Chapter 15 – Do You Need A Budget?

“Look everywhere you can to cut a little bit from your expenses. It will all add up to a meaningful sum. ~Suze Orman

To this point, we’ve discussed what I feel are the fixed costs: housing, food, and clothing. In the last chapter, we discussed saving at LEAST 10% of your paycheck. I consider the remaining expenses variable costs. You have control over these costs. You definitely need to track your remaining expenses, but do you need a budget? Let’s look at the difference between fixed and variable costs and then decide, if you personally, need a budget.

FIXED COSTS

In terms of expenses, fixed costs are expenses that we must pay and have little influence over. We have influence of what kind of housing we choose, but shelter is a necessary fixed expense including your mortgage or rent, insurance, and the utilities that come with it. In the housing chapter, we discussed that all these costs should be 35% or less of your income. You also have a lot of control over your food and clothing expenses; however, you MUST eat and, at least in the American culture, you MUST wear clothes. Although I call those expenses fixed, people can find the most savings in these areas. I would also like to change our culture to believe that saving at least 10% of your income is a must too. The 10% can be considered fixed, but you can and should save more.

VARIABLE COSTS

In my opinion, all your other expenses in life are variable costs. You can choose to have these expenses and choose what percentage of your income they will be. The most common are transportation, gas, entertainment, internet, and TV service. I’m a firm believer in tracking all your expenses. Knowing where your money is going at all times is the key to financial success. The closer you track your expenses, the more control you’ll experience. In this blogpost from the Simplified Motherhood blog, the author gives us 58 of the most common budgeting categories that can help you better track your expenses. The further you breakdown your expenses, the deeper you’ll have control. But the real question here is, do you need a budget?

DO YOU NEED A BUDGET?

For most people, I highly recommend a budget. The more detailed the budget, the better. You simply track all your expenses for 30 days and then create a budget. We discussed all the apps and methods for tracking your expenses in this chapter. Once you’ve tracked your expenses, create your budget. This may involve spending less on some expenses, so you can spend more on others. After a couple of months, revisit your budget. After nearly two decades of helping people with their personal finances, I’ve found that some people do not do well with budgets. Building a budget is as simple as listing your income to the left, and then list out your expenses to the right. You can see how much money is allocated to each expense and make adjustments as needed.

For some, budgets become stressful and feel like dieting. To lose weight, many people seek the newest diets, suffer for a couple of weeks, and then go back to their old ways. This creates a negative Pavlovian response to dieting and makes it increasingly difficult to attempt dieting in the future. I have found that people respond the same to budgeting. If you want to properly control your finances without a budget, you have to keep good track of your expenses. On her blog, I’m Poorer Than You, the author states simply, “I just track and plan.” She just tracks what she spends, plans out future expenses, and then knows what’s normal and what’s not normal. I’d argue that this is still a budget, she just has enough expenses to track it all in her head. Same with the author of Reaching for FI, who admits to not having a budget but “meticulously” tracks spending via an app called Personal Capital.

Some people are also worried about apps and software having access to all their personal finance data. Apps and software that track your expenses are considered aggregators. They aggregate all the accounts you give them access to and then they track your expenses, investments, and savings for you. Capital One and Chase both warn that they aren’t liable if your information is hacked while using a third-party software.[1] That being said, many of these apps are secured using the same methods as the banks that warn you about using them. The risk may zero sum, while the risk for some people of having not having a budget may be great.

Like the blog The Simple Dollar writes, “When you don’t have a budget, getting into debt is a piece of cake.” This is because we lose track of small expenses that add up quickly. One I’ve noticed in the military is snack bar expenses. A fifty-cent soda for lunch and a dollar candy bar in the afternoon. Then the next day, something for breakfast, lunch, and the afternoon. At the end of the month you’ve spent $30-$45. Increasing interest rates on credit cards is another thing people lose track of.

My emergency savings account bank is generous and lets me know when my savings account interest rates have been increased. They send an e-mail like this.

Financial Genome Project

Unfortunately for credit card holders, you don’t get the same message when your credit card interest rates rise. As the Federal Reserve increases interest rates, so do credit cards. Credit card interest rates rise quicker than savings account interest rates. Three years ago, the national average for credit card interest rates were 14.89%, a year ago they were 15.44%, and now they’re at 16.41%.[2] If you’re not tracking them closely, your minimum payments can keep increasing and you could be going further in debt. Maintaining a budget can help you keep track of all the moving pieces. The only problem I have with budgets is how people interpret fixed and variable costs.

I once helped a person that had a tight budget and put actual cash into individual envelopes. She would put $20 in her entertainment envelope and $20 in her dining out envelope every two weeks, among all her other expenses. The entertainment and dining out expenses became fixed costs for her. If at the end of the week she didn’t spend $20 on entertainment, she would go somewhere and blow it on something not value added. She could’ve saved that money or used it to pay down debt. Her budget busted when she had some car problems that were greater than her emergency savings account. She came to me when she was struggling week to week, barely making it to the next paycheck. I was happy to see a budget, but surprised that she “couldn’t find savings anywhere in her budget.” She felt that since she had a budget, those expenses were all fixed and couldn’t be reduced.

So, do you need a budget? It’s a personal choice. For most people, I highly recommend a budget. You can let the free apps I discussed in the tracking expenses chapter create and maintain your budget or develop your own. There are many free budgeting tools on the internet. If you choose not to create an actual budget, then make sure you’re keeping a keen eye on all your expenses. We won’t go into each expense here, but I plan to give the rest of the expenses their own chapters. For example, I’d like to explore transportation in its own chapter.

[1] https://www.reuters.com/article/us-column-weston-banks/why-banks-want-you-to-drop-mint-other-aggregators-idUSKCN0SY2GC20151109

[2] https://www.creditcards.com/credit-card-news/interest-rate-report-021418-unchanged-2121.php

Chapter 12 – Best Budget Tools to Help Track Expenses

A budget is telling your money where to go instead of wondering where it went.”  ~Dave Ramsey[1]

Up to this point, we’ve discussed what are arguably the most basic of necessities.  If you’re living within your means, you should be spending 50% or less on basic necessities.  As discussed in previous chapters, you should spend no more than 35% on Housing Expenses, 5-15% on Food Expenses, and 5% on Clothing Expenses.  Many people spend their money without knowing where it goes.  It is imperative that you track your expenses.  I’ve helped people over the last two decades with their personal finances and over half find ways to help themselves simply by tracking their expenses.  I’ve compiled a list of the best budget tools to help track expenses.  Before reading future chapters I highly recommend you start tracking your expenses now using these budget tools.

Best Budget Tools to Help Track Your Expenses

Create your own.  Many people create their own budget tools to help track their expenses.  I created my own using Microsoft Excel.  The main reasons why people choose to create their own is 1) to have maximum flexibility and 2) for online security purposes.  Many apps have great categories for tracking your expenses, but may not have all that you’d like.  For example, when we discussed Food Expenses, I mentioned that in 2016 we spent more in dining out expenses than groceries.  Most apps let you differentiate dining out and groceries, but maybe you also to track what kind of dining out you’re doing.  Maybe you want to track fast food, lunch, and dinners to see where you could possibly cut.  People also create their own budgeting tool because they’re concerned with a mobile phone app having access to all their financial accounts.  If you’re making your own in Excel then you’re most likely having to manually input all the data yourself.  The benefit of an app is having all your accounts automatically linked, categorized, and reported without manually having to do it yourself.

Mint Budgeting App.  The most popular (measured by downloads) budget tool people use to help track expenses is the Mint budgeting app.[2]  The main bulk of the apps’ services are free; however, they have premium pricing as well.  The premium package offers enhanced services like advice and TurboTax integration.  I’ve personally heard nothing but good things about Mint.  The only negative feedback I’ve heard is that it requires a little bit of financial knowledge and some people with no financial knowledge have a hard time navigating around.  Again, I’ve only heard this from very few people.

You Need A Budget (YNAB) App.  The second most popular budget tool people use to help track expenses is the YNAB app.  It has a monthly fee, and like Mint, those fees help provide premium services.  If you’re struggling with your budget, and you don’t want to make your own tracker, then paying a small monthly fee could save you quite a bit of money.  The national Overdraft Fee is $35.[3]  YNAB only costs $6.99 a month.  If you’re experiencing overdraft fees, then the small fee could save you 80% a month from escaping those overdraft fees.  If you’re interested in YNAB, please use this referral link to benefit you and a contributor to this website.

Dave Ramsey’s EveryDollar app.  This may not be one of the most downloaded apps, but Dave Ramsey is probably one of the most ubiquitous financial planners in the US.  He’s created a whole empire helping people with their finances and his EveryDollar app is a free part of his toolbox, while also providing a premium service as well.  I don’t necessarily 100% agree with Dave Ramsey, but his advice probably helps most low- to middle-income people.

There are many more apps that can help you track your expenses.  Up until now, our spending chapters focused mainly on “fixed” basic necessities.  You need shelter, food, and clothes.  Your goal should be try to minimize these expenses.  Most other expenses are variable, and there is a growing movement to disconnect from many of these other expenses like TV service, internet, cell phones, and cars.  An even more important reason to track your expenses is to know how much discretionary money you have to save from each paycheck.  Once you have shelter, food, and clothes, saving money should be your next “expense.”

[1] https://www.goodreads.com/quotes/349829-a-budget-is-telling-your-money-where-to-go-instead

[2] https://www.gottabemobile.com/best-budget-apps/?gbmsl=1

[3] http://www.nclnet.org/overdraft_fees

Chapter 7 – Housing

Chapter 7 – Housing

“Everyone has a fundamental human right to housing, which ensures access to a safe, secure, habitable, and affordable home with freedom from forced eviction.” ~National Economic & Social Rights Initiative[1]

“All of these government factors contributed to creating a situation in which millions of people were buying homes they couldn’t afford, in which the participants experienced the illusion of prosperity, in which billions upon billions were going into bad investments.” ~Forbes.com, 2008[2]

We are finally at the point where we can start discussing how spending our money impacts the financial genome.  In our lives, our expenses range on a spectrum from basic needs of survival to luxuries. How you define each expense is a personal choice; however, shelter is almost always considered a basic need, and is where we’ll start our spending.  A basic need is not to be confused with a basic right, which typically drives a political discussion.

Conventional and modern Certified Financial Planning uses a “28/36 rule,” which states no more than 28% of your monthly income should be on housing costs and no more than 36% of your monthly income should be on debt (includes mortgages, consumer debt, etc.).[3]  Dave Ramsey, a popular financial guidance advisor offers a similar recommendation of no more than 25-35% on housing[4].  Finally, the Bureau of Labor and Statistics determined 2015 average housing expenses were 32.9% of income[5].  So, based of all those numbers, the average real expense and advice is 30%, and that’s the percentage we’ll use.  Before we go further, you should check your housing costs to see how much you spend. Do you spend more on housing than 30%?

Once you’re an adult and no longer live with your parents, housing costs are generally within your control and your income is typically the basis for making that decision.  At about this point, your bias may have already kicked in and you’ve already decided that renting or buying is the best option. Please try and clear your mind of which decision is optimal because it truly comes down to timing, location, and the current financial landscape.  To have the greatest influence on the genome, the key to optimizing your income is to consider the Return on Investment (ROI) of every next dollar you spend. Additionally, when you make a decision to buy or rent, there is an opportunity cost with doing one or the other.  So, the decision to buy versus rent is based on the potential ROI and opportunity cost.

There are many types of housing that we get to choose from.  Due to my military background and my frequent moves, walking through the types of housing I’ve been in will help us navigate through the options many of us have.  The key takeaway is that I started small and moved to bigger, more expensive housing options as my income increased.

The first housing type I lived in as an adult was a military dormitory.  This was an extremely small (maybe 150 sq ft.) 1-bedroom, 1-closet, shared bathroom and kitchenette single’s room. It came furnished already, and I wasn’t required to pay for it—well, sort of.  The military pays for dorms by utilizing the funding the Department of Defense receives from federal taxes. In theory, the estimated cost of the housing is deducted from my pay.

After a couple of years, I moved out of the dorms and into a 1-bedroom apartment which had 1 bathroom, a small living room, and a kitchen.  The apartment was nearly 400 sq ft., which felt big compared to my small dorm room.  Once you move out of the dorms or military housing, you receive a Basic Allowance for Housing (BAH).  For civilians, this is just part of your normal salary. I spent about $350 a month and my salary was $1,200—roughly 30%.

A couple years later, we rented increasingly larger houses; the largest being 1,400 sq ft.  Each time we moved, I ensured that (even with all bills included) we never exceeded 30% of my salary.  The places we rented were slightly bigger or were newer.  We finally bought our first house nearly 4 years ago. Even with all utilities, our monthly housing costs are down to 20% of my salary.  This is the definition of living within your means.  If your housing expenses exceed 30%, then you have less income to go to all the other expenses.  Some people I’ve helped with their personal finances have housing expenses approaching 55% of their income.

Despite all the political missteps and the insatiable greed of lending companies and brokerages, if the public kept housing costs to less than 30%, the United States may have avoided the 2008 financial collapse.  Products like interest-only and punishing adjustable-rate mortgages would have been quickly exposed under the 30% model.  How much are you paying in housing costs?  Let’s look at how spending your salary on housing impacts the financial genome.

For starters, you are part of a $217 TRILLION global real estate market[6].  Isn’t that amazing?  Real estate is the combination of all apartments, townhomes, commercial buildings, residential homes and everything in between.  You have a choice of either renting from a company or an individual or buying your own property.  We must be careful on how we use the word “own” in our lexicon.  Typically, people need a loan to buy a house, and you’ll always need to pay property taxes.  So, while you have a loan, the bank technically owns the property.  It is also important to realize the actual value of a property is based on what a buyer is willing to pay.  Many people confuse this philosophy, thinking there must be an intrinsic value of real estate, making it better or worse than any other investment.

In the following chapters we’ll analyze the specific genome connections we connect to when buying or renting.  For now, consider us entering a new galaxy—the “housing galaxy.”  Housing is incredibly connected between all ranges of government, other individuals, corporations, shareholders, insurance companies, and billionaires.  You impact all of these.

[1] https://www.nesri.org/programs/what-is-the-human-right-to-housing

[2] https://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html

[3] https://www.goodfinancialcents.com/how-much-of-mortgage-house-payment-can-you-afford-based-salary/

[4] http://www.leavedebtbehind.com/frugal-living/budgeting/10-recommended-category-percentages-for-your-family-budget/

[5] https://www.bls.gov/opub/reports/consumer-expenditures/2015/home.htm

[6] http://www.savills.com/_news/article/105347/198559-0/1/2016/world-real-estate-accounts-for-60–of-all-mainstream-assets