How Budgets Can Help Your Money Mindset

In this episode, Nikita discusses how our upbringing informs our money mindset, and ways that (if this is holding us back), we can use budgeting to help us improve it. She goes over 5 different methods for budgeting, and speaks personally on value-based spending as well, and how budgets can serve as a way to give ourselves the permission to spend when we tend to save every penny out of anxiety. 

To respond directly to anything in this episode, you can write to Nikita at nikita.wolff@3rddecade.org

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Hey 3rd Decade community! I'm your host Nikita Wolff, and today's episode is really special to me because it's one that's very personally relevant to my own financial journey. Psychology has always fascinated me, but then I started to understand how much our money behaviors are influenced by our psychology, especially as it pertains to those who grew up in difficult financial circumstances. Many of us grew up in homes where there was a narrative about money. Maybe it was good or it's bad, we need more of it. Other people need to work harder for it. People who have a lot of money are greedy, whatever it may have been by the time we moved out and went on to establish our own lives, we more than likely carry that money baggage along with us without ever really questioning if it's even something we agree with. I know this is something I am working through to this day, and I don't think I'm alone in that, which is why I wrote today's episode. I was recently listening to an episode of I Will Teach You To Be Rich by Ramit Sethi. His podcast is one that really challenges my perspective, which is why I listen to it. I find some of the episodes unrelatable due to the fact that some of his guests have 8 million net worths or make 300,000 per year, but a trend that I see throughout each of his episodes, and really the whole purpose of his podcast is to draw attention to the fact that if you have not worked on your money psychology, you will still behave in similar ways, whether you are making $30,000 per year or $300,000 per year, the premise of his book and podcast are something that he calls living your rich life, essentially spending lavishly on the things that matter to you and cutting back ruthlessly on the things that don't. The episode I listened to most recently was talking about the guilt-free number. This is basically the amount of money that you have left over in your budget after meeting your savings goals, your investing goals, and the obvious must pays . I sat down and did this exercise and found a number quite higher than what I currently choose to spend on myself each month, and this is really tricky for me because immediately my mind goes to should I invest more, but I really don't want to? Then it's should I save more? It's like I'm consciously or unconsciously always putting myself into a situation where I don't actually try to just enjoy the money, but instead I create situations where it still feels scarce, where I still cringe at sub $20 purchases. I ask you to join me in this exercise. I am really trying to challenge myself to think of ways that would be be enriching to my life to spend this additional money. I recently started an online class with the University of Arizona on retirement planning, and in the very first lecture, one of the things my professor was discussing was, which resources provide direct and indirect happiness. This class is coming from the perspective of why financial advisors do what they do for their clients, how that job is not merely about making people rich, but equally about helping people to reach their full potential and live a life that's fulfilling to them. We've all heard the debate about where money and happiness intersect and how much income someone needs to make before the correlation plateaus, but this lecture was a different take on something that I had heard a hundred times. Money does not directly impact happiness only indirectly, so having a lot of money is not the thing that will make us happy. It's the things or experiences that money can buy. So if I scrimp and save every penny for my entire life, I might have a 5 million retirement, but will I have lived a life that I enjoyed along the way? I can say for myself, probably not because at my income level, that would not allow me to also spend money on experiences like road trips and vacations, concerts and activities with my friends. To me, these are the things that make my life feel rich, so using money as the tool to have them is well worth the trade off of having retirement closer to the 2 to $3 million range where I know I will still live comfortably and be able to enjoy similar activities. I know in my own mental exercise of determining what expenses make my life better and which ones don't. I am not the person that's knocking on the door of Apple every time they come out with their latest release. As a matter of fact, I'm still rocking an iPhone from 2017. Granted, I think I'm on the cusp of needing to replace that, but my phone does not bring me happiness, and therefore I've not prioritized the replacement of it. Another thing I've grown to really know about myself is that I love buying things used for both financial reasons and for reasons relating to reducing waste. I do this for a lot of my clothes, my cars, my books, my photography equipment, anything that's perfectly suitable after its first owner, and I can't even tell you how many thousands of dollars I've saved in my twenties by doing this. If you're able to harness the power of not caring what other people think, you will be better off for it. You should always make decisions in line with what you want, not what you think will make an impression on other people. And lastly, comparison is the thief of joy. Don't compare what you have to what someone else has. You likely don't have the same goals and circumstances, so making purchases to keep up with the Joneses is a fast track to debt and a lifetime of never feeling like you have enough. I'd love to encourage you to pause the episode here and jot some notes for yourself on a couple of questions. First one being, what are the things I enjoy most out of life? There are no right or wrong answers here. Second one, where am I spending money that I feel indifferent to or that doesn't feel beneficial? If you can answer those questions for yourself, I think it can really carve out a meaningful plan for your money, which brings us into part two of this episode. Budgets so many of us have negative connotations with the word budget. It's often been something used almost synonymously with restriction, but that's not the way budgets should be viewed. Budgeting is not about not spending money. It's about deciding how you're going to spend it ahead of time. You'll be better off if you can remove your emotions from every financial decision possible. This means the more hands off and the more automated you can be, the better. I can tell you for sure that if I had had to think about putting in my Roth IRA investment every month since 2020, I wouldn't have done it every time. I would've absolutely invested less because the stock market did some wildly unpredictable things in the past two years. By making this commitment and these automations ahead of time, I was consistent in funding my retirement goals, and honestly, I think my mental health was better for it too. I go several months at a time without looking at my retirement balances because I know we're in for a rocky ride in the next handful of years, but I also know that these numbers are irrelevant to 30-years-from-now-Nikki. So use a budget as a form of pre-commitment to achieve your financial goals. There are a handful of different approaches to budgeting and what works for you might not work for the next person and vice versa, but what's important is to find one that works with your financial circumstances and your psychology. You could even choose to blend some traits from each and customize something that works with your brain and your personality. The first one is the 50 30 20 rule. The basic rule of thumb is to take your net income and break it down into three buckets, 50% being for needs like housing, utilities, gas, groceries, insurance, minimum loan payments, and other mandatory expenses. The next chunk 30% will be for your wants, like subscriptions, travel, entertainment, eating out, and the last 20% is for savings, retirement, and debt payoff. Some people might find their needs take up less than 50% of their net pay, which is a nice position to be in. They can decide how to allocate those other buckets, but if you find yourself above that, you may need to determine ways in which you can widen the gap, and by widening the gap, we're referring to either making more or spending less. Another method is called month ahead budgeting. This can be particularly useful for those with variable incomes. It does however mean that you need to have a month's worth of expenses on hand and be out of the cycle of paycheck to paycheck living. The way that this is done is by using the money you make this month to determine what next month's budget can look like. I could see this working well for someone with a sales based job, a realtor or someone who works as a server. There are so many professions that have different varying paychecks, and this can be a really good way of planning ahead for the slim months and making the best of the generous months. Then there's the envelope method. This can be done physically or digitally. If you're someone who struggles to stay within certain amounts each month, widen a , which stands for you, need a budget, has a paid version of this where you allocate certain amounts to certain categories ahead of time and it assists in keeping you on track to stay within those amounts. But this can also be done using physical envelopes and cash. Say you have $500 that you can allocate towards your grocery expenses. It's a pretty effective tool to not only have to hand physical cash over and watch the pool of money lesson, but to also have a threshold where you truly run out or you have to pull from another categories. Envelope zero based budgeting is slightly similar except that you don't really leave any of your dollars not accounted for. This concept of giving every dollar a job can be motivating to help you reach your goals and to not just have cash collecting with no plan for it. And lastly, the pay yourself first approach. The goal with this method is to make meeting your goals almost invisible to you. It's almost like a reverse budgeting strategy where you build your spending plan around your savings and retirement goals. So for instance, if I know that I need to invest 15% of my income to retire comfortably, and I'm also planning to purchase a $10,000 car in a year, I should set up both transactions to happen automatically before I ever see the money. This can be done through the form of direct deposit or automatic savings transfers, essentially treating these savings goals like priority number one. Of course, with this, you need to be realistic. If this is going to make it impossible to afford your needs, you'll wanna adjust what you're putting towards those goals. But it's much easier psychologically to adjust to living on a smaller amount of money than it is to part with the money at the end of the month assuming there's anything left. All right , So those are the common budgeting methods that we hear of people successfully using. Do any of these sound like something you already do? Did you get some ideas from today's episode? I'd love to hear from you. So I've linked my email in the show notes. My hope for you is that you can walk away from today's episode with some tangible tools for managing your finances and reframing your money mindset. I hope today's episode was valuable to you. Thank you for sharing your time and have a great week.