I was recently informed about an interesting experiment that was going on between my grandmother and younger brother. For every $1000 he saved from his new job he received an extra $100 to help get him started on a budgeting plan. Nan was trying to teach the family great habits in a super selfless manner and I was intrigued to see how this played out.
As you can imagine, even a 16-year-old kid knows how good a 10% return on savings is so he initially banked as much cash as physically possible. He racked up $1000 before you knew it, took a little longer to cross the $2000 mark and it was around this time he discovered online shopping and the budgeting completely fell off the rails. Watching the experiment unfold really got me thinking about the true drivers of budgeting and why some people succeed but so many fail.
Initially for my brother who’d never had any money of his own, the additional $100 was a great incentive because it held so much intrinsic value. $100 to a teenager who’d just received his first pay check was a huge amount of cash. As he accumulated an increasing amount of money though, the $100 became significantly less important. Why? It’s still the same value. Why did he suddenly begin to care less about saving his money to get the extra $100 than he did about the new clothes that he was ordering? Did he need these things more or did he just lose interest in saving?
I believe the answers are the exact same reason so many people fail to budget well and hinder their own success in life. It ties directly into two things, the focus of why they are saving money and the process in which they go about facilitating it.
I want to talk about these two concepts and how I can hopefully change budgeting from the boring chore that you must do into a rewarding foundation that energises you to structure your finances for success. Firstly, changing your mindset from ‘bills first’ to ‘savings first’ and why that’s so important and secondly understand that no matter what you do if there isn’t a strong purpose behind the budget behaviours won’t stick.
‘Savings’ Should Never Come Second
Unfortunately, there isn’t any avoiding having to pay your dues (Unless perhaps you’re Jordan Belfort but that’s a topic for another blog). There is no magic wand that removes the responsibility of paying bills but it must come after you’ve allocated your savings for the pay period. Think about it, the one thing that we can all agree on is that most people will do whatever it takes to pay their bills. We’ll sacrifice a night out with our friends or an expensive dinner at a nice restaurant to make sure we can pay our rent on time or the power doesn’t get switched off. How many of you will sacrifice the same things to save some extra cash? Most of you won’t. It’s easy to find a good excuse to spend money toward the end of the month to reward yourself for something or maybe just spend some money because it simply feels good. Either way, it’s not very effective at achieving your life goals.
By thinking about our savings first and making sure that we allocate them as soon as we get paid we effectively change our own wage. It’s a common fact that we tend to live to our means, but by automatically withdrawing our savings as soon as we’ve been paid we effectively reduce our income. Shifting our mentality to thinking about how much we can save first, and then thinking about the rest of the expenses for the month ensures we’re maximising our excess cash. If you previously missed it, here’s a previous post on how to work through your budget and understand how much cash you should be able to allocate to savings each month.
The Truth About Earning Money
An interesting fact according to Deloitte’s shift index survey is 80% of people hate their jobs. Pretty scary, right? This says to me that people care more for things earning money allows them to do than the hate harboured for their jobs. It makes sense then that if the most important, and enjoyable things in your life are experienced outside of work, managing the cash that you receive from your job and maximising the return on the time you trade should be a high priority. Even if you can’t save anything right now, it still should be thought about every single pay check because ultimately that’s what you want to achieve. Budgeting and maximising your cash-flow allows us to achieve more, and rely less upon the jobs that most likely drives you nuts.
Saving money must be the highest priority and you need to understand what you want to achieve long term to drive the habit of saving first, otherwise simply thinking you should probably save a portion of your income will have no effect on saving habits. Most people live in a stressful world with hard jobs and need some relief from their life. Spending money on things that brings instant gratitude is so much more rewarding upfront than putting money in the bank and watching it build up to some arbitrary number that serves us no purpose. Even saving for a house deposit with no time frame or realistic expectation doesn’t have much effect because without specifics it doesn’t hold any reality. If there’s no purpose for these savings we will reallocated the money to things that seem more important, like a few beers and a chicken parma with the boys or those new boots that we saw during the week.
How To Target Your Expenditure
Many people recognise early on that without a driving force a budget falls apart so they start setting goals, whether it be a new car or an overseas holiday. These goals work, people start ticking things off that they’ve worked hard to get but the problem is the savings is so often centre around consumption. These goals are OK, people need to live but they need to run alongside goals that are going to improve the quality of their lives in the long-term. I want you to set goals that are not only going to provide enjoyment, but make sure that you don’t have to work just as hard, if not harder, each and every year to keep succeeding.
5 Tips For Budgeting Success
I’ve put together a quick 5 step process which should help you to get a budget up and running as soon as possible.
1. Establish your long-term goals
Sitting down and thinking about your future can be tough, and although your long-term plan may change along the way it’s important to start working towards targets that are going to provide you success in the short-term. Once goals have been established you can determine how much this is going to cost, the time frame in which you wish to achieve these goals and understand how much you will need to save to achieve these goals
2. Write a ‘savings first’ budget
Spend a night at the kitchen table and rummage through your previous expenditure so you can accurately establish a budget for yourself and make sure you think about savings first. Removing the cash from your world instantly reduces temptation to spend the money on other things. Remember, out of sight, out of mind.
3. Automate your savings transfers
Don’t leave your ability to save a portion of your income down to human action it’s just too important for that. Set up your accounts to automatically transfer your savings the day after you get paid. Saving money won’t ever have to be something you think about again until you need to revisit your budget when and if your circumstances change.
4. Track your goals
Nobody gets excited by having a pile of cash that they can’t spend. Make sure that you use your own spreadsheet or an app to track your progress against your goals to ensure you stay motivated and can appreciate the success you create.
5. Review your budget and goals regularly
Putting together a budget and setting up your accounts correctly is a great step but it’s important to regularly review your plans. Over time your personal circumstances and aspirations will change so be sure to update your spending habits and ensure that your money is working towards what you really want to achieve now, and not 12 months ago.
There are no hard and fast rules around exactly how you should budget, each and every one of your situations are unique and will therefore require some tweaking. The main concept you should take with you is by targeting savings first and setting meaningful goals, you will guarantee that you’ve always got cash-flow working towards improving your life and knowing that makes it considerably easier to set the money aside.
As always, if you’ve got any further questions or there are some concepts that you’d like to explore further I’m always happy to answer questions.
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