Budget Sense

While I don’t like talking down or preaching to people about finances from a position of ‘know it all’ , I do like to offer any advise I can when I realize the person is totally clueless or their situation is in need of some simple advise.

One of the advice I give out to people is to to simply save money and ensure you are paying yourself first. As simple and as obvious as this financial lesson may sound, it is lost on so many. The good news is, some of these same people are one advice away from turning their life away.

A friend of mine, whom we shall refer to as ‘Nick’ , was the recipient of such friendly but crucial advice. About two years ago or more, the topic of finance and money management came up and after knowing his situation, I gave him the simple advice and the importance of automating his savings. Moreover, I brought up the concept of paying yourself first. In his mid 40s at the time and while he had saved money in the past, it was sporadic and more of an afterthought. In other words, saving money was far from a priority for his pay check. I explained to him how not prioritizing this will ensure not a penny remains after he takes care of both essential and non-essential budget items. And I use the term ‘budget’ here loosely as he didn’t even have a real budget.

Fast forward to last week, where I had a chance to meet Nick for a mutual friend’s birthday. After telling me about his new job , the topic of finances came up and he proceeded to thank me for advice from years ago. Confused and clueless about this advice he had received from me, I asked him and he reminded me about the ‘pay yourself first’ recommendation I had given him years ago. Ever since, and after automating this through his payroll and bank, he has yet to skip a payment. I felt very proud of him and totally blown away by how one simple advice – coming casually and out of the blue – could make such a large impact. It is like the compound effect that starts small but builds up over time.

Seeing that he was committed and took my advise seriously, I offered him another advice that I myself had started to implement last few years. This is to forego any salary increases and let it continue to go to savings instead. It is money you never had to begin with, so just keep pretending that and let it go to savings instead. This was explained in a previous post but the concept is simple to understand and apply. Say your bi-weekly net payout is $1750 and from that, $250 goes to savings automatically. Let us assume you had a salary increase and your bi-weekly payment is now up to $1850. Take that extra $100 and add it to your existing $250 of automatic savings for total of $350. As long as you do this from the start, you won’t feel it and you just have a better financial future ahead of you.

Your life or someone’s life may just be one advise or lesson away from being completely different. When it comes to financial management and freedom, never shy away from advising others, or accepting advise from someone else, as obvious as the advise may be. While the advise may be the same, depending on the context and circumstances, there may be very valuable insight that can help. In this case, had me and my friend not talked about the strategy or prioritizing savings first, he may have wasted the last two years without any savings. And two years can make a world of difference.

In your budget, a ‘savings’ category is essential for emergencies or general savings. But what if you want to purchase something pricey, like a vacation or new furniture? Instead of dipping into savings, create a new category dedicated to the specific item. For instance, if planning an $800 Mexico vacation in August, make a category named “Mexico Vacation-August 2011.” This specificity helps your brain focus on the goal.

Now, where does the extra money come from?

Review your budget line by line. Assess which categories can afford some cuts for the “Mexico Vacation-August 2011” category. Start with the ‘Savings’ category. Temporarily reduce the contribution (e.g., from $125 to $100) until you’ve saved enough for the vacation. Continue saving your usual amount once the goal is met.

Explore other budget items. Can you allocate some funds from your personal spending or weekly ‘Grocery and Food’ category? Assuming 12 more pay periods till August, dedicating $60-75 per cycle could reach your $800 goal before August.

Bit of effort for significant savings

With creative budget reallocation and minor sacrifices, save for your Mexico vacation without disrupting your routine. Planning allows you to afford the vacation while maintaining other life activities and savings.

For more substantial items like a car, extend the timeline (ideally one year) and be prepared for more significant sacrifices, but nothing extreme.

In emergencies, dipping into savings may be necessary. If prepared, it becomes more manageable.