One of the worst financial tasks people have to conquer is creating a budget. And the financial industry has done everything in its power to screw it up even further for you! Software, talk show hosts, “envelope systems”, and full on courses you pay good money for exist and yet most remain clueless as to how best to write a budget.
I’ll take the mystery out of it for you…it can be done in literally 30 seconds. It’s simple but not easy. If you are a client of mine you know how much I love that phrase, “simple, not easy”. How do you lose weight? It’s simple but not easy. How do you build muscle? It’s simple but not easy. How do you have a better morning routine? Simple…not easy. How do you create a budget? It’s simple but not easy.
It’s not easy because in order for you to achieve results, you need to execute on the advice. The advice itself is not complicated - it’s basic math. However if you won’t execute the advice, then you go nowhere.
Your 30-second budget:
Take 100% of your income and fill it in here $_________
- Deduct 30% for taxes $__________
- Deduct 10% for God (or charity) $__________
- Deduct 20% for savings $__________
Spend the remaining 40% ($_________) on whatever you want. But you only earn the right to spend this 40% if you do the above first.
That was the 30-second part. The simple part. Now let’s discuss the “not easy” part.
First: your income
This should be obvious, this budget works for you no matter what you make. $100k, $500k, $50k, $1 million. Doesn’t matter. So we always just start with 100% of whatever it is that you make including all sources of income.
Second: Taxes
Not many people ignore paying taxes. You know why? Because it isn’t an option. You pay your taxes or you go to jail. The government knows that if they give you the option to pay, then you will find something else to spend that money on and that is not ok with them. So the first thing that comes out of your income is tax. Maybe it’s only 20%. Maybe it 50%. This will depend on your income and where you live. It’s cheaper to live in TN than in NYC. But no matter what you make or where you live, the first thing to go is the tax money. You simply have no options here and so this is the one column that always occurs.
Third: God
I’ll take heat from people no matter how I frame this: I don’t care if you give money to your church…I’m not your pastor or your rabbi. I’m also not going to get into a debate over whether or not you should give before you pay tax or after. The reality I see is that most people aren’t coming anyway near giving away 10% of their income no matter how you calculate for it. So give the 10% before tax, after tax, to a church, or to a charity…doesn’t matter. But give. My successful clients tend to give more than my clients who struggle financially (I can hear it now, “yeah but that’s because they have the money to give”. For some that’s true but for many, they do well with money because they gave before they had it to give). Everyone has an excuse not to give 10% away, but those people are usually the people who have an excuse why they can’t save either. Giving is good for the soul. I don’t care if you believe in God or the “Universe”, it does us all well to give some of what we make away because it teaches us to be grateful. And gratitude is a powerful motivator when it comes to protecting and building a balance sheet.
Fourth: Save
20%. Minimum. Taxes aren’t your money (actually it IS your money but that’s not how the government sees it!). Those who give to God believe that the 10% they give away isn’t their money either…it’s God’s. But what about savings? That’s not your money either!!! At least, it’s not your money as you think of it today at 35 or 45 or 55 years old. The money you are saving is your “future self’s money”. Your “75 year-old-you” money. The money I have saved up today is because 23-year-old Joe actually was smart enough to save. 23-year-old Joe didn’t know 41-year-old Joe. And 41-year-old Joe doesn’t know 75-year-old Joe. But my 75-year-old self is 100% reliant on me, today at 41, to save so that 75-year-old Joe can live a decent lifestyle at a point in time when I may not be able to physically work anymore to provide a paycheck. You need to begin to save as if it’s a requirement, not a suggestion. If taxes were a suggestion, think how little you’d pay. Operate like the government and stop treating savings as a “suggestion”. Savings is a requirement.
Fifth: Spend the Rest
After deducting the above from your income you will be left with anyway from 40-60% of the original income number. This is what you get to spend. And I would suggest you spend every cent. This is where your lifestyle will be determined. And the lifestyle you become addicted to is the lifestyle you will demand of your future self when you can no longer generate a check. I call it Lifestyle Addiction™.
We all get used to an ever-increasing lifestyle slowly over time. Most people don’t go from a used Honda Civic to a new Mercedes in a single year. We grow into our lifestyles over time and in doing so we become addicted to the lifestyle. My industry teaches everyone that they won’t NEED the same lifestyle they have now. That’s true. But you don’t NEED that lifestyle now either. You want it. The desire won’t simply leave you at 65 or 75. You’ll still have wants and desires that you had built up over the last several decades.
The question is how in the world will you be able to re-create a lifestyle that is 70-80% of your income if you’ve only been saving 5-10% over the decades? Answer: you can’t. This is why you hear people on TV and radio suggesting you need to take more risk and “get” the 10% rate of return they promise the markets will give you. But you can’t just GET a 10% rate. You get what the markets give when they decide to give it.
The real way to ensure your lifestyle continues is to never get addicted to a lifestyle that you can’t afford. This is why you need to give and to save roughly 30% of your income. If you do that then the rest is yours…spend it! Get addicted to it! You will be able to re-create that lifestyle because it’s only 40-50% or so of whatever you make….and you are saving 20% to compound over the years to replace it. Doesn’t saving 20% of income to replace a 40% lifestyle sound more doable than saving 5% to replace an 80% lifestyle???
Again, the above is so simple. It’s basic math. It does NOT over rely on markets giving you a specific rate of return. It already adjusts itself year over year for changing taxes and income. But you need to execute on it. For some of you, it won’t be realistic to do this overnight. If you aren’t giving any money away and you are only saving 5% or 10%, I don’t expect you to change immediately. It will take baby steps and it will also take time. I will give you the tools to get there…but will you do the work?
Simple…not easy!
Next Steps:
- Write out your 30-second budget.
- Write a list of excuses as to why you can’t do this.
- Send both to me right now (or whoever is your financial adviser).
- Be open and willing to receive the coaching necessary to make the changes to your Lifestyle Addiction™.
- Be patient. Your future self is relying on you!