Budgeting is one of the most fundamental skills for financial success and there's a reason
that pretty much every Financial expert out there recommends them.
There's also a reason that I have done I think close to a dozen videos on this channel on
different types of budgets already, and no we haven't covered all of them yet.
So given that information, you may rightly be wondering to yourself why I made the title
of this video “Why Budgeting Doesn’t Work” because that would seem to go against many
of the ideas that I have covered in previous budgeting videos.
I mean why would I make those videos if budgeting doesn’t work in the first place?
Well, today I’m going to explain why I think budgeting often times doesn’t seem to work
and offer a solution as to how we might go about fixing it.
Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about
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So recently, some of my offline friends have been asking me what is my budgeting method?
They say I've done so many of those budgeting videos already but I never actually say which
budgeting method I personally use and that’s perfectly true but it's not in an attempt
to withhold information or not be upfront with all of you about it.
It’s because I firmly believe based on my experiences working with people on their finances
that what works well for one person may not work well for another whether because the
situations are different, or the goals are different, or the mentality toward money is
different.
It could be for any number of reasons and it is personal finance after all, which means
there is going to inevitably be some sort of variance to what works for each individual.
That's why I do a bunch of videos on a bunch of different budgeting methods and let you
guys pick which one will work best for you, or at the very least just try one and see
if it works and if it doesn't try a different one.
But my friends' question made me think of another question: Do we actually know what
budgeting is trying to teach us in the first place?
It wasn't really a question I had ever considered before but now I'm not entirely certain that
all of us really realize what a budget is actually designed to do and I don't mean just
on the surface level of, hey it's trying to help you control your spending, yes it's doing
that but there's more to it than just that and that's what I'm going to talk about today.
Today I'm going to be talking about what a budget is really trying to teach us and show
you how big of a difference learning this lesson can make to both our finances and our
lives.
So why doesn’t budgeting work?
And what are budgets trying to teach us?
Well, in answer to the first question I think it all comes down to our approach to budgets
in the first place, as opposed to the budget itself.
Let me explain.
When many of us hear the word “budget” it immediately conjures up images of frugality
and the need to take away some or all of the things that we spend money on that we actually
enjoy…
basically, the idea of sacrifice, because for some reason most financial content, at
least from what I see, focuses so much more on the sacrifice aspect of achieving financial
success as opposed to the rewards of achieving financial success.
And don’t get me wrong, keeping your expenses low and living the frugal life has many benefits,
I’m a big fan of living it myself, but that may not the best way to inspire people to
take the massive action that’s sometimes needed to get our financial houses in order.
The idea that we should be trying to sell people on, in my opinion, is how to be frugal
and extremely happy while living your dreams.
So the answer to the first question is that it’s very hard to get started on, let alone
keep up with, something that we don’t enjoy or don’t feel good about over the long haul.
This is especially the case if we don’t see much progress early on and if it is your
first time budgeting and your financial house isn’t in the greatest condition, to begin
with it likely will take some trial and error to get things working moderately well.
And that’s understandable, it's your first time, of course, you may forget something
here and there and then maybe something goes wrong with the
car and breaks your budget in a month when you otherwise would’ve been fine.
It can all get very discouraging so we need to find a way to alter our approach to budgeting
if we’re going to make it work over the long haul and I’ll come back to that in
a minute.
The obvious answer to the second question and the one that most people will give is
budgets are trying to help us to control our spending.
And while that is true, they do help us to control our spending the thing I think it's
really trying to teach us how to do is figure out what is worth spending money on in the
first place.
Because so many of us go through life spending money we don't have on things we don't need
to impress people we don't even like or even know in many cases.
And what's worse is not only do we not need the things that we spend that money that we
don't have in the first place, a lot of times when we do some self-examination we find that
we don't really get that much enjoyment out of any of it.
Now, in order to control our spending we do of course need to know where our money is
going in the first place which is why the zero-sum budget is something I recommend everybody
at least tries because it can reveal a lot of valuable information even if you don't
end up sticking with that budget month after month after month, but the actual act of balancing
a budget down to the penny is not actually the point.
It's a means to an end.
Because all we’re really trying to do is to identify those things that we're currently
spending money on that don't really add that much joy and excitement into our lives so
that we can limit that spending or find a way to cut it out entirely.
Doing this allows us to both vastly increase our savings rates which allows our money to
start growing exponentially very, very quickly and use more of our money on things that actually
bring us joy.
This is how spending becomes controllable for the long haul.
That's why you can find so many of these so-called super savers that spend less than $40,000
a year and are really happy with their lives.
They don't spend much money sure but the money they do spend is all on things that bring
them Joy and for most of us there aren't too many of those things out there, at least not
nearly as many things as what we're currently spending money on.
This is the approach that we need to take.
We need to stop thinking about budgeting as a synonym for sacrifice or frugality because
when you start looking at a budget in terms of it being a tool to help you figure out
what you truly value in life and giving you the ability to spend your money on those things
as opposed to all the other stuff that you’re money is currently being wasted on, you no
longer feel like you’re really sacrificing much of anything.
And if you don't believe me go on to Reddit and
start talking to some of the people in the leanfire Reddit page (I'll leave a link in
the description) start asking them what they're spending their money on and why.
Ask what they're no longer spending their money on as well as how happy they are with
both their financial situations and their lives.
You'll find that a lot of them are spending less money on things that they own and more
on things that they can do or that they can be such as traveling the world, learning a
new language or even something as small as starting a garden or just a fun side project
for a little while.
And as a direct result of that level of self-awareness, they’ve developed when it comes to their
spending habits you'll probably find that a lot of people in that community actually
live a pretty good lifestyle compared to the average joe despite spending less.
So let's take a look at an example of how much of a difference this way of thinking
can make in both our budgets and our lives.
We'll start with John and Jane.
John and Jane are doing okay for themselves they bring home about $48,000 a year and their
expenses are broken down like this:
$1,200 a month in rent for a very nice apartment in a small Minnesota town
$300 a month between gas and car maintenance for their two cars
$200 a month in car insurance for the cars $75 a month in utilities that are not covered
in the rent $400 a month in food and $300 a month eating
out twice a week $500 a month car loan
$20 minimum payment on a credit card $310 a month to student loans
$300 a month for health, vision and dental insurance
$200 a month in various entertainment and quality of life items which includes their
cable, internet, and phone package, as well as things like Netflix, Hulu, movies and so
on $50 a month on average for clothing shoes
and other apparel $50 a month to miscellaneous expenses that
come up from time to time $50 a month into their travel fund,
$45 a month to other savings and Investments.
All in all, it totals $4,000 a month or $48,000 a year.
However recently their travel fund allowed them to go on a one week trip to Hawaii.
They saw so many great things and met so many great people that they realized they want
to be able to do this again and regularly because this kind of experience was worth
the money.
However, saving only $50 or so dollars a month towards Future travel expenses just wasn't
going to get the job done.
It would be a long time before they are able to go to Hawaii or anywhere else again let
alone trying to do it 2 or 3 times a year which is what they would want.
So they took a look at their budget and started really asking themselves is this $1,200 a
month apartment really bringing us an extra $500 or $600 a month worth of joy?
These are the kind of questions they never really asked themselves before.
Don’t get me wrong they enjoyed their $1,200 a month apartment, it was pretty nice but
was it so much more nice than a $500, $600, or $700 a month place that it would be worth
all that extra money that could otherwise go towards future travels?
In the end, they had to answer, no.
John and Jane then went through the rest of the budget and ask the same question for every
last line item and proceeded to cut the fat so to speak when they felt something wasn’t
worth the extra money over the alternative options.
Once they were finished, they began looking for alternative options for the items that
they didn’t feel were worth the money in their budget.
For example, after browsing on apartments for weeks they found an apartment that was
not only $600 a month but it had all the utilities included except for electricity and there
was free Wi-Fi in the building.
John and Jane figured that they could move to that apartment which seemed fairly nice
even if it wasn't quite as good as the one they were in currently and try it out and
see how much value that extra $600 a month on their current apartment was really giving
them.
They wanted to find out how much happier they would be in their current apartment versus
this other apartment given that this other apartment would help them save so much more
for their travels due to the lower costs.
As it turned out the answer was not all too much.
The more expensive apartment was definitely nicer, but the difference in cost which allowed
them to have more funds available to live their dream of traveling the world more than
made up for it.
In addition to the rent difference, they also figured with free Wi-Fi they could still watch
their favorite shows on Netflix or Hulu so they could cut the cable bill.
They also decided, in an effort to save a little extra money that they would only have
one subscription active at any given time.
There was no need to pay for Netflix and Hulu every month.
They could watch Netflix for a month or two to get through the shows that they wanted
to see and then switch over to Hulu or vice versa and just keep alternating between the
subscription services that they enjoyed so that they could still get the entertainment
without having to pay for everything at once.
And as it turned out given how much time they were at work and their usual nights out they
didn't really have time to watch all of those subscription Services every month anyway,
so they didn’t really even miss them.
So between their two phones priced at $50 a month and their Netflix subscription of
$10 a month and $20 a month for movie tickets their entertainment budget went from roughly
$200 a month down to $80 a month.
For some line items such as say gas for their cars, they had to think of more Creative Solutions
on how to save money.
They figured that they could go to a cheaper place for gas such as Costco and figured that
it could end up lowering their monthly food bill since they would be buying in bulk, so
between those two savings measures they thought it would be worth the price of the membership
if they went there regularly.
So they gave it a shot figuring that the worst that would happen is they would go back to
what they were doing before so it's not like they were taking a huge risk but luckily it
ended up paying off.
They saved about 10% a month on gas, dropping their monthly payment from $80 a month per
car on gas to $72 a month on gas per car and they also managed to get their food bill to
go from $400 a month down to about $300 a month on average.
There was also another unintended consequence of making this particular switch, they ended
up cooking more in order to get through all the bulk items that they were buying before
the food went bad and got thrown away.
And beyond that, they actually realized they enjoyed cooking together.
It gave them another opportunity to spend some quality time together and it was just
enjoyable to be able to share in each other's company, discussing what went on that day
and what they wanted to do in the future.
They also realized as it turned out that's what they enjoyed about going out to eat.
It wasn't so much the food as it was the fact that going out to the restaurant was a good
way to facilitate them sharing in each other's company.
So they decided to cut down the number of times that they were going out to eat because
it wasn't providing as much marginal value as it was before.
Instead of going out to eat twice a week they started going out to eat twice a month, which
dropped their eating out budget from about $300 a month all the way down to about $75
a month, but their levels of happiness remained roughly the same.
Suddenly when they sat down to do their next month's budget they realized that they now
had over $1,000 left over at the end of the month which they could put towards their savings
or their travels or their debts.
Now their dream of traveling two or maybe three times a year seemed not just achievable,
but downright probable.
So they began looking to see what their next trip was going to be and figured out that
an average trip was going to cost them roughly $2,000 once they took advantage of some travel
hacks that they figured out about while researching.
That meant in order to take the trip 4 months from now (which would put them on pace to
have three trips per year) they would have to save $500 a month of that $1,000 they now
have left over and they figured the rest could go to pay off their debts so that they could
create even more leftover cash flow in the future months.
After living their dream of traveling two to three times a year for the next year they
realized that few things if any made them happier than exploring the world, trying crazy
foods, and meeting new people.
For them, that really was their dream and if they were retired that is what they would
be doing...
So the question then became how could we do it all the time?
Obviously, they would have to have some sort of passive income whether that be through
a business or Investments or whatever they needed some sort of income because they couldn't
just keep taking vacations every month or they’d eventually run out of vacation time.
But they weren't the savviest business people in the world and didn't really have the desire
to run one even if they could.
So they chose not to do that instead they chose to pay off their debts and find a way
to lower their housing costs even further since that was still the biggest line item
on their budget.
They figured once their debts were paid off they would have close to $2,000 a month left
over which would be a good amount to get started investing in something.
But they didn't immediately start investing in stocks or bonds instead they decided at
first they were going to invest in saving money and they did this by building their
own tiny home which, once built, would allow them to eliminate their rent payment.
granted at that point they would probably have to get their own internet setup among
other things but it likely wouldn't be quite as expensive as renting especially if they
were willing to stay there for several years which given that their goal was to travel
all the time and all they really needed was a home base, I'd say it's pretty likely, so
it was a good solution for their situation.
Over the next few years, they eliminated the rest of their debts and saved up for as well
as built the tiny house themselves in their spare time.
When all was said and done they were living on about $20,000 a year or a little under
$1,700 a month, thanks to the fact that they no longer had a housing or rent payment nor
did they have any debts and they cut the fat from their budget as much as possible all
without losing much happiness...
As a matter of fact, this experimentation process as you can see led to them learning
what they value most so if anything happiness may have increased.
Now they're in a position where they're making way more than they spend, and depending on
whether they decide to invest until they reach the point where they can retire (which according
to the 4% that I’ve covered in previous videos would take them roughly 11 years assuming
an 8% return) or if they just go until they reach the point that they achieve coasting
financial independence, they're likely able to live out their dreams and have money left
over to invest for their future.
And that my friends is in my opinion what budgeting is really trying to teach you.
But that'll do it for me today once again if you enjoyed this video be sure to subscribe
and hit that Bell next to my name so that you'll be notified of all my future uploads.
I generally upload every single Monday, and if you have a friend that would be interested
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out there and start our own Financial revolution.