What Do I Want My Money to Do For Me?

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.

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 on the topic is You Need a Budget by Jesse Meachum, who does a wonderful job of re-framing the budgeting conversation.

He made three points worth highlighting:

  1. Design your financial life around your priorities. There’s an old adage that goes something like this: if you want to know where your priorities lie, take a look at your bank statement and your calendar.

Meachum rightly talks about the importance of prioritizing your spending:

Without a budget you have no way to prioritize your spending and may not 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. A budget lets you see exactly how your spending affects the rest of your life.

  1. 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:

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.

He recommends adding line items into your monthly budget for these infrequent expenses so you can break them up into more digestible pieces. This turns it from an emergency fund into a more well-thought-out spending plan.

  1. 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.

There are financial rules of thumb like the one 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.

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.

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

Adapted from an article by Ben Carlson of Ritholtz Wealth Management

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