Budgeting: The Ultimate Hack For Financial Success

Sick of overdraft fees? Late payment letters? No money leftover? You don’t have to live under that constant stress. You likely just need a budget. In this post is going to show you that it's possible to break this cycle.

After implementing a budget my wife and I were able to pay off almost 60k in debt and build a 6-figure investment portfolio in 4 years. Let me show you how, towards the end, I have a special gift for you. Let’s go

🙋‍♂️ Why do you need a budget?

Only 24% of Millennials demonstrate basic financial literacy. That financial illiteracy cost Americans $415 billion in 2020. The number one mistake we make when it comes to building wealth is not how much money we make but how much we keep. So here’s why:

• The average credit card debt in America is $6,270.
• 40% of Americans have less than $300 in savings.
• Only 30% of Americans have a long-term financial plan.
• Just 39% of Americans have enough cash to cover a $1,000 emergency.
• 32% of Americans saved nothing for retirement in 2020.

Myth # 1: *“If I had more money, all of my problems would be solved”*Reality: Actually, spending less than I earn may solve many of my money problems.

Myth # 2: *“Budgeting is for people who are in debt.”*Reality: Budgets are for anyone seeking to stabilize their finances and avoid debt.

Myth # 3: *“If I balance my checkbook, that’s as good as budgeting.”*Reality: The checkbook can’t help me prepare for unexpected expenses like car repairs or doctor visits. Budgets can.

Myth # 4: *“Following a budget inhibits my freedom of choice.”*Reality: Following a budget increases the likelihood that I’ll take care of my financial priorities first, such as housing, food, savings, and transportation.

If you identify with one or more of the above myths, then make a personal decision to implement the “realities” into your thoughts. If you still have difficulties budgeting, remember this:

“If You Don’t Control Your Money, It Will Control You”

🎯 Identifying Goals

Budgets work best when you tie them to personally important financial goals. To exponentially increase your likelihood of achieving the written goal, share your goal and plans with someone else and then report your progress on a regular basis. A study from the Dominican University in northern California reports that such actions can lead to a 71% greater likelihood of reaching your goal. If you want - drop it in the comments below.

The SMART principles, here’s what that would look like:

• Specific: I want to build an emergency fund of $20,000.
• Measurable: I want to save $4,000 per year, which is $333 per month and $11 per day.
• Achievable: My budget includes up to $450 of disposable income that enables me to save the targeted amount of $333 per month.
• Relevant: According to my income and expenses over the past year, I should be able to achieve this goal.
• Time-bound: I want to save $20,000 within five years.

💰 Record Earnings

You know how much you make. Grab a few pay stubs, or bank statements and write them down. I would say a 90-day average on a weekly and monthly basis. It’s important to make sure you use net income and not gross.

Gross income is the amount of money your employer says you make. In your personal finances, gross income is a fantasy. It includes lots of money you never get to spend, like social security and Medicare taxes, not to mention income taxes and potentially health insurance premiums.

Net income is the amount of your paycheck. Net income includes the amount of money you have available to spend and use to pay bills. Always base your household budget on your net income.

If you work freelance or own a small business, you may have inconsistent and unpredictable income. In such cases, estimate your income on the lower end. It would be better to experience the pleasant surprise of having more income than expected versus having less.

💸 Track Expenses

Tracking expenses can really be a horrible experience, sometimes just straight-up frustrating. Here is what you can do to keep your sanity, distance yourself to the why. Don’t start questioning the expenses, or justifying them. You’re just a stenographer throughout this process. Let’s talk about the what before we get into the how.

If you're like most people, your largest budget percentage is likely to be housing. Ideally, you should aim to keep this at no more than 30% of your income. If you're spending more than that amount, that could put a strain on your budget. In that scenario, you may have to shrink your other percentages to accommodate higher housing costs, increase your income, or look for less expensive housing. This is one of the biggest reasons home loans run debt-to-income calculations (DTI) before providing anyone with a loan.

If would like all the ins and outs of budgeting and a specific tracking sheet template, check out my e-book on budgeting.

Prioritizing Expenses

Just because a bill arrives in your Inbox on the first of the month does not mean you should pay it before your other bills arrive later. To prioritize your expenses, categorize them into the spending groups as outlined below.

1. Survival needs: Your top priority expenses – those you make sure to pay before affording any others – include just three or four. First, ensure you have covered your need for shelter and security.  Next, you need to afford food, whether fresh groceries or canned goods. This does not include dining out, which comes under your lifestyle choices. You will need a minimal amount of clothing as well for survival. Survival clothing includes protective items like coats, basic coverings, and footwear. Purchasing multiple outfits and pairs of shoes or buying for fashion will also come under lifestyle choices. You should also include contributions to an emergency savings fund under your survival needs.

Some people like to include investing and savings as a survival need because even though it may not be a survival need for today, it may tomorrow. If you need help on that check out this video on investing in ETFs with just $100.

2. Critical wants: These critical wants include our choices in access to information (e.g. cell phones and Internet service), childcare, debt payments (often for previously purchased survival needs or critical wants), and transportation (e.g. car payment, fuel, insurance, and maintenance). Depending on the situation transportation may be a survival need but trust me, you can always downgrade. Back in 2016 I gave up my 2016 Lexus GS 350 F-Sport for a 2011 Nissan Altima and did so happily as my payment went down from a whopping $992 to $298. You can always make the choice to lower your expenses by downgrading your car, home, apartment, etc. A critical want does not justify getting into a loan you can hardly afford or which exceeds your ability to pay.

3. Lifestyle Choices: often engender the greatest amount of anxiety among consumers when budgeting. Oddly enough, even though they often make up a majority of the household’s monthly spending, needs and critical wants add little to the feeling of well-being, Instead, consumers consider them basic necessities rather than contributions to living better.

4. Trival wants: spending on trivial wants has to do with expenses that would have little effect on your day-to-day living if you did without. For example, while you might find great joy in going to the movies, chances are you don’t go daily but more likely just once or twice a month. For me, it’s like twice a year. Most of my movies nowadays start with a lamp jumping on top of an I.

5. Long-term wishes: like saving up to start a business, investing in a child’s college education, and putting money aside for a vacation will all fit well within the long-term wishes section of your budget. Cutting such spending from your long-term wishes plan will have virtually no impact on your day-to-day lifestyle, although it might have an effect on your emotional health. After all, many long-term wishes make up a focal point for hopes that provide strength and even a mental boost during difficult times.

💡 3 Ways You Can Start TODAY

1. Easiest: Google Sheets 🗒

Other than writing it down on paper, the easiest way to get you going is a Google Sheet. I already have a template ready to go for you where you can just fill out all your info and you’ll be good to go. If you’re just getting started I definitely suggest you do it on Google Sheets. Although it’s manual it will be a very good learning experience for you. You can access the Google Sheet here. You'll need to make a copy and move it into your own account. Everything will be auto-calculated for you, including the pie charts.

2. Free: Wave Apps 🌊

Next up is Wave. I used wave for many years, and still use it for my business. It’s a very powerful, all-in-one accounting software that is free to use. The accounting section has very powerful budgeting options, reconciliations, cash flow analysis, etc. Wave allows you to get started in seconds and connect all your bank accounts. The transactions will appear automatically, and you can say goodbye to the manual receipt entry.

You can also do invoices, banking, track sales, etc. You can check it out here.

3. Best: Truebill 📲

I came across Truebill a few months ago and signed up on the spot. I’m a huge UI/UX junkie so when I saw how well it’s designed, I knew it was for me. Managing money can be hard, and not to mention time-consuming. Truebill “empowers you to save more, spend less, see everything, and take back control of your financial life.” That sounds pretty good, right?

Here is why I love this app:

1. It allows me to keep everything extremely organized.
2. It makes it very easy to budget, not to mention get alerts so we stay on track.
3. I said “we” above because my wife has her own account - budgeting is a household project.
4. It tracks my net worth.
5. I link investment accounts, savings accounts, and everything in between.
6. You can set up rules for auto-categorizing - this is 😍

I mentioned it last because it’s not free.

But I can save you almost 50% without a referral link! As of writing this you can sign up for a paid version, then manage your subscription and suggest a cheaper price you’d like to pay. From $5 to $3 (the lowest they’ll go).

🧩  Compare And Calculate

NOW THAT YOU HAVE REASONABLE estimates of your upcoming expenditures and your expected income, simply subtract your planned spending from your projected income.

Perhaps as a tribute to the power of parental and educator influence, 60% to 80% of American households have consistently lived “within” their means since the late 20th century.

Unfortunately, Mom, Dad, and the teacher got it wrong. “Living WITHIN your means” is perhaps better described as “living paycheck to paycheck.”  It means you have nothing left over after paying your bills. It means you save nothing and invest nothing. It means a single financial bump in the road of life can send you into a financial tailspin that can take years to recover from, if ever.

One of my favorite books is called Atomic Habits. The authors discuss how a very atomic habit can make a massive impact. This applies to your budget. Imagine you set up your monthly budget, and when it’s all said and done you’re right a $0 remaining after paying for everything. At the end of each month though, you subtract 1% from your needs and wants and add it to your investing category. Could you do it? Instead of spending $500 a month in entertainment, you spend $495 (99%) instead? Of course, you can!

At the end of one year, your investing category would be at 12%. Your future self will thank you for this.