and how much you actually spend are rarely the same thing how many of us have said yeah this is what I want to spend in the end of the month comes and we said oh my gosh I didn't even come close spent way more on all these things that I wanted to and we just give up out of sheer frustration we say how on Earth do we reconcile what I want to be spending with what I'm actually spending well there's a few ways to do it I'm going to speak to the way that's worked for me here's the problem I see most people falling into with their budgeting most people are doing they're spending on credit cards now nothing inherently wrong with that but when you're spending on a credit card the hard thing is you're not seeing how much you're actually spending every single day or how much that's adding up to every single month unless you're meticulously tracking your expenses to make matters worse what you're spending this month you don't even pay for until next month and this month you're trying to pay for things that you spent on last month and you don't even remember where that money went and you're left wondering how on Earth my credit card bill get so high and unless you go through every single expense you're just not going to find a way to reconcile the two so what did my wife and I do well we stopped and credit cards sure there's points sure there's some benefits to it but what we found was it became too difficult to track how we were spending now we could like I said if I wanted to every single day reconcile expenses and see if I want to spend $500 a month on my own personal expenses how much have I actually spent but we started using debit cards instead and not only did we use debit cards but we have separate debit cards for different types of transactions show you what I mean we started using a tool called every dollar now I'm not endorsing this I have not getting paid at all by every dollar but every dollar is an app that we use now there's a paid version and a free version we just use a free version because every single month we can come in here and plug in number one what income is coming in like I said I'm just making up some of these numbers now to walk you through it let's assume I say $110,000 per month is coming in the next step is to say What expenses do you have and this is now going to show you the concept of a zerob based budget well expenses we just looked at those here so here's the expenses I marked down in the spreadsheet and I've just taken those and put them right here so all these are the same numbers and what I like about every dollar is I can look at this and can say what are my recurring expenses what are my expenses for gas and groceries what about entertainment and it creates this little summary right over here what do I do with this well what I do with this is I've created separate bank accounts at our bank titled recuring expenses gas and groceries entertainment which again is kind of those joint expenses if we're doing anything as a family and then ashen's money and James's money so if I was going in to do the budget this month I would literally slide this amount of money now I have a separate account that's called income so all actual income coming in doesn't go to any of these and cluttered up there's a separate account that's kind of just like a pass through account where money goes to our income account and then I immediately slide it over to fund where current expenses or gas and groceries or entertainment or ashon money or James money here's the beauty of this I'm not saying this systems for everyone that's only system that works Just A system that works for us I don't have to track my expenses number one recurring expenses that money is already accounted for if$ 10,000 comes in and I slide $7,200 over what that means is that's already spent on mortgage or rent or the gym bill or utility bills or the savings we're doing for retirement or for car purchase or whatever it might be I don't have to think about it this account here is going to go from 7200 and by the end of the month it's going to be down to zero in the next month I'm and refill it again these accounts here are the only things I really need to look at Ashton's money I don't really need to look at that's for her she can spend on whatever she wants to spend on my money if I'm spending on myself I'm not tracking things all I'm doing if I want to know how am I doing this month I open up my app and say okay I have $400 left I have $300 left I have $0 left maybe it's a 15th of the month I'm not going to spend any other money on myself until next month because if I do there's nothing left I'm going to hit an over draft I'm not going to be able to pull money out so in doing this what it's allowed for is we don't have to track expenses because all we need to do is look at the balance of each account hey gas and groceries how are we doing are we on track well we need to be mindful because that's already starting to come down too much we need to spend a little bit less this coming week and this isn't the only way to do it but it's a way that's really worked for us to where I'm a big fan of discipline I think discipline is a great thing I don't want to actually have to exert my emotional energy discipline on tracking expenses on a credit card every single day to ensure that we stay within budget so this is kind of like the anti- discipline approach to budgeting not looking at anything once a month I'm coming in here and refilling these accounts and then we're spending them down through the rest of the month the next month we do the same thing and here's actually what I like about every dollar again we're just using the free version you can use the paid version where it's actually tracking your expenses for you we don't need it for that this is more for me to understand how much do I need to put into each of these buckets each month to use but if I want to say look at the next month I don't have to go in and re-input every single transaction I can just start click start planning it's going to pull all the data from the previous month into there so if I say you know what this month we want to increase our retirement savings and I bump that up by $200 a month great it's going to now show your over budget and I'll show you what I mean by that let's say here I've determined we need to increase our savings for long-term Investments that's needs to be $530 a month well I'm going to get this notice that $200 over budget so I need to go through this and find $200 somewhere or I need to increase income by $200 in order to make this work maybe in this case I say okay Ashton we got to uh bump our own allowances down by $100 each well it's an every dollar budget again it's a zerob based budget again it works so this is the system that we use to ensure that once we've created Clarity which is the process we went through right here what are our actual expenses now we're using this to to create those constraints of putting the money in the right bank account and knowing that we're not going to be able to spend any more than that this is simply the cash-based envelope system but using it with debit cards instead using it electronically with banks instead now here's a few closing tips if you're watching this and saying yeah that makes a lot of sense I will tell you it takes some time to get set up here is the first thing that we found so we are previously banking with Chase now any of these actual companies that I'm mentioning is absolutely not an endorsement or recommendation just telling you what we previously used Chase is fine but anytime with most major Banks if you have money in an account and that money drops below a certain level you're going to get fees you're going to get charged a fee if your account balance drops below $2,000 in many cases well with this system we had many different accounts in many of these accounts we were trying to spend the money down to zero so recurring expenses for example we're loading that up and it's being spent down over the course of the month I don't want a $12 fee across five six accounts every single month as we start to spend that down so the traditional Banks didn't work for us most Credit Unions all credit unions really that I've seen aren't charging fees if you don't maintain a minimum balance in an account so we switched over to a credit union to be able to implement this so I say that because some people say this system works great I'm going to start to implement it well you might need to switch Banks depending upon where you are the second thing a lot of people say hey this system works great but I really love my credit card I'm just going to do the same thing with my credit C card here's why that's really challenging to work let's say that I want to save my money up I'm getting $500 a month and I want to buy new golf clubs I don't even like golf but let's say I'm trying to buy new golf clubs and it's going to cost $1,000 to do that well if I have $500 a month I'm going to need to save for a little bit to get there so if I don't spend money this month and I don't spend money the next month now I'm at $1,000 if I'm putting money into a separate bank account with a debit card attached that money grows If instead I'm not giving myself a physical bank account I'm just giving myself a $500 credit limit well every month that credit limit is reset so it works fine if I was just to spend that $500 and then stop and spend it and pay it off but how do I know how much money I've accured if I'm not spending $500 every month well if you don't have that money earmarked in a separate account it's really difficult to do so not to mention the problem I mentioned before of the thing about credit cards that was difficult to do and you don't have anything against them and some ways I do because tend to overspend Too Much with credit cards but in principle they can provide some benefits I just didn't find that in our situation the benefit was worth the hassle or the benefit was worth some of the cost of just making it too easy to overspend in certain categories the hardest thing for tracking was this month like I said we look at our credit card bill why is it that balance well I don't know we have to go through every single expense last month and it wasn't even just the calendar month typically the billing Cycles may be the 12th of last month to the 12th of this month where do we spend money on I I don't know unless I'm going to track track that it's really difficult to tell debit cards give you a real-time assessment because they are attached to a specific bank account a realtime assessment of where money is going and how much money you have left before you're running out of money for that specific month the last thing I'm going to say about this is it so incredibly easy to use where once you do The Upfront work we did take some time to set up new accounts to determine what our expenses are don't expect yourself to know exactly what you're actually spending in certain categories give it a few months start moving the right direction it took us a few months to really dial this in but now that it's dialed in it's been 10 minutes a month new income comes in adjusts the numbers a little bit in every dollar and then fill up the buckets fill up the different accounts with the specific amounts needed no hassle no tracking and allows us to stay on track with the things that we know are most important to us in terms of how we're spending now knowing how much you're spending doesn't just helped today it also helps you for the future because when you get control of your budget you can also start to understand how much can you save for the future how much do you need to save for retirement now if you want to understand how much do you need to have saved for retirement to spend 5,000 $10,000 $15,000 per month at that time I created this video that you'll see a link to here that video I'll walk you through how much do you need to save in order to be able to create a portfolio that can support a desired level of income throughout your retirement once again I'm James canel founder root financial and if you're interested in seeing how we help our clients at root Financial get the most life with their money be sure to visit us at www. root Financial partners.com
