Financial Independence Part 2: How To Set a Budget

I’m Pretty Sure I’m Good With Money. Knowing How To Budget Won’t Help Me, Will It?

Budgeting may as well be a four-letter word these days. Instead of screaming “I’m an awesome time – super fun!” it feels restricting and super, well…very NOT fun. Sticking to a budget means you can’t spend much on things you want, right?

Nope! Budgeting actually helps you spend money where you want to (or need to) the most. We all need to save for retirement, emergencies, our kids’ college (if that’s the path you’re taking), and the fun things we plan to experience and acquire in life. But how can we get there when money already feels tight? You can find the way by answering a single question:

Where Is Your Money Going?

You probably think you know, but until you track your spending for a little bit (ALL of your spending) you can’t be sure. We tend to make a lot of small purchases here and there that add up in a big way. Now, I know that tracking things sounds lame. And tedious. And annoying. But we’ve come a long way from pen-and-paper (or even Excel) tracking solutions! I’ve found the way to track your spending in a way that isn’t an hours-long process you dread. How? You need to…

Make Setting a Budget Easy (in 5 Steps)

When I first found out about software that aggregates my account balances for me it blew my mind. These are SO useful in helping us stay on track! I recommend Mint for this exercise and will use it as my point of reference, but Personal Capital can work as well.

Let’s walk through the process:

Step 1: Create a Mint Account

Go to Mint and create your account if you don’t have one. Intuit, the creators of TurboTax, bought Mint in 2009 so there’s a pretty good chance you have an account already! Once created, log in and get ready to see some dollars.

Step 2: Add Your Accounts

This is pretty straight forward – add your checking, savings, credit card, and mortgage accounts (along with any others you might have) so Mint can pull in all the data for you. This shouldn’t take more than a few minutes.

Step 3: Review Your Spending Categories

Mint has a great feature: it automatically categorizes your spending into buckets (Groceries, Entertainment, Gas, etc.) based on the vendor, but it isn’t perfect. Take a little time to go through and make sure everything in your accounts is categorized correctly.

All set? Great! Look at your spending categories – specifically, the amount you’ve spent in each. Is it what you expected? Are there some gas station stops, Best Buy and Amazon purchases, or subscription services you forgot about? Are you house-broke or car-poor (meaning you spend so much of your income on your home or vehicle that you’re tight everywhere else)?

Did you somehow gasp spend more than you earned in the last month?  If you don’t regularly look at where your money has gone, I bet you’ll be surprised!

Step 4: Set Category Budgets

The next step is to go to the Budgets tab, take a look at your spending based on the categories you just set up, and enter your desired spending goals. Play around a bit here! Adjust what you allow yourself to spend in each category to see how much extra money you can have left over, and stick to it.

Step 5: Review Your Spending Monthly

Here’s the actual key to success with money: review your spending at least once a month! Put it on your calendar, make a phone reminder, throw up a sticky note…whatever it takes. I mean, shoot…make it a wine, pizza, and spending review date night! However you approach it, remember that the reason you’re doing this is to be aware of any bad spending habits that may be starting or resurfacing. Those bad habits are small today but will keep you from your goals tomorrow if left unchecked.

As you make this a routine, it will probably be something you actually enjoy knocking out as your debts disappear and your savings and wealth grow right before your eyes. I never knew how much I’d love seeing numbers grow until I saw it for my own net worth!

“But Dave. I mean, come on. You talk about small buys that are a few bucks – these are tiny! You don’t really expect me to pay close attention to those, do you?”

Well, yeah. Not that you need to stop buying them, but at least be aware of what they’re doing for your checking account. Why? Because…

Small Changes Have a Big Impact

When I was first digging into my spending 10 or so years ago, I was getting at least two energy drinks a day (Monster Zero, to be specific), seven days a week. No big deal, right?

To quote one of my favorite FIRE authors Kristy Shen: “Let’s math shit up.”

These drinks were on a regular promotion of 2 for $3 at the time, so I was spending $21 a week ($84 a month) on energy drinks alone, tax not included. That was the same amount as my energy or internet bill! Naturally, I cut that down immediately. Energy drinks are not that important to me.

I did this exercise for all of my spending and was able to free up a lot of money that I didn’t realize I was throwing away on things I didn’t really need or care about. What did I do with the extra? I put it away into savings or toward more intentional purchases, of course!

I’m a FI guy, so here’s a fun exercise to see what some extra money can do for you.

Thought Experiment: What could you do with an additional $300 per month?

This kind of money can make a surprisingly big impact on your life! Let’s assume you can free up $300 a month by trimming down on some small routine purchases that aren’t particularly important to you – what could that allow you to do?

• Retirement Investing: $3,600 per year in an index fund that provides 7% growth after accounting for inflation (ex. VTSAX) would amount to an additional $50,329 in 10 years, $148,744 in 20 years, or $342,342 in 30 years!
• Debt Paydown: An additional $3,600 a year in paying down your car loan, student loans, or mortgage! Think about the freedom you’ll have when no one can hold any debt over your head.
• Vacation: $3,600 a year (or a smaller portion of that) for the amazing vacation travel you’ve been planning!
• Emergency Fund: Building up your cash cushion to get closer to F-U Money is priceless and opens up so many options in life! An extra $3,600 from cutting out some small insignificant expenses can get you much closer, much faster.

“Okay, I’m sold! But I’m not going to pull out my phone to check my spending for every restaurant and electronics store. How else can I stay on top of things?”

I’m glad you asked.

Make Your Spending Visual

One of the most valuable things you can do when starting on your budget is to see and feel the money you had at the start of the week leaving you.

When I was getting started with my own budget, I would withdraw a specific amount of money in cash, “fun money”, that I could spend each week. Once it was gone, it was gone. I didn’t let myself spend any more on fun things (video games, eating out, beer, etc.) until the next week when I’d pull out cash again.

This really made me think about each purchase. Once I got the hang of it I was able to spend my money on things I really valued instead of small impulse purchases, occasionally winding up with extra that would increase my monthly savings even further.

Another tip for this that I outline in The Path to Financial Independence Part I: Optimizing Your Money Mindset: wait a day before making a purchase that isn’t planned. You’ll be surprised how often you forget about that impulse buy when you sleep on it.

Two Final Tips!

We’re in the final stretch! Let’s finish with some really important tips that can help you guarantee that you’ll meet your financial goals.

Pay yourself first! Change your thinking from I’ll save what I have after spending to I’ll spend what I have after saving.

Automate everything you can, every step of the way. Schedule automatic payments so you don’t have to remember anything. You may already have this set up for some bills, but what about your savings? Setting an automatic transfer to your savings/investment account will remove your ability to spend that money by mistake.

Budget Resources

To finish, let’s review the pros and cons of the resources mentioned in the article before wrapping up.

Mint (Intuit)

I used Mint for years! It’s a great utility for tracking your spending across all accounts and visualizing where that money has been spent. It also shows your debts, so you can track and set goals to pay them down ASAP!

Pros:

• Free and owned by Intuit, creators of TurboTax
• Great user interface and overall usability
• Links with your accounts (bank, credit card, mortgage, etc.)
• Provides on-demand account balance information
• Syncs across web browser and mobile app

Cons:

• The Net Worth tracking was not as robust as competitors like Personal Capital
• Strong push for additional services and credit cards due to the free nature of the app (pretty counterintuitive to beginners that should not be looking at credit cards at the start)

Personal Capital

This is my go-to resource for tracking my net worth and overall spending. The focus is more on the net worth side of things, though, so for someone focused more on building a budget and tracking their spending I’d recommend starting with Mint.

Pros:

• Free
• Links with your accounts (bank, investments, credit card, mortgage, etc.)
• Outstanding net worth tracking functionality
• Retirement planning tools that let you plan for multiple scenarios
• Informative user interface for those that are more analytically driven
• Syncs across web browser and mobile app
• Free financial advisor appointment once you hit a specific net worth threshold

Cons:

• Occasional popups for the free financial advisor appointment once you hit a net worth threshold
• User interface is informative but not particularly pretty

Budgeting Google Sheets Templates

Pros:

• Free!
• Available anywhere that has internet
• So many templates choose from – linked resource is one of countless resources online

Cons:

• Manual input required
• No linking with accounts

Honorable Mention

You Need A Budget (YNAB)

I gave the YNAB free trial a shot after hearing about it from multiple blogs and podcasts. It wasn’t for me, but it may be really helpful to you.

Pros:

• Great user interface
• Links with your bank accounts to pull information in directly
• Syncs across web browser and mobile app
• Allows for goal tracking
• Spending and Net Worth reports

Cons:

• Requires a subscription
• Setting up a budget can take more time than most will probably like
• User interface was pretty but confusing when using multiple bank accounts and trying to adjust the budget

Conclusion

We did it! Pat yourself on the back for getting yourself started on the road to knocking out your financial goals!

Let’s wrap things up with a TL;DR.

• Know where you’re spending your money!
• Set up your accounts and budget goals in Mint or Personal Capital
• Track your spending at least once a month
• Make your spending visual
• Pay yourself first
• Automate everything!

And that’s it! What do you think – are you a budgeting fiend? Or is it all nonsense and you’re just planning to YOLO your way to retirement and your savings goals? Let me know in the comments!