Budgeting Finances with Quality of Life In Mind

As time goes on and I get older, I find it more difficult to find books or advice that pertain to my particular circumstance. I guess that’s a normal thing as we all get older and make different choices that lead us to different circumstances. Some self-help books just become books of encouragement and not a how-to.

I tend to be a person that has a lot of drive and desire, but if I don’t have a starting place, I am paralyzed. I don’t start for fear of starting on the wrong foot. I look for inspiration and examples but most of what I find is people saying “just start” and “be persistent”. I need a bit more than that. Those are nice sentiments of course, but for someone like me, it’s not quite enough.

Today I want to talk about budgeting finances and just some behavioral improvements that I made in my life over time that helped me get my spending and management of finances back on track.

One thing I would like to point out is that some of these budgeting tips are not for someone just starting out in their career. Or for someone who lives from paycheck to paycheck. These money management tips are more suited for someone like me who is in mid-career and has strayed away from the good budgeting and saving habits that were a necessity younger in life. A lot of what I am talking about here are habits that I have found help me to correct bad learned behavior around money.

Budgeting

If you are unable to measure something, you are unable to improve it. The first step to measuring something is to record the data. This is the basis of all improvement. Personal finance strategy is no different. This is my personal budgeting framework. You can tweak it to suit your circumstances and goals. But the basis of getting control of your budget is recording the data. The data here is income and expenses. This all seems obvious, but below I will lay out my categorizations, psychological tricks, and habits that have helped me feel wealthier.

In the past, I rewarded myself for big accomplishments at work or in life. I would only buy luxury items or “big wants” after some type of success or life event. But my reward system became less and less strict as time went on. I began buying items because I could and not because I needed them or an event required or deserved it. For me, this was a big sign that I had thrown money management goals out the window and was focusing only on instant gratification.

When I look back and think about my life during my college years, the changes I see in my spending habits are amazing. I was on a partial scholarship and student loans paid for the rest. During school, I just had a small job through the university. During that time, I could make $20 in New York City last for a week! Of course, I didn’t pay monthly rent and was on a meal plan but I was so good at saving that I would delay gratification to the point of suffering. Those days are long gone. Now I’m not going to say that I need to return those days. But some good behavior patterns can be learned, or should I say relearned, from remembering how much I valued money during the times where it was truly a commodity.

So the first thing I did when I made the choice to be more conscious of my spending was to just review what I was spending. This was not to beat myself up about it. What I spent in the past is in the past and long gone. There’s nothing I could do about it. But this exercise showed me how I was spending my money and gave me a view into my spending priorities versus what I thought were my priorities. It also gave me a clear picture of how many of my belongings were purchased out of habit or impulse. This is my first little psychological budgeting trick.

Priorities

I write down what I believe my priorities in life are. It doesn’t have to be some deep coming of age list. For me, it was just an hour-long moment of self-awareness. This is the meat of budgeting finances. On my list were my family, comfort, good food, and quality memories. However, when I looked over my spending for the year (which was made a lot easier by using my bank’s online banking spending categories), I noticed that I was not spending as much on quality memories and comfort as my priorities would suggest.

I’ll give you an example. I saw that I spent a lot of money shopping. This is fine if looked at in a silo. But I saw that when buying plane tickets for my family’s vacation overseas, I had bought the cheapest tickets I could find. When I think back to that trip, I remember being so stressed out as we had two layovers with a baby, stroller, baby bag, our two carry-ons, and our two personal bags. Now the overall trip fit into my “quality memories” category, but me skimping on the tickets did not fit into my “comfort” category. Just by diverting the money I spent on a few items of clothing and accessories I could have bought us direct flights with a budget to check additional bags. There were lots of little epiphanies like this. And bringing these trade-offs to my attention gave me the proper mindset needed when diving into drafting out my budget.

Let’s Get to Work

So after reviewing everything, and understanding my past habits, it was time to sit down and make a budget. The first thing on the budget is all the necessary expenses. I call them survival expenses. This is psychological trick number two. Some people say to start out by collecting and understanding all of the income per month. But I start by laying out all my actual “needs”. I put needs in quotes here because some of these items may actually be “wants” once the exercise is finished. Starting out your budget this way can end up one of two ways. It can show you that you either have a lot of disposable income you could be using for investment or it can show you that you are living beyond your means because necessities eat up a huge chunk of your income. Figuring out your survival expenses is a critical first step. Here are the survival expenses I listed out in my budget.

1. Housing Cost – rent or mortgage (+ insurance) or rental insurance (if it is a requirement of your rental building
2. Utilities – Electric, gas, minimal form of communication (a landline from your home or minimum cost for cell phone service)
3. Sanitary Needs – Cost of toiletries such as soap, toilet tissue, dishwashing liquid, Etc.
4. Transportation Cost – What is the cost to get back and forth to work. This usually is a car payment + insurance cost + fuel + maintenance cost of your vehicle. When I was living in New York I did not need a car, so the cost for me was the cost of the Subway
5. Childcare Cost – This is the cost of making sure your children are well taken care of. At the minimum for me, this was daycare cost, toiletries for the baby, and a budget for medical visits as they are unavoidable when a child is in daycare
6. Food – Here I mapped out what it costs for me and my family to eat on a monthly basis. Starting out, I did not cut out the cost of eating out as I considered our ability to eat out as an important part of our quality of life. This choice will be particular to you. But if you found, when you look through the money you spent in the past few months, that eating out was a huge expense (as I did), you can cut this down quite a bit. My family cooks at home more often than not. But I found that my lunches at work were costing an average of $14 per day. This was just about $300 per month that I could have saved, or had more nights out with my family, or shopped with! So I cut lunches out of my budget. More on that in another post.
7. Saving – A set percentage of income monthly. I do this through my 401K. If you work for yourself or do not work for a company that provides this, you should always save at least 5% of each paycheck in some type of interest-bearing account

These are all of the costs that I classify as survival expenses. Once you have these laid out, the next step is to compare these costs to income for the month. Here is where you are able to make the decision of whether you actually have the disposable income to invest or if you are living above your means. My rule of thumb is that you need to have at least 30% percent of your after-tax AND after 401K contribution (if you work for a company providing one) income remaining after you have paid for your survival expenses as we have not even spoken about other debt that may be present.

So for example, if you only have 20% of your income left after survival expenses and you still have not factored in student loans, credit card debt, personal care above base necessities, etc., you are living above your means. If you do not have any of these expenses, you are in a great place! Being debt-free is awesome. I am not in that boat so I put my threshold at 35% because it is important for me to invest an additional 15% of my income monthly.

Now you can come up with your own threshold by working backwards. However, unless you have a bit of a buffer in your survival expenses, as I did with the budget for eating out, your survival expenses are pretty unmovable. To reduce them would require large life changes such as moving, changing your vehicle, changing childcare providers, etc. Without these large changes, your survival expense is a set variable.

Income = survival expenses (set) + investing & saving (set) + disposable

The levers of this formula you can move up and down are your income, how much you invest, and your disposable income. Let’s say your goal is to buy a house. Saving for the downpayment may mean that you have to set your disposable variable to zero or, of course, make more money (we are going to get to that in later posts). If you notice, I do not list saving as an item you can use as a lever. I consider saving as a survival expense and you should too.

Additionally, I separate savings from investments because I consider savings as money that is ALWAYS easily accessible (ie liquid). Sometimes investments are not liquid, so I separate them here. But money should always be making money. So even your savings should be earning a return. Always deposit savings into high-interest savings accounts. With the high amount of FinTech companies nowadays, there are a plethora of companies willing to pay you to hold your funds. That is basically what high-interest savings accounts are. Banks paying for deposits. So take advantage of it.

Now what I have laid out here may sound obvious. But the small act of being self-reflective and honest about your priorities make a huge difference. My priorities showed me that I did not want my family’s quality of life to change. So with that in mind and my investment goals, I chose to reduce my disposable income lever to fit with my priorities. You can do the same. Adjust your levers to fit your priorities… HONESTLY. It is not desirable for everyone to completely cut out parts of their lives so don’t think that this is the only way to go about budgeting. However, looking at your budget with the numbers in one hand and your honest priorities in the other should put you on the path that is best for your family.