The "B" Word

A while back I read to my boys from the classic book Treasure Island by Robert Louis Stevenson (it’s available for free on ibooks). It’s a fantastic book and tells of a few men and their mutinous crew sailing from England to Treasure Island on a ship called the Hispaniola. I was thinking how this large ship couldn’t make such an impressive journey without the aid of a very small rudder to steer it.  Naturally, as a CFP® I see a financial parallel for the rudder.  The parallel I see for the rudder is a budget.  The dreaded “B” word.  But a budget is no less important than a rudder as without either you’d never make it to where you want to go.  

Keeping to classic literature, Charles Dickens in David Copperfield explains budgets best:

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Truer words have not been spoken.  

So let’s talk about the “B” word.  For quite a few people, budgets seem like a financial strait jacket sucking the joy out of life or it may seem like a diet for your money.  For others it feels more like, a middle seat on a long flight; something unpleasant but necessary to get you to where you want to go. And even others, the rare type, love everything about budgeting.  Regardless, of which camp you may find yourself in budgets are necessary (unless of course you are the US Congress).

Budget Makeover

However, I think it’s important that we see budgeting in a better light. Recently I read an article that gave a new and improved term for budgets: “A spending plan” (not bad actually). I think it is also important to understand that spending plans aren’t designed to deny you lattes or your subscription to HBO but rather a way to understand how to plan a lifestyle that will satisfy you both now and in the future.

Additionally spending plans are important to make sure you are making the most of your financial opportunities (for example: ensuring you are getting the full 401k company match, or getting the highest rate on your savings accounts, or reducing insurance premiums or mortgage rates). It’s also to ensure you are not wasting money as well ( for example: old gym memberships, music streaming services you no longer use but forgot you have, etc). One study found that the average American pays $237/month for subscription services and that 84% of consumers completely underestimate how much they actually spend on those services every month.  

So How Should One Budget

Some like to create budget on paper, others in Microsoft Excel, and others still using one of the host of free apps and websites available out there (My personal favorite is www.mint.com).  Whichever one you will use consistently is the one to use. 

Best Budgeting Tip

I get asked what is the most effective way to budget and the best way is to automate your savings and essential spending. The idea is that you setup automatic withdrawals from your income to save 10-15% into your retirement accounts, along with smaller percentages saved in a rainy day fund, or for future expenses (cars, vacations), etc. Then you automate essential spending; for example: mortgage, tithing, groceries, utilities, car payments, etc. Whatever is left over you can spend however you want (for example: lattes, restaurants, HBO and other subscriptions).

Is it Working?

How can you know if your budget is working?  Here is a way to tell.  If you have revolving credit card debt (that’s non-medically related), don’t have an emergency fund (at least 3 months worth of expenses in savings) and are not saving 10-15% of your income in a retirement plan, it would be wise for you to review your budget.  You don’t want your financial ship sailing with a compromised rudder.  Just like a ship off course you can make the corrections to get you back on course.

Inspirational Number Crunching

By just saving an extra $5/day in your mattress after 40 years you’ll have $73,000. However, if you invested that at 7% for 40 years it gets you $365,000. Just spending an extra $1/day you don’t have, and putting that on a credit card with a 10% interest rate for over 40 years, will cost you $160,000 for the $14,600 you borrowed!

These numbers demonstrate both the potential power of having a spending plan and the potential perils of not having one.

With a spending plan you can ensure that the “B word” in the future will be Bountiful instead.

If you would like help with your spending plan please send me an email to: jonny.west@ciadvisers.com

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. Any examples are hypothetical and are not representative of any specific investment. Your results may vary.