MM002: How to Set Up a Budget

Today, we tackle how to set up a budget, the cornerstone of any personal finance plan. The household budget is where it all starts, and without a firm foundation in place, it's easy for our long-term savings and retirement goals to slip from our grasp. That changes today when we work to conquer the household budget keep more of our hard-earned dollars. Budget nerds, unite! IN THIS WEEK'S EPISODE * Budget essentials * How to track expenses, especially discretionary spending * Differentiating between needs, savings and wants * The 50/20/30 Budget * How to pay yourself first, every month * Quick overview of Betterment HOW TO SET UP A BUDGET Money goes in and money goes out. As long as you’re not in the hole, you’re good and you’ve got budgeting on lock, right? Not so much. Budgeting is more involved than just making sure that you pay your necessities, like paying your bills on time, making sure that the mortgage or rent is paid, utilities, daycare/school, you know the costs that are there every month. It’s easy enough to plan for those items. For the purposes of this conversation, let’s call these “needs.” What I want to talk about is the small stuff. the costs that eat away at your money, the sand that falls through the cracks. Let’s call these the “wants.” Too often, our spending priorities get a little mixed up, and we end up spending money on our “wants” and “needs,” but we forget to set aside enough money for the items that will allow us to get ahead and reach our financial goals. Let’s call these “savings,” for now. They include savings, retirement accounts, investments, big-ticket items like vacations, landscaping, paying cash for a car and more. It reminds me of a lesson I learned early in school. You were given a jar and a couple of big rocks, a handful of pebbles and a pile of sand. You had to figure out a way to get everything in the jar. You’d inevitably start by filling the jar with the sand, and then placing the rocks and pebbles in the jar, but it wouldn’t fit (kind of like overspending your budget). The only way for everything to fit in the jar (or to stay on budget) is to put the rocks and pebbles in first, and then pour in the sand so that it fills in the cracks and crevices. This is very much like budgeting: needs (the rocks) and savings (the pebbles) go in first, and then the wants (the sand) goes in last to fill in whatever room is left. Alright, at risk of budgeting a dead horse, I hope that sufficiently covers the importance of budgeting. But how do you set up a budget? In short, a budget is simply a way to track income and expenses and keep on a track. Having (and sticking to) a budget doesn’t inherently mean that you instantly become a cheapskate. You can if you want to, but it just allows you to set your priorities. If you want your budget to allow for higher-than-average housing, private school for the kids, hiring a housecleaner or splurging on entertainment, that’s fine, as long as the rest of the math adds up and still allows you to reach your savings goals each month. Or, if you want to use a budget to trim and tighten your budget to the point where you do become a cheapskate, all the more power to you. There are many different budget techniques, and a quick Google search will bring up several options. It doesn’t matter which one you pick as long as it works for you, so read about the budgets and their philosophies to make sure it aligns with your philosophies. For instance, you’re going to have a hard time sticking to an extreme savings budget (where you’re saving over 50-60% of your income) if you’re not willing to give up almost all of your discretionary spending or live extremely below your means.

Om Podcasten

Welcome to The Modest Millions Show. We’ll discuss personal finance strategies for average folks like you and me so we can better understand and control our own financial destinies. We’ll cover everything from how to setup (and run) a budget, which is the most critical building block of any personal finance plan, to how to figure out what your “ideal retirement” looks like, to the exploration of supplemental and/or passive income streams that can help fuel your personal finance goals. If you listen to money podcasts like The Dave Ramsey Show, Dough Roller Money Podcast, Radical Personal Finance, Afford Anything with Paula Pant, Smart Passive Income with Pat Flynn, BiggerPockets, Investing in Real Estate with Clayton Morris and Listen Money Matters, you'll definitely find value in The Modest Millions Show. Subscribe today so you don't miss an episode!