CFO of Life #106: Budgeting - the toll to achieve your goals

A budget is telling your money where to go, instead of wondering where it went.

This beautifully summarises how you should think and behave with your budget. You should use it to track and plan your spending. Nothing more or nothing less.

Your budget is a plan for how you spend your money to get to your goal. It shows you how much money you should spend every month on rent, food or fun. It shows you how that relates to your goals and your aspirations.

But a budget is also a way to reconcile how you spend your money. It helps you understand how much you spent relative to how much you planned to spend and how much you expect to spend.

?It is that simple!?

That is why in this week’s newsletter, I will break down the top 5 topics to teach you all about budgeting, where the most important points are:

1. A budget is just a tool
2. The size of a budget decides its use
3. How to scale up and down your personal budget?
4. What people get wrong about budgeting?
5. Mental shortcuts to help you think about budgeting?

?If this is your first time reading the blog, my name is Simeon Ivanov (Si-Me-On). I write this weekly blog about personal finance called CFO of Life to bring you on the journey towards becoming the CFO of your Life! I hope you like it and that you stick around for the long term!

Now, let’s get into the thick of it!

Just like everything in personal finances, a budget is a tool. A simple recollection of your plan on how to spend your income to achieve your goals.

That could be your plan for how to save money to buy your first house. It could be your budget to get you through some hard times.?

Or if you are lucky, you could be planning how to spend all the money you won from the lottery.

You see, a budget is just a line-by-line plan on how much and on what you should spend money. But we all know it is just your best (g)estimate of how you will spend it and what you will achieve.

You see, the type of budget doesn't limit how good it would be, it only limits how much you can achieve in that time. As a budget is only as good as the use you put it through!

?For me, the size of a budget would show me what you intend to use it for. To paint you a picture, I will show you the 3 different types of budgets and what they represent.

?A Ramen budget is what most people imagine when they hear that word. They imagine shrinking all their spending and only allowing themselves to spend enough money on ramen noodles and water. Which is the extreme and uncomfortable way to budget, but we know how people approach diets and directly jump into the biggest extreme.

?Still, this is a valid approach to life when you are poor or pressed for money. But you will be surprised how many people live like that when they don't need to. Or how many people try this type of budget and fail miserably as it restricts them to the point of no return? And they stop putting effort into their finances because they get burnt out.

?An Adjustable budget is something that quite a few people have, as it is just a guide on what to spend and where. Nothing more, nothing less, but just a super balanced plan on how to spend your money.

?While you can imagine that this is easy, this is usually done out of necessity and is a somehow restricted budget that supports a specific goal. You would take a certain amount of money towards what you want to achieve and then adjust the rest to get you through the month.

Now, that is a great approach towards paying off your debt, saving for your first house or preparing your emergency fund. It is a way to ensure that your goals are achieved and that you have something for the rest of your life needs. It also provides you the flexibility to move around all your money and cover any current need.

?Last but not least, a Fully locked budget is just what it sounds like. It is a budget that accounts for all the money you have to the last dollar. It allocates them all to a specific job and gets them moving.

This is quite an interesting approach towards money, but it is super strict and requires a lot of oversight. Now, I’d love to tell you that this is perfect but it is not, as you can quickly spiral out of control if you suddenly need to do something that is not in your plan. But, that is another conversation for another day.

?This is one of the most fun exercises you can do with your budget and one of the most insightful ways to learn about yourself and your money! Hopefully, you will only need to scale up your budgets and never scale down!

?In a nutshell, scaling up a budget could go two ways - linear or selective.

Linear scaling is simply continuing to allocate your money in the same way, just spending more in each category. While this is easy and fun, you have to be careful not to push too much lifestyle creep into the wrong categories as you can quickly outspend your budget.

?That is why a selective budget increase would allow you to move the additional funds to the places that will drive the most impact. As an example, every time I have to increase the amount of money I have in my budget, I add a bit more towards entertainment and investments. That way I improve both my current happiness and I ensure that my future is taken care of.

?While it is fun and games to increase your budget as you have more money, when you get to the situation where you need to drastically spend less, it is a lot harder. But the rule of thumb is to cut a sizable amount from the biggest categories of spending as that would bring the quickest and the largest impact, where focusing on the smallest things might not help a lot.

?People get a lot of things about personal finances wrong and quite a few of them are about budgeting.

?A well-made budget is a guide, but people think that it is a bible and that once they commit to it, this is set in stone forever. And this has fundamentally broken so many people’s journeys of personal finance.?

?“Everyone has a plan until they get slapped in the face” and once they get slapped in the face, they panic and run around putting up fires. Which causes a lot of anxiety, unhappiness and discomfort that understandably leads to people swerving away from their plans and forgetting all about them.

??Another way people see budgets as a bad thing is that a budget limits what you spend on a specific thing. It is the guidepost that tells you what to do and what not to do. But it also blocks you from going over your limits and commitments.?

?Which if I have to be honest is quite annoying at times, but it is a necessary evil! It is an evil that keeps you away from your short-term wants and pushes you to stick to your long-term goals.

?People also get it wrong about how and when a budget works for them. Quite a few of the people I speak with think that a budget will immediately change their financial situation and allow them to achieve their goals. While I wish it was all true, a budget is a tool that provides you with a lot of value, but that value comes with time and patience!

?Last but not least, people forget that a budget works for the person/people who created it. Hence, my budget is tailored to my life, my goals and my expectations of life. You need to find the way that works for you, as if you are blindly copying people’s budgets there is a huge chance it won’t be suitable for you. But you might be lucky and stumble your way to success!

?Let’s start with my favourite one “A budget is simply permission to spend $XX on whatever you like”. This is why I love budgeting, it allows me to afford to go out and not stress about it, it allows me to travel and not stress about it, and it allows me to enjoy life a bit more. And hopefully, you can see how using that limit of $XX for something can be positive, as it would also force you to spend that money on the things you enjoy doing!

Another mental shortcut I use is “Look at your budget as the budget of your business”. That way you will force yourself to be a bit more attentive with your money. That way you will be a bit more careful about how you spend your money and a bit wiser and more diligent. The last thing you want is for your business to go bust as you’ve squandered all your money on takeaways and brand-name bags!

?A different mental model I use is that each one of my goals is attached to the different types of spend I have on my budget. My goal to enjoy life more is attached to my minimum spend of $XX per month on entertainment and $Xk a year for travel. That ensures that I have a number anchored to my goal and a goal attached to my spending. So, when one is achieved, the other will be achieved.

??Just as importantly, you need to track, observe and understand what value you get from your spending and your budget. As with everything, if you don’t get enough value in your life from it, you should stop doing it! But if you are getting a lot more than expected, then you should try and get more of it to maximise the happiness and joy in your life. That is why it is important to track and trace how your money works and what it does for you.

Remember, budgeting is a journey, not a destination!

?So, regardless of what you want to achieve, take the time and build a budget that would work for you. Take the time and slowly cut your spending and don’t overdo it. Take the time and ensure that you will be well taken care of and that you will have enough without restricting yourself.

?Now it is time for me to go research the next topic and get it ready for you, but more of that next Monday!

Post #106 in the series CFO of Life #si #personalfinance #CFOofLife