In this episode, we are going to be covering how to properly budget and create a money management system that is designed for success.
As always if you have any questions or comments email us at [email protected]
David Moffatt (00:00):
Hello, everyone. Welcome to the escaping debt podcast. I hope you're doing exceptionally well. Today, we're going to be talking about how to properly set up a budget that actually works, that you can actually stick to, and that actually improves your finance in a measurable way.
David Moffatt (00:16):
Now, before we get that, remember that our goal is that no consumer should have to struggle with the burden that debt causes. We believe that it's simply not possible for someone to work for the creditors and the consumer at the same time in an unbiased fashion. We work for you, not your creditors.
David Moffatt (00:33):
Let's dive into this topic here. Setting up a budget that actually works is actually significantly more complicated than most people think it is. I remember reading this article several years ago that mentioned the idea that the overwhelming majority of budgets don't actually work for people. They basically cited, saying that they're restrictive and that they don't work because it's just numbers on a piece of paper.
David Moffatt (01:01):
I have to agree with that, but not for the reasons that were basically being said in this article. I think the reason why budgets don't really work is that, again, most people think of a budget as simply how much money's coming in and how much money is going out and that's it.
David Moffatt (01:23):
If you ask anyone who has a working budget, they will define it as that and it will be that simple, but they've developed a mindset to be financially, if we're going to call it, financially fit, it's a muscle that you work out that you get better at. Being good at finances and something that you're just simply born with, it's something that you actively work towards and get better and better and better at.
David Moffatt (01:49):
We're going to discuss the four things that you have to do in order to establish an effective budget, but remember that developing the budget isn't actually the goal, okay? Honestly, you can take a piece of paper out right now and I bet you, assuming how much money you make and your expenses, it would take you five minutes to go through and write that out. Even if you didn't know your expenses or your income, I mean, you could look that up and you could have a budget written out in 15 minutes.
David Moffatt (02:17):
But is that really the exercise? Of course not. The exercise is developing that muscle to be significantly better at managing money. You want to be consciously thinking about money more often, in a positive way, of course. You want to make better decisions, which will ultimately help your budget and help you keep more money in your pockets.
David Moffatt (02:45):
Everything about finances is behavioural. I want you to forget about math, and that's a topic for another podcast, for sure, but what I want you to focus on, and this is actually step one of developing an effective budget, what I want you to focus on is what you consider to be your bad habits.
David Moffatt (03:05):
Now, I don't want to know what people think your bad habits are. I want you to analyze what you know are your bad money habits. For example, 'kay, for some people, it might be eating out for some people, it might be smoking, for some people, it might be they go to the thrift store too often, okay? You have to think about where you overspend money.
David Moffatt (03:28):
The reason why I say this is because if you pick something that is "cliche" or the societal norm to be a bad option, and you try to modify that bad habit, then what will end up happening is it'll actually be more difficult than is possible to remedy it.
David Moffatt (03:48):
For example, if you smoke and you like smoking, well, quitting smoking is going to be next-to-impossible for you. If you enjoy it and you don't consider it a bad habit, then how are you going to tackle it, right? I want you to find something that you've always wanted to get better at, from a financial perspective, of course, and keep that in your mind, okay?
David Moffatt (04:10):
There's basically three things that you need to do as part of step one. By the way, this whole step is really analyzing your habits and, and picking a focal point to work on for the next 30 to 60 days, okay? For example, let's pretend that I eat out a lot, okay, which I probably do more than I should, but I don't think it's that big of a bad habit, so it would actually be a bad habit for me to pick, but again, for argument's sake, we will pick this one. You pick eating out.
David Moffatt (04:42):
What I want you to do next is think about why you do the bad habit. In the example of eating out, well, I do because it's fast, it's convenient, it's easy, there's no stress involved with, you don't have to know how to cook, it's just simple, right?
David Moffatt (05:03):
Now, the curious part about this is that once you understand why you do something, you can really start to think about, "Okay, well, what else is available out there that will help me achieve the exact same why, but from a financial perspective, at least, cost less or cost the same and be significantly healthier?" Now, a lot of people will say, "Okay, well, just go and cook your meals," but you got to remember that cooking the meals doesn't answer your why.
David Moffatt (05:34):
Cooking your meals at home isn't fast, it isn't convenient, and it isn't easy because you have to know how to cook. It's not something that you can do on the drop of a hat, right? You have to actively plan to do this, which is another thing.
David Moffatt (05:48):
Let's think about some compromises, which is step three. Just to recap the steps here, step one is to identify a habit that you want to cut down on, step two is to figure out why you do the habit, and step three is to make compromises that still meet all of your whys.
David Moffatt (06:05):
For example, with eating out, remember, fast, convenient, easy, it doesn't require cooking, nothing like that, okay, instead of doing the bad habit, which was going out to eat, say at a fast-food restaurant, maybe instead, you stop at the grocery store and pick up one of their pre-made sandwiches and a drink. Now, it's still fast, it's still easy. It's convenient, probably actually more convenient and quicker, to be honest with you, it's probably a little bit better for you and if not, it's probably equally as bad as what you were going to eat, but it probably cost half the price. You can go into a grocery store and pick up a sandwich and a drink for probably $7 to $8. I would challenge you to find at least a mainstream fast-food joint where you're going to eat for $8 or $9, right?
David Moffatt (06:59):
Imagine if you're going to one of the big name, fast-food restaurant, it wouldn't be uncommon to spend, say, $15 for a lunch. Well, if you get that down to eight or nine bucks, you've shaved off a significant portion of that eating out budget. Even if you continue to do that to every single day, that savings would amount to hundreds of dollars a month, right?
David Moffatt (07:21):
Think about that. You've achieved the exact same results, fast, easy, convenient, right, and potentially better again, depending, unless it's McDonald's, which is delicious, but that's neither here nor there, and you have now replaced it with something that is significantly cheaper that's saving you money.
David Moffatt (07:43):
Do you get that idea? This is something that you want to work on for a period of 30 to 60 days, depending on the habit and how frequently you do it. The more frequently you do habit, the faster it takes to replace that habit, right? For example, if you're only eating out once a month and that's the habit that you want to pick and choose, well, it might take you several months to kick that habit, but for example, if you choose smoking and choose an alternative to smoking, then you might be able to replace that habit significantly quicker because you do it more frequently, right? That make sense? That's step one, is to identify your bad habit and to figure out why you do that bad habit. Then from there, you want to make compromises for that bad habit.
David Moffatt (08:31):
Now, the reason why I get people to start with this stuff first is that you actually want to try to go for the easy wins. You may go through and figure out, "Oh, man, I spent so much money on X," but if you didn't think and no one and want to make a change to that category, it's going to be very difficult to change it, even if you're overspending in it. I hope that makes sense. We want to start with the easy wins and then over time we're going to develop this, okay? Again, step one is your habits, all right?
David Moffatt (09:01):
Step two is determining how much money you've spent in the past. Now, this involves pulling out the last 12 months of your bank statements, assuming that your situation and finances haven't significantly changed, right, and if they have, you just go for as long as you can up to the point of change. 12 months of your bank statements and you basically go through it line by line. I want you to categorize everything, even items that you may consider to be a one-off item. The reason why I say this is because if it showed up on your bank statement, in your finances in the past, the chance of it happening again are actually pretty high, so at least plan for it, okay?
David Moffatt (09:43):
Basically, you pull a pen and paper, literally line by line through your bank statements and credit card statements and wherever else you're spending money from and you categorize every single purchase, okay? You break it down based upon your financial situation. For example, for some people, they may have a fast food budget. For others, they may not, they may categorize it in simply "restaurants," where some might have a restaurants, a fast-food budget, maybe a lunch-at-work budget, you just really have to categorize these based upon how you spend your money, 'kay?
David Moffatt (10:22):
Also, you want to categorize these in such a way that you can analyze the data after the fact because once you go through all 12 months of those bank statements, you're going to take the totals of the category and divide it by the amount of months you analyzed, which in our example is 12 months, but if you only pulled out six months, which you shouldn't be, unless your situation has changed, by the way, then you'll simply divide it by six months, okay?
David Moffatt (10:46):
Now, what you should have is the average monthly amount that you spend. This is the amount of money that you need to plan for on a monthly basis, but you also have to understand that some months are more expensive than others, so you do have to take that reality into account, but what you want to try to do is have a number where some months are going to be probably a little lower than it, some months you're going to be a little higher than it, and you'll modify it along the way.
David Moffatt (11:21):
The goal of this process is really to have the amount of money that you actually spent, not the money in your mind that you think you spend. For example, a lot of people are like, "Oh, I go to the grocery store every two weeks, so I only spend $400 a month." Okay, well, there's a couple of problems with this, right? If you're only going to the grocery store every two weeks, then you're probably lying to yourself. You're probably going three or four times a month, you just don't realize that 30, $40 that you spend here and there on the extra things and then secondly, twice a year, there's going to be that extra week, so you're actually spending a little bit more. You get that idea, right? Anyway, that's step number two, is to really analyze your past spending.
David Moffatt (12:04):
Step number two is now to actually go down and write a budget, 'kay, and to make a spending plan. You're going to take the categories that you had in your budget, you're going to look at your budget and you're going to see what is realistic based upon your past spending, okay? You also want to take into account the habit that you want to tackle and you want to consider how much less that habit is going to cost you. For example, in your budget, you may have spent historically $400 a month on eating out, fast-food lunches, that type of stuff, but with your newfound going to the grocery store, you may be able to trim that by 40%, so you would take 40% of whatever amount of money that you averaged over that last 12 month period, okay?
David Moffatt (12:50):
I also want you to assign a date to when you spend the money in the given category. In a category like lunches, where it might be multiple times a week, I want you to actually plan which days of the week you're going to do it. Now, why is this? Is it just extra work because I want you to do it? No. The reason why is because I want you to properly understand when you're going to be spending your money so that when you look back at this, you're going to have a very, very good understanding of what money still has to be spent, okay? Make sense?
David Moffatt (13:33):
Again, step one: Analyze behaviors, come up with compromises. Step two: Go through the last 12 months of your bank statements. Step three now is to go ahead and essentially make a spending plan based upon your previous spending in the past, but understanding your habits that you're trying to compromise.
David Moffatt (13:52):
A quick note before we go to a little commercial break here is I don't want you to cut on multiple different categories, okay, unless you otherwise have to, or unless you think, "Oh, man, this category is absolutely just, cold turkey cutting it right now," and the reason why is because once you start cutting too many things, well, what I'm trying to prevent is failure, right?
David Moffatt (14:16):
I'm trying to prevent you from failing because once somebody fails, they get really, really distraught and upset about the whole situation and then they really get discouraged. The last thing that you want to do is get discouraged over this, which will make you want to quit, right?
David Moffatt (14:35):
Anyway, let's go to our sponsor of today's episode, which yet again is us, 4 Pillars Consultant Group. We're one of Canada's largest independent debt restructuring firms that exclusively represents the consumer that's in debt. If you are struggling with debt in any capacity, please reach out to your local 4 Pillars office. We're personally located in Halifax in Nova Scotia. We'd be more than happy to help you out with whatever debt situation that you're experiencing currently. Consultations are completely free. We'll go through every single option, ranging from budgeting all the way to bankruptcy and everything in between to help you identify what the best option for you is, not your creditors.
David Moffatt (15:16):
Okay, let's get back to the main talking point here. We're talking again about establishing a proper budget and the steps involved with that. We've already gone through three of the steps. Again, the first one is analyzing your habits, making compromises, the second step is going through the last 12 months of your bank statements, the third step is going to be to actually make a spending plan itself, and the fourth step, and arguably the most important step, is to track your spending based upon your plan.
David Moffatt (15:47):
With the plan, going back to step three, you actually put dates of when you're going to spend your money, okay? Step four is going to be looking at and tracking your money on as frequently of a basis as you can handle. The most successful people at managing their money analyze their spending at least on a weekly basis, okay? What I really recommend is doing it daily and how I recommend people get into the habit of doing it daily is by a few tricks.
David Moffatt (16:21):
The first trick is to simply look at your bank statements, online banking on your phone, three times a day: when you wake up, at lunch, and then when you go to bed at night. This will just keep your money on the top of your mind.
David Moffatt (16:34):
Change the screen saver on your phone, on your work computer, whatever you're doing, to an item that you want financially. For some people they might want to save to take that trip to Cuba. Put the background of the trip to Cuba. Some people might want to save for their kids' education.
David Moffatt (16:56):
Well, I don't know, take a picture of the university they want to go to, I don't know. I'm just giving you examples here, okay? The goal is that you always want to be thinking about your money.
David Moffatt (17:06):
When everyone says, "It only takes five minutes to go through and write down what you spend your money on during that day," yeah, because it's true, it only takes five minutes, but the problem is there's so many of these little things that take five minutes that you really need to prioritize which five minutes you want to spend it on. Hopefully, it's tracking your expenses, okay?
David Moffatt (17:26):
Really, at this point in time, what you're going to do is if you're properly tracking everything, you're just simply going to repeat steps one, you can skip step two, but I do recommend you do it at least on a yearly basis, but you can skip step two, you're going to want to analyze your expenses for that whole month on a daily basis or no more than a weekly basis.
David Moffatt (17:49):
You're then going to go back to step one, analyze your bad habits, figure out why you do them, come up with compromises, you're then going to skip step two. I don't know why I can't say "skip step two," but whatever. You're then going to go and make a plan, again, based upon that bad habit, tackle a new one, right? Spend 30 to 60 days on each habit that you want to cut and tackle and then rinse and repeat.
David Moffatt (18:21):
The really cool part about all of this is that what we found is that clients that diligently do this for two to three months, I'm not talking about an eternity or a lifetime here, two to three months, they develop almost like a clarity with their money, okay?
David Moffatt (18:35):
They don't need to look at their bank statements every day, they don't need to track their spending every day, although they do, I must add, because they just know, they know what money they can spend, they know what money they have, they know what they can't spend money on, they know if they've overspent in the category and if they have to make adjustments for the next month. They just know it.
David Moffatt (18:56):
That's really the goal that we're going for, because what we're trying to avoid is these impulse or forgetful spending. The last thing I want you to do is think you have money for something, go to spend that money and then realize, "Oh, I needed that for," in a worst-case example, say, "For rent" or car payment or something like that, right? That's what we're trying to prevent. Ideally, we want you to have just a clarity with your finances.
David Moffatt (19:27):
That really sums up how to make a budget. Again, quickly for everybody, there's four steps. The first one is understanding your bad habits, figuring out what you're going to use as compromise. The second one is to go through the last 12 months of your bank statements to really figure out how much money you've actually spent. The third step is to make a spending plan, AKA the budget, and the fourth step is to actually go and review and track your spending as it goes, okay?
David Moffatt (19:55):
This is really, in my opinion, the only way to effectively make a budget. Any other way, in my opinion, is guessing, but you know what? I could be wrong. If you have any questions, comments, concerns, want to ask or provide any input today, or you simply don't agree with my method, email us at [email protected] Be more than happy to answer and address it on future podcasts.
David Moffatt (20:20):
Remember, everybody, that our goal is that no consumer should have to struggle with the burden that debt causes and we simply believe it's not possible to represent the consumer and the creditors at the same time in an unbiased fashion. That's why we work for you, not your creditors. Have yourself a wonderful day. Bye.