5. Budgeting for people who hate budgeting

Transcript:

Hello, and welcome to episode number five of the Canadian Money Roadmap podcast. I'm your host Evan Neufeld. Today's topic is going to be about budgeting. We're going to take a look at how you budget, some rules of thumb for some of the major budget categories and the main part of this that I recommend that you listen to is the alternatives to budgeting. 

So budgeting is one of those things that as financial planners, I get a lot of clients coming into my office and saying “Oh, it's something I should always be doing, I should be setting up a budget”.  The fact of the matter is the person that thinks that they should be doing a budget or that you need to work with a planner to set up a budget for the first time.  That's not necessarily the case, but I'm going to get into a few of those different factors as we go here. But as an intro to budgeting: a budget is a proactive thing instead of a reactive thing. 

It's setting aside a portion of your paycheck for different categories of spending. So your vehicles, groceries, going out for meals, gifts, and insurance.  Everything that you want to spend money on and especially the things that you don't want to spend money on, but you know you have to.  The point of a budget is that once that category has been used up for the month, you need to stop spending on those items or borrow from another category for the month. 

It keeps you on track to spend only the money you have. But because it's restrictive, people tend to avoid budgets. It's not fun having a spreadsheet or a piece of software tell you where and when you can spend your money, so people usually just disregard them. I'm going to come back to this a number of times throughout the episode here. 

But budgeting is one of those topics that as a financial planner who works with many different types of clients, it's very interesting to see the people that do and do not use budgets.  The people that are in most need of a budget, the people that say, “Oh, new year new me, I’ve got to set up a budget this year, I’m going to do it”, versus the people that have had a budget in place for a long time.  They're probably the people that don't actually need a budget because of the discipline that's required to set up and stick to a budget in the first place is the same type of discipline that you need to not over spend on your own without even knowing where your money's going.  

I'm going to talk about a few different ways that you can get out of that rut of not being a budgeter.  Full disclosure, I'm not a budgeter either. I hate budgeting and the way that my brain works, I can't do it! So I am going to be in the camp of people that don't budget and so my alternative here gets in the way of my own bad discipline when it comes to budgeting. But because this episode is about budgeting, I should probably tell you how to budget and what some of those things are that you can do.  

So a budget is all about your data; what you're spending, what you need to spend and what you need to plan for.  But bad or incomplete data leads to a bad or incomplete budget. So where does that data come from? Well, you can do it manually, a spreadsheet is the tried and true method of doing a budget using Excel or numbers, that's one of the main ways that you can do that. 

Most of those programs actually have templates built into them that you can just load up and you can see as simple monthly budget, these are great tools to use and they're free. You can plug your numbers in there, see how it changes month to month, and you can make your adjustments as needed. 

I've got a tool from part of our financial planning software that we use. It's free and I've linked it in the show notes here.  It just shows you a few different categories and a few of the basics, It’s not 75 different categories. It's pretty simple and it's a good start so you can see where you're currently spending, where you'd like to end up, and then what the difference is in each category so you can make those adjustments or know exactly where you need to make those adjustments.  

So a spreadsheet is the first one but everything is manual.  For people that aren't interested or don't have the discipline to do a budget, manually inputting all of your transactions and all of your spending for a month is probably not going to be the best system for you. Another option for budgeting is also a manual process, but it's less about spreadsheets and more about physical, tangible feedback.  We refer to it as the envelope system. I've never done the envelope system, but I know people who have and really liked it. Maybe this could be something for you.   What you do is set up your budget for each category of spending. So like I mentioned before, your groceries, your insurance, your gifts, your going out, your restaurants, and all that kind of stuff and for every envelope you set aside exactly the amount of cash that you want to allocate for that month. This isn't using your Visa and this isn't using your debit card.  This is using cash because the way that our brains work, we're actually wired to have a little bit of pain associated with the actual transaction of changing the hands of our money.  So if we are physically handing our money over, it doesn't feel as good as using a credit card, which is simple as it's kind of a faceless transaction.  So the cash system here lets you see exactly how much is left and you can physically feel how much you're handing over for each of the categories.  Now in this time of COVID-19, cash is one of those things that's not really being used as much anymore so the envelope system might need a bit of a modern take in our current environment. But that is another strategy that you could use.  

I mentioned some software before to automate your transactions at least, so it kind of combines the spreadsheet system with a little bit of automation. The first one that people use a lot is called Mint and it is an app that you can download on your phone, on your computer, wherever, and it actually connects directly to your bank account, credit cards and everything. It imports all of your transactions automatically so what you have to do then is just categorize each of them. The system actually learns over time for example every time I go to Safeway that's groceries, right? So you don't have to do it every single month, but it at least takes the burden of automatically putting the transactions into your spreadsheet for you. 

I've used mint before. It's a pretty good system, but again, it's one of those things where you have to force yourself to take a look at  it every month to review what your transactions were every month or every week or every day or whatever you want to do. But you want to review what your transactions were and adjust your behavior accordingly if it's not in line with the budget that you set inside of it.  

Another piece of software that I know people have used and really like, and I also know people who've used it and really didn't like it, it's called You Need a Budget. Now that's a pretty on the nose name there, but they also go by the acronym YNAB.  This software isn't free, last I checked I think it was about $5 a month. It's an American software, but it still works with Canadian banks and things like that. The same way as mint, it automatically imports your transactions, but the strategy that they use is that you give every dollar a job.  It's telling your money where to go instead of figuring out where it went.  YNAB is exactly that system. So you go through your categories and if you're spending more on clothes this month and less on gas, you can kind of borrow from different categories as you go and it just adjusts. The problem that I have with YNAB is that you essentially need to pay attention to the software and not to the dollars in your bank account  because you are always allocating for the future, which is great, but at the same time, it's really tough to see a growing balance in your checking account and not want to spend it. For example, if you want to replace your phone every two years, YNAB says you should set aside $10 a month for the next two year. The only way that that works is if the money is already in your checking account for that dollar amount and for that category.   If you're continuing to look at your chequing accounts like “my goodness I've got $10,000 in here”, but you're not realizing that you've essentially pre-saved for all of the things that you don't anticipate saving for like that new set of winter tires, the home insurance, or those big one time purchases that you need to make. You can get yourself into trouble really quickly with that system if you're looking at your bank account and seeing that money as spendable. You need to stick with the YNAB system and keep looking at your categories of what you're able to spend that month. 

Another thing that people ask me all the time is rules of thumb when it comes to budgeting.  How much should I be saving? How much should I be spending on a house? How much should we be spending on a car? There's a lot more nuance to those specific types of questions, but I'm going to talk more about macro categories of your needs, your wants and your saving.  The rule of thumb that goes along with those three macro categories is the 50, 30, 20 rule.    

So 50% of your take home pay you should set aside for your needs. So that's your mortgage or your rent, paying for your vehicles, Groceries, Phone bill, electricity, and all those different things that you actually need to spend money on every single month.   

Then 30% of your take home pay on your wants.  So that's going out.  That’s probably buying new clothes. I know you need to buy new clothes at some point, but a lot of people spend more on clothes than they need to. That is your Netflix subscription and things like that.  

Then finally, 20% on debt repayment and savings.  Is that enough for your specific circumstance for saving or debt repayment?  Maybe it is and maybe it isn't, but  I recommend that you work with an advisor or a financial planner to make sure that the savings and debt repayment categories are best suited to your situation. If you do charitable giving on a regular basis, I recommend that you take it out of the category of the 30%. 

So if you're doing charitable giving, I would say that you should do 50% on needs, 20% on wants, 10% on charitable giving, and 20% on savings and debt payment. You can tweak that to however you'd like, but if you're looking for rules of thumb, that's what I would recommend there. 

Now I've alluded to this part of the podcast a couple of times already for the people that are not interested in budgeting, don't have the discipline to budget or have said in the past that they want to set up a budget. I'm in the same boat as most of you that are probably listening to this. So what I recommend for people that don't want to be tracking their spending every month, they don't want to set up the spreadsheet, and they don't want to have to take a look at every single transaction and then have a month that something unexpected comes up and the whole thing explodes and you throw your hands up and say, “forget it, I'm never budgeting again!”.    

What I recommend you do is you first automate all of your good habits.  Your good habits include paying your bills, paying off your debt, savings, charitable giving if that is something that you want to do. So all of the things that you know you have to do in a month and you can automate, do it because the last thing you want to do is make a decision onn whether you should do this or do that when it comes to needs or wants.  Take care of all of your savings, all of your debt repayment, your bill payments and your mortgage which that's usually taken care of already.  Anything that you can automate that you know you're going to be spending money on every month, do it, so that once you've done all of the good things with your money, then you can spend the rest as long as you're not going into any additional credit card debt or adding onto your line of credit or things like that.   You're essentially staying in good shape because all of the things that you want to do including saving for the future,  you've filled up your emergency fund, you're taking care of the long-term savings, you're paying off your debt, everything that you know you want to do that month is already being taken care of.  Automate all of your good habits, don't increase your personal debt and spend the rest. Obviously, this isn't as comprehensive as a full budget, but you know your money will be going to the right places automatically and allows you to be flexible. 

So for example, some months may be more expensive like December, because of Christmas gifts, or the month that your vehicle insurance is due.   Unless you're using a system like YNAB where you automatically are saving well in advance for those times when you're going to need the money, but most people aren't going to do it, myself included. 

The flexibility of the automate your good habits system is really nice so that you can still take care of everything that you need to do while not being hampered by the restrictions of a monthly budget.  The unconventional advice here is if you've ever said, “I need to set up a budget” or “this is the year I'm going to get control of my money” then the reality is that you probably shouldn't try to set up a budget because you're probably not going to stick to it. So I recommend this automate your good habits approach so that you can start some good habits with a system taking care of it for you instead of your own willpower.  

When I think of budgeting, I think of dieting and trying to lose weight just by dieting.  The statistics say with a diet that the people that lose weight by dieting, 90% of them gain all of that weight back within five years.  This is anecdotal evidence here for sure, but if you get some success from budgeting, the chances are most people kind of slip back into their old habits if they don't have a system that's really sustainable. So we got a lot of people that will get motivated for one day, you know it's the new year's resolution problem where people get motivated for a very short period of time and then forget about it. So automating your habits and letting a system take care of the good stuff for you will get you on a better track than actually having the motivation every month to track all of your transactions. If your spending got you into trouble in the first place, you need the help of a system because willpower alone really works for long enough to make a difference. 

The first month that you're looking at setting up a budget or starting an automation system, set up a system for automatic debt repayment first. So if you have student loans, if you have a line of credit, if you have a personal loan to somebody else; set up an automatic transfer to that person's account, to your line of credit, to your student loans institution, or whatever the case may be.  Set it up automatically so you never have to choose month to month  because most people will find that over time “Oh, I think I've been paying off this much per month”,  but in reality if you miss a month here, you're late a month there and it doesn't have any significant repercussions for you then you're probably not going to stick to that system.  So automate it. 

As soon as you get paid, have the system take care of that money first off.  After that first month of your debt repayment, you could run it for a month or two, just to make sure that everything's working. After that, set up a system for your automatic bill payments. So if you've got your cell phone, cable or whatever you need to pay month to month. If you're able to automate it, even if that's running on your credit card, you can do that.  I'd recommend that you run it out of your checking account, just because running it off your credit card might be a way to increase your credit card debt without you really realizing it. If you have it just coming out of your checking account, you're essentially paying your bills and paying your debt with your money first before you're spending it. 

Then after the third month of kind of letting that run and making sure that that works for you, then you can set up a system to automatically save or invest your money. I would recommend that you work with a professional to do this, but if you're saving and investing on your own already, work with your financial institution to set up a system where you can do that automatically and you don't have to think about it. 

One of our former partners at our firm always told people that if you try to spend your money first and save whatever's left at the end of the month, there's never ever going to be anything left at the end of the month. He recommended that you save off the top and then spend the rest. I'm recommending that here as well so included with the items that you spend off the top, you do your savings, you do your debt and you pay our bills off the top and you do those automatically. But anything else that you can possibly automate, I would recommend that you do it after you've taken care of your debt, bills, and saving systems. 

If you're still with me, Thanks so much for listening.  Just as a review, if you're going to budget, you can start with a spreadsheet, you could do the envelope system, or you could use software.  But if you're going to do it, I recommend that you automate as much of the recording of transactions as possible and using software like mint or YNAB is a great way to do that.  If you're looking for rules of thumb for building your budget, using the 50, 30, 20   to cover off your needs, wants, spending, and debt repayment categories. That's a really good place to start. 

And for those of us who hate budgeting and never want to do them and never want to track transactions or anything like that. Start by automating all of your good habits.  Your good habits are your savings, paying off your bills, charitable giving and debt repayment. Then from there you can spend the rest of your money.  As long as you're not increasing your personal debt every month, you'll be good to go. 

Thanks for joining me today on the Canadian money roadmap podcast. If you enjoyed today's episode, I'd really appreciate if you left me a review on Apple podcasts with your biggest takeaway. If you have questions or ideas for topics you'd like me to discuss on future episodes, please reach out via my contact info in the show notes. 

This podcast is intended to be educational in nature, and you should always consult your financial, tax, and legal advisors before making changes to your financial plan. Any rates of return discussed are historical or hypothetical and are to be used for educational purposes only. Evan Neufeld is Qualified Associate Financial Planner and Registered Investment Fund Advisor. Mutual funds are provided through Sterling Mutuals Inc.