Budgeting: Beyond the Bitter Pill.

Let's be honest: the word "budgeting" doesn't spark excitement.

But, like an unpleasant medicine that offers much-needed benefits, budgeting is essential for financial health. It's interesting how the Greek word "pharmakon" embodies this duality, reflecting something that can be both harmful and healing—much like our relationship with money!

Creating and consistently using a personal budget is the foundation of financial stability. It is also the cornerstone of economic progress. While often perceived as restrictive or monotonous, budgeting transcends merely tracking numbers. Instead, consider it an exercise in profound self-awareness. It puts us in the driver's seat of your financial life. It empowers us to align our choices with our deepest values and aspirations.

Most importantly, budgeting helps us cultivate a "truth-seeking" mindset towards our financial patterns.

We must candidly examine our consumption habits. Why?

Our wealth ultimately depends on what we have versus what we consume. This is especially true when factoring in the power of time-compounding.

This realisation brings to light a simple yet fundamental principle: our available resources must consistently outpace our consumption.

This is necessary to maintain or boost financial health.

We express this concept within a succinct formula:

WealthTomorrow=WealthToday+(Income?Consumption)×Time

Where:

WealthTomorrow: Our overall financial position in the future

WealthToday calculates our net worth as assets minus liabilities.

Income: Our earnings throughout the time.

Consumption: Our total spending in a given period.

Time: The period we evaluate for changes in wealth.

What does "compounded by time" mean, and how does it work?

This part may be abstract. Our natural wiring as humans challenges us to understand the link between present decisions and future outcomes.

The power of compounding is like a financial superpower—growth multiplied by growth.

To clarify, stay with me. I'll explain using practical examples. They demonstrate the significant benefit of starting early and saving regularly over time.

Use the imagination now. (Thanks, Business Insider.)

We have three individuals—Susan, Bill, and Chris. Each invests $5,000 per year at the same annual return rate. However, they start at different ages and for various durations.

Susan invests $5,000 annually from ages 25 to 35 (10 years).

Bill invests $5,000 annually from ages 35 to 65 (30 years).

Chris invests $5,000 annually from ages 25 to 65 (40 years)

Even though Susan only invested for 10 years, she has more money than Bill, who saved for 30 years. This is because of compound interest, which means that Susan's money earned from her investments over those 10 years keeps growing. Chris, who saved for the combined duration of both Susan and Bill, ends up with the most money saved. This shows the significant advantage of starting early and saving regularly for a long time. (Check the graph.)

If you put $10,000 in a savings account with a 5% interest rate, you'll get $500 in interest the first year. In the second year, you'll get interest not just on the original $10,000 but also on the $500 interest from the first year, giving you $525 in the second year. This keeps happening, with the interest you earn each year adding to the initial amount and earning more interest in the following years.

Even more advanced variables may affect this formula, but let's prioritise its key message for now. We essentially have three core strategies at our disposal:

• Attack: Focus on generating higher income levels, a common approach for many folks.
• Defend: Prioritise cutting expenses and reducing unnecessary spending patterns. The underdog strategy.
• Mixed: A mixed approach of attack and defence: trying to increase our income levels while keeping our consumption patterns stable and not proportional to the increase.

A truly effective strategy will focus on the third option. For me, at least.

Budgeting empowers us to save money, optimise our spending, and invest with informed foresight. Following a plan reduces those stressful surprises and offers control over our money management. Imagine that a budget positively affects other areas of our lives. It enables open communication and collaborative financial decision-making. While there's no one-size-fits-all way to budget, this is the approach I've found works best for me.

My Personal Budgeting Philosophy

When it comes to managing my money, I believe in simplicity and active awareness. Sure, fancy tools are out there, but they aren't for me. Let me break down my process:

1. Keep it simple. The beauty of budgeting lies in understanding and controlling where our money goes. Complex systems with intricate spreadsheets easily discourage long-term use. A more straightforward approach—one that makes sense to you—is the key to sticking with it through life's changes.
2. Zero Automation. While there's a whole world of helpful budget apps, I take a more "old-school" approach. I log into my online banking and place each transaction into my expense tracker. Doing this periodically offers immense value. It forces me to confront my spending, making poor patterns stand out and reinforcing smarter choices. Guilt is a powerful tool if channelled in the right direction. Consider it a workout for' financial mindfulness'.
3. Divide and impera (needs, wants, and savings). After drawing inspiration from Maslow's Hierarchy of Needs Theory, I have categorised my consumption into three areas:

• Needs: Unavoidable basics like shelter, food, transportation, and necessary healthcare expenses. Prioritise these, knowing they underpin stability.
• Wants: This is where it gets exciting! This category covers everything that sweetens life, from dining out to hobby costs and upgrades. Cutting back wouldn't cause hardship. Be honest here, as wants sometimes mask themselves as needs!
• Savings: What doesn't go to needs or wants should feed savings. It's not just about retirement! You may have one for an emergency fund, another for your dream vacation, and some for investments. Having multiple savings accounts, each with a designated purpose, provides a tangible sense of progress. This visual clarity boosts motivation and makes saving more rewarding.

My Method in Action

• One Debit Card: This keeps things clean. Spending gets centralised, minimising the need to cross-check multiple accounts.
• Monthly Transaction Deep Dive: This 'appointment' with myself is invaluable. There is no judgement, just pure data. Categorising everything within a spreadsheet puts my habits into sight and prepares me for the next step.
• The Golden Rule: 50/30/20. While percentages are fluid, this classic is my guideline. I dedicate roughly 50% of my income to needs, 30% to wants, and at least 20% to savings. My minimalistic lifestyle allows me to be super frugal with my wants, so often, even more, goes into that savings bucket, adding a sense of safety.
• Automate ONLY the savings: When our wage is deposited into our bank account, we should set up an automatic payment to transfer a portion of it into another bank account, different from what we usually use for our spending. It can be quite bothersome to move our savings back and forth for spending purposes constantly, so it's easier to leave them where they are and simply forget about them.
• Visualise: After tracking and categorising expenses in separate funnels, I must visualise the results using diagrams and charts. Our vision is much stronger than our other senses. Seeing the data helps me understand my spending habits more. It also helps me make necessary adjustments. I can identify areas where I may be overspending by visualising my budget. This creates a solid memory impact in my brain.

This is my simple strategy for budgeting and tracking expenses. No jargon. I believe in keeping things achievable. Focusing on the fundamentals will just compound and have a greater impact. Ultimately, our financial freedom comes down to understanding our behaviour; what we do accounts for about 80% of the factors. It's better to focus on what we can control: ourselves.

Nonetheless, I'm no financial guru; I'm simply someone who stumbled on a method that works wonders for me. Everyone has priorities and unique situations, so feel free to adjust this approach. The ultimate goal is to avoid mindless consumption and develop awareness so we can confidently allocate our money where it best aligns with our lives.