Most people I first meet for the first time group budgeting in the same category as root canals and timeshare presentations. So what is with the Google search results for ‘budgeting’?
Could this stock photo utopia be reality? With a better approach to budgeting, you bet it can. Let me show you how.
Let’s start with how not to do things.
And so it goes.
There’s a better way. Filling out lengthy, super-detailed forms is not the best way to start. It’s unlikely that you remember every purchase, so our approach starts with looking at a few lines that matter most.
Note: Click here to read Part 1 of this series where we explain the two sides of a budget and why we recommend shifting your focus away from expenses.
THE EXPENSES THAT ACTUALLY MATTER
You can think about your spending as 😃 or 😫 spending. The official names are discretionary spending (money you enjoy spending) and fixed spending (the money you spend reluctantly).
Here are some examples:
Why do we want to focus on fixed expenses first?
- Easier to do – There is typically less of them
- Bigger impact – The total dollar amount is usually higher
- No guessing involved – The amount typically stays the same each month
Congratulations! At this point — without ever budgeting — you are one step away from having a completed budget.
Take a look:
A) Your monthly income = $5,000
B) Your fixed expenses = $3,500
C) Your discretionary expenses = (A – B)
Your discretionary expenses are $1,500.
In this scenario, you would likely be spending $1,500 a month on discretionary expenses. If your bank balance is growing each month, it tells me you’re spending less. On the other hand, accumulating debt means you’re overspending.
That’s why this $1,500 is what we care about most — It’s spending we can control.
Remember Josh and Janelle from Part 1? They’ve recently calculated their 😃 budget and they are learning to re-channel their discretionary spending into attainable goals.
Expert Tip: Automate your banking in a way that you don’t have to think about the fixed expenses each month and review them only annually to ask for the best rates from suppliers.
THE STORY OF JOSH AND JANELLE
We walked Josh and Janelle through our budgeting process, and they were surprised by the results.
Josh and Janelle combined monthly net income = $8,300
Fixed expenses = $6,555
Discretionary expenses = $1,745
Like most people we work with, once they saw the amount available for discretionary expenses, Josh and Janelle knew they needed to track that spending closely. This was the motivation they needed.
TIME TO TALK ABOUT SAVING
Josh and Janelle have some big goals that they needed to save money for such as vacations, buying a bigger home, and retirement.
The next step was to decide how much they need to save and which accounts to save in. Together we developed this strategy:
For Josh and Janelle and the majority of our clients, financial planning and budgeting are less about right or wrong and more about trade-offs. There’s no right or wrong answer to “how much should I save and where should I save it?“, It all comes down to considering trade-offs.
One of the biggest trade-offs we make are decisions about saving for retirement. It’s difficult to sacrifice our lifestyle today for a time that seems so many years away. A financial advisor can bring clarity to your decision. Using financial planning software an advisor can create multiple scenarios of what your future retirement may look like under each decision.
What’s next for Josh and Janelle? Will they reach their goals and show up with the other happy Google search couples?
I’m certain of it. They’re sticking to their plan, they’ve automated their banking to ensure consistent progress, and keeping a close eye on their 😃 spending. And that’s why the anti-budget works.
CURIOUS HOW YOU COMPARE FINANCIALLY TO YOUR PEERS?
At InvestorDNA, we have a tool to compare you to thousands of Canadians like you. If you’re curious to see where you stand in relation to your peers take the survey here and download the free report and analysis.
InvestorDNA is a technology driven wealth management firm based in Calgary, Alberta. Smart Budgeting is 1 of 9 modules we offer our clients. To learn more about InvestorDNA, Riley Anderson, or these modules please visit www.InvestorDNA.ca
