Budget 101 & 201
So let's think about these 101 and 201 levels. We're gonna kick it off with 101. These are a bit stricter, not necessarily things you're gonna wanna be doing for years. In some cases, it might only be a style you wanna use for a month, but it could kick you off and get you into a head space that you find really productive moving forward. And I want you to think about it as a way to take back control, and essentially be earning the right to level up to this 201 style with a little more flexibility. First is the cash diet. This is the juice cleanse of the financial world. That's how I would like to describe it. It is not something I think is really sustainable long-term, but it puts a lot of very strict restrictions on you. Then you have tracking every penny and the envelope system. Some of those might sound familiar, but first let's talk about cash diet. So, it's really simple in theory. First, you run that cashflow, how much is coming in, subtract how much is going out. I also recommen...
d, any time you are starting with running your cash flow, add a buffer. $50, $100, a little something, 'cause I bet you, the very first time you try running it, you have forgotten a bill, or some sort of reoccurring charge, or maybe it's an annual charge that you forgot is coming up. It's just nice to have a little buffer in there. Step one is run that cash flow. Then you're going to pay all your bills, put some money into savings, and then you have the remainder for spending in the month. I like this 800 number. It's very round and easy to understand. So let's say that, every week, you have $200 that you can spend. Now, this is probably going to go to your things like your food, paying for transportation, any sort of variable cost that you are just week-to-week spending on in your life, since all of your bills have already been paid off. Then you're going to go to an ATM and physically take out this money in cash. And that is a fundamental point of the cash diet is all of your spending is meant to be happening in actual, physical cash. And the reason that this is a great way to reset, and like why I call it the juice cleanse, is because it has been proven time and time again with studies that we spend less when we spend in cash compared to swiping on plastic. Some people would dispute that. I think a lot of us feel like, when I have cash, it just goes away so fast. Now, is that because you're recognizing how fast you're spending money, or do you spend more? That's definitely one thing I would always position, because what is helpful about doing the cash diet is you are physically seeing that money dwindle down in your wallet. But if you're putting it on a card, it's really easy not to pay attention until the end of the month. So, like I said, these are all budgeting styles that are very strict and have very firm rules. And the other part is, the tactile experience of actually handing cash across a counter as opposed to swiping a card, you really connect with it a little bit more. Coming back to that psychology of money idea, it's much more likely that you're going to think, even ever so briefly, very quickly about why am I buying this, do I need this, what is this purchase? Where if you swipe a card, really easy, just kinda swipe and forget it, not even think about it. Now, part of the problem is we live in a very digital age, so cash diet can be a little bit harder to do, especially because some things we buy online. So, for example, I always bought my dog's medicine from a website online because it was significantly cheaper to do that than to go and get it from the vet. Well, if I was running the cash diet, what I would do is I would make the purchase online, on my card, but then I would take that amount of money out of my wallet and put it to the side. Let's say it was $30. Then, when I went to the ATM the following week, I would only take out $170 and roll over that $30, so then I'm still kinda cashflowing it in a way that makes sense for me and the money that I have to spend, but I can still kinda give myself permission to make online purchases 'cause it makes the most sense, and let's be honest about the world we live in today. And then, like I said, this final step is to spend only in cash. Now, I've called this the juice diet because I don't think it is something that is sustainable for long periods of time. I think it's something that can be a great way to kinda reboot if you are feeling that you are completely disconnected from your financial life, from your money, you don't know where it's going, cash is a great way to try to see if maybe that works for you. And it might not. These are all tailored to you specifically. You might try it for two weeks and be like, this isn't working, I don't like it, I'm switching back to my card. The one thing I love about the cash diet is you can couple it with this next method, called tracking every penny. And this is, as the name implies, every single time you make a purchase, you write down exactly what the purchase was, or how much you spent and what the purchase was. So, how much you spent sure is important, but the what is actually the more important part of this process, because what we're doing is we're gonna go back after let's say two weeks of tracking every day and audit our purchases. Now, you can track it in a variety of ways. It could be that every time you make a purchase, you whip out your phone and you make a note, maybe you carry a physical notebook with you and write it down, maybe you put it all on one card so you can go back through and check. The only thing about that style, if you just put it all on a credit card and go back and check, you might not actually know the what, because it could just say a restaurant or a particular store, but you might not actually remember what it was. The reason you wanna go back and audit your purchases is to look for patterns you were not realizing were there. Now, I'm not coming for your lattes in this section. I feel like that's an easy time for people to say stop drinking coffee, stop going out to lunch. Again, it's about what you value, and a great example of tracking every penny was a roommate I used to have. She lived in New York with me, and she was working a regular corporate job, but she actually wanted to be a yoga teacher. That was her dream job, and she had to go to training in order to be able to get certified to do this. She needed to free up a little bit of money in her budget, so I said, hey, why don't you just try two weeks tracking every penny, see what happens. She comes back to me after the end of one week, she goes, you will not believe what I'm wasting my money on. Every day, 3:00, I leave my office and I go to the coffee shop. Pretty common, but she was not buying a latte, she was buying a bottle of water, every day, spending $3 on this bottle of water. At the end of the week, she was just wasting $ that she did not need to be spending. And she goes, all I have to do is just go for a walk instead, but it was something that was just a mindless routine she had started even years before because it was a way to just get out of the office and go do something. And that's what I mean by tracking for patterns. So, it's places that you may not even be realizing you are mindlessly spending money, because one, the amount could seem so low, something like $3, what's the difference, and it's this mindless pattern where you don't actually value that bottle of water. Now, if she was going in there and getting a latte and that was the simple joy of her afternoon that got her through the rest of her workday, fine, it's okay, keep spending that money if you want to, it's something you value. But you want to be looking for things that you don't, and then you cut 'em. And the important part here is to make sure you're reallocating that cut money towards something else, some other goal. Perhaps it's savings, perhaps it's padding a different part of your budget that you need a little bit of help on, and in the beginning, every time you get the compulsion to spend it there, you can just go in and route that money into a place that you need it to be. Now, what I'm saying about tracking every penny with the cash diet is it's this way to really double down and take back control, and for about a month, I'd like to challenge everybody to try it for about a month. See what it feels like to physically spend cash, see what it feels like to look in your wallet and see that money dwindling down. But also make sure you know where you're spending, because that is an important critique of the cash diet is you don't know where your money went because there's really no record unless you're keeping the receipts somewhere. So, by coupling it with tracking every penny, you know exactly what you spent it on and where it went. Like I said, maybe not the best strategy for long-term, especially just doing it in cash. I do think tracking every penny can be a great long-term strategy, as you're truly trying to take back control, but if you just wanna hit the reset button, these are two great options. Now, for a more long-term system that still sets up a pretty rigid situation, it's the envelope system. Sometimes you might hear this referred to as the clip system, people using paperclips, pretty much the same thing. Still gotta run your cashflow, know how much money you have, where it's going, and then, really, you're still paying off your bills and your debts first. This system is actually meant to be coupled with the cash diet. You are supposed to spend in cash. There are technological options, though, if you don't like that. But you're going to write out your main spending categories on envelopes, and this could be things like groceries, transportation, household items, so also be thinking toilet paper, paper towels, things like that that you need, beauty products, I'm not just talking about makeup here, I'm talking about razors, soap, shampoo, things that you're gonna need month-to-month, and perhaps you also wanna put in that entertainment buffer. I mentioned it the last time and I'll bring it up in consumer debt, I don't think you need to be in a complete state of deprivation if you're trying to take back control, so if you wanna have $20 a month that you can spend on some sort of indulgence while you're aggressively paying down debt, I'm okay with that. I consider that your fun fund. But you write down your different spending categories on physical envelopes, and then you're going to allocate how much money you need in each envelope. So maybe it's you need $300 into your grocery budget, $200 into transportation, $50 into beauty, $50 into household, $25 in entertainment, however you wanna set it up. And I recommend you physically write the numbers on the envelope underneath you saying what it's for. Example of a breakdown. And then you're gonna stuff those envelopes with cash when you get paid, and when you need to make a purchase for any of those, you're gonna take the envelope with you, pay for that item out of the envelope, which is why it couples with the cash diet. And one of the key parts of the envelope system is when that money is gone, it's gone. So if you spend it all in the first part of the month, you're not supposed to be borrowing from anywhere else. The only place that you really could borrow is if it's something like discretionary spending like entertainment, if you need to fund that back into groceries or transportation. This is a very strict system, but it can be very effective for people who are looking to do things like paying off debt and paying off debt quickly. You also could do this digitally. There are apps and online resources to do it digitally. Some people also just open a bunch of different checking accounts and label each checking account or savings account for a different what would be envelope category. The only thing there is you really have to be on top of your game of moving your money around, you could have multiple debit cards. If you do that, make sure that you're actually labeling them. I would just put a post-it note on it and be like grocery envelope, or grocery fund, transportation fund, what have you. So there are ways to kind of hybrid this into being digital if you want to, if you don't actually wanna be doing it in cash, but a lot of people do find it a very effective way to take back total control and be paying off debt very quickly. Does anyone have questions about these three styles before we move on? Anyone tuning in have questions? Great. So, the 201 budgeting levels, I wanna talk about percentage budgeting and then this idea of zero sum budgeting, which is when we're first gonna get into talking about one great option for financiers. So, first with percentage budgeting, it's very simple. The concept is 50% of your money goes to fixed expenses, 20% to savings and investments, 30% towards your life, life being flexible discretionary spend categories, also including things like food, entertainment, maybe for your pets, anything like that. Now, these percentages are certainly flexible. Especially if you live in a more expensive city, you might find particularly early on in your life and career that something like 60 or 65% of your money is going towards fixed expenses. Rent can be high, utilities, you might be paying down debt. The problem is, a lot of times, we tend to attack the savings and investments component and whittle it out of there instead of life. Or, we might inflate and go 50/50 fixed expenses and life, not focusing on savings and investment. So, one thing I just want you to be very aware of is that if you are going to try percentage budgeting and creating these buckets, that you don't slash savings and investments down below 10%. If you are trying this style, it means that you feel like you've worked yourself into a financial situation where you are, quote unquote, entitled to use it, you've gotten it together, but I want you to be saving at least 10% towards your savings and investments, 20% being the minimum goal. You can also flip this another way and reduce your fixed expenses down to something crazy like 10 or 20% and be putting the rest into savings and investments. That would be wonderful. A lot of us aren't there yet. So really, this is just the idealized version of what these percentages should look like, especially that your fixed expenses being rent, mortgage, debt payments, anything like that, the constant outflow should not be exceeding 50% of your income. Now, zero sum budgeting. We're gonna take this slow because this one is a little bit intense, but it's a great style for anyone that has variable income, as well as people with a traditional paycheck, because the goal is to break out of the paycheck-to-paycheck lifestyle, because you are going to be using last month's income to pay for this month's expenses, but it can take a little bit of time to get there. So, you need a budget, or YNAB is a really popular software that people use to do zero-sum budgeting, and I'm going to refer to the rules that they set up when you're going through their system when we talk about zero-sum budgeting, just to make it a little bit easier to understand. So, rule number one is this idea of giving every dollar a job. This is the entire point of the zero-sum budget, you wanna be zeroing out your paycheck. That sounds super exciting at first because it sounds like you get to spend all of your money. That's not actually what's happening here. What's happening is that you write down all of your different categories. Say we have a couple, and they are earning together five grand per month. Their bills, which includes things like rent or their mortgage payment, utilities, cell phone, health insurance, life insurance, renter's insurance, all of that is at $2300. Then they have a student loan payment, $500. And I'm not gonna read off every single thing. You guys can read it. But the point being that every single dollar of their $5000 income per month is being assigned somewhere. They know exactly where it's going. I also would say put in a miscellaneous spend category for when the unexpected pops up. That's not necessarily related to an emergency, but we're talking invite to something you didn't expect, maybe a gift that you forgot to buy, little things like that, or it could be an annual expense that came in that you kinda forgot about. So, that's just a nice little savings buffer you could have. But the whole point, every single dollar has a job, you know exactly where it's going, you have all these categories written out. Now, the next thing is to embrace your true expenses. I do not use zero-sum budgeting personally, but I do actually use this rule because I think it's incredibly helpful. And one of the things is for you to write down all of the annual expenses you have, so things like your renter's insurance, your Amazon Prime, if you're paying your car insurance annually, anything that's an annual expense, write it down, add it all up, and then you divide the total by 12. So, every month, you're putting a little bit away to save for these annual expenses, so when they come up, you are ready to make that payment, because who among us has not gotten an annual expense that we totally forgot about, and then it kinda blew up our budget for the entire month? I know that definitely happens to me. And again, I like the idea of having a little bit of a buffer, even in this particular category, or having just a miscellaneous category for assigning your dollars a job, because it really ties into the next rule, which is roll with the punches. Unlike the envelope system, you can actually borrow a little bit here and there if you need to. Now, hopefully you're not pulling out of things that are going to debt or savings, but more things that are discretionary income if you need to reallocate funds from one category to another to compensate for a shortfall. But this is another reason why having that miscellaneous little buffer part of your budget can be incredibly helpful. And while this is a strict system in the sense of every dollar has a job, you have all these categories, it still allows you to have a bit of flexibility in your life. Now, here is the hard part of the zero-sum budget, this idea of aging your money, because, like I mentioned, the goal is to be spending last month's income for this month's expenses, which means you've managed to get a month ahead, which as someone, if you're in a paycheck-to-paycheck cycle, or even with variable income, can feel really tough at the beginning, which means it could take months for you to get a to a point where you can truly kickstart using this. Now, sometimes what people will do is, if they have a very healthy savings account and they wanna kick off and use this style, they might go into their savings account and let's say that their bare needs get covered with $2500, they pull $2500 out, start the month of November with that money, and then the money that they make in November serves as the budget outline for December. Now, kind of going back to this idea of giving every dollar a job, if you're traditionally employed, this is super easy because you know exactly how much money you're making every month, so you can go in and just kinda keep these categories the same. Now, when you're living with variable income, one of the reasons this can be helpful is because, if you have managed to bust out of the paycheck-to-paycheck part of the cycle, another option when you're aging your money is just put a little bit of money away every month until you get to a point where you have enough to cover your base needs, and that's when you can kick off actually using this budgeting style, so again, it can take a few months, maybe even up to a year. But what happens, then, is you have to be a bit more hands-on if you have variable income, because you know, let's say we're going into November, so what I earned in October is what I have to spend in November, so I know exactly how much I earned, and then I can go out and, you know, massage some categories. If it was a lean month, there might be some things that I'm cutting out, there might be, perhaps I can't save quite as much this month, maybe I'm cutting out entertainment, food, I'm not gonna be able to go out to eat, whatever it is, and then months where things are nicer, one, I would say save more to buffer for the future, which we're gonna get into, but two, then you can kinda go back to what would normally be your default status. But every month, you can check back in and reassign your dollars a job, which is why it really is helpful if you have a variable income. So then, the reason this is hands-on at first, but in the future, it can be very helpful, is because it does help destroy this paycheck-to-paycheck lifestyle, 'cause you are only relying on what you earned last month, so you're not feeling that kind of desperation of, especially as a freelancer, I haven't been paid yet for this work. So it's money that you actually have physically in your bank account, and it's not just about your outstanding invoices, and we all know that feeling and experience. And I would also say, as I just mentioned, make sure that you're adjusting categories that are the non-essentials, and I would, as much as you can, try to leave savings alone, but if you're trying to be aggressive with your savings, maybe you have to pare that down a little bit. But obviously, coming back to the credit score ideas, making sure your bills and your debts are always being paid on time.