Making a Game out of Budgeting
Many people who have survived the coronavirus pandemic and ensuing economic fallout relatively unscathed have been focusing on ways to better insulate their finances for the uncertain future. It is natural for us to take current circumstances, both positive and negative, and extrapolate that things will be on the same path into the future. As my dad used to tell me growing up, most people “make decisions assuming nothing will ever change, but you can always count on things changing”.
Sometimes, it takes seeing millions lose jobs just like the one you have, your favorite restaurant closing and possibly never reopening, or retirement accounts dropping 25%+ in a month to make you step back and examine your finances and priorities. For many, the number one stressor is financial insecurity, regardless of income.
I have former clients who could never get their spending under control and spent every dollar they earned, even though they were making close to $500k per year. At the same time, I have a few clients that have never made anything close to 6-figure salaries and yet have retired when they wanted to, living a better lifestyle now than when they were earning a paycheck! So what’s the secret? It’s all about Savings Rates, not income.
For many people, they hate budgets. I’m in the same boat! I hate that most budgets focus on CUTTING spending, AVOIDING expenses, and LIMITING fun. Notice that every one of those words is NEGATIVE!
Some, like me, need a game. We don’t want to focus on the restricting parts of budgeting, but instead “keep score” in other ways. I have a client who has diligently saved for decades and, now that she is retired, she can afford just about anything she wants. But, she STILL plays games with her budget, trying to keep certain costs lower than what we’ve put in the budget, keeping even more money in her investment accounts growing.
Here’s what I recommend. Instead of worrying about expenses, save first. Boring, I know. But stick with me. Come up with SAVINGS targets, rather than SPENDING targets. Come up with a number and set aside that amount of money with EVERY paycheck in a different account, preferably at a different bank. Then, you’ll have a smaller amount to look at in your main checking account, and you’ll find creative ways to keep spending that low. After that seems doable, increase the amount you SAVE to the other account. Over time, you may even be just like my Financial Independent client who still plays the game of “saving” money compared to her budget.
When you are just starting to save, balance between short-term and long-term savings. Build an emergency fund with a portion of your savings while also saving into a retirement account with each paycheck. Once you start focusing on the rate that you are saving, I’ve found that it doesn’t feel nearly as restricting as when you were just focused on the “budget”.
A quick note about debt: paying down debts faster than the minimum payment is a form of savings. Include these amounts in your Savings targets and celebrate when you can shift some of these debt payments to true cash and investments!
And this is not just in personal finances! I recommend every new business owner read the book “Profit First”, which is all about using scarcity to take money out of the business FIRST, then managing expenses to what is left over.
Focus on your SAVINGS rate and you may find that you are avoiding unnecessary expenses and are able to hit your personal financial goals faster.
