One of the biggest misconceptions there is about financial planning is that budgeting is one of the only ways to reach financial success. When working with a financial planner, people immediately think this is the first step in their financial plan and they will be forced into a tiny box, limiting the amount of money to spend in various “categories.”
Well the good news is every party has a pooper but the pooper isn’t me!
As a CERTIFIED FINANCIAL PLANNER™ I never ever recommend a budget to clients and friends.
Is that reckless? Not in the least…. it rarely works, so why bother!
I equate a budget with dieting. In the last 2 years have you, or someone you know, tried a new diet, drastically limiting calorie intake, eliminating carbs, or eating one meal a day in hopes of fitting into your old high school jeans? Let me guess, the answer is “yes” and you started out with gusto, but when the chips in the cabinet started calling your name at 12am, you cheated here, you cheated there and eventually gave up.
In my experience, budgeting makes people feel restricted and they can only feel that way for so long before they “cheat” and say “I don’t care what my financial planner says, I’m buying that corvette” Trust me I want you to have the corvette, but budgeting won’t get you there.
What’s the alternative you ask?
I call it the Save Spend Track (SST) Strategy.
Sounds much better than budgeting already, don’t you think?.
Allow me to elaborate..
Save Spend Track
Every cash flow analysis should begin with the end in mind. What I mean by that is, you have to figure out how much money you need to accomplish all of your goals and objectives FIRST.
To go back to our weight loss analogy, no one says I want to ” lose weight”, instead everyone says,” I want to lose 5 lbs or 15lbs.” They make it specific. They define success. They have a target.
Financial Planning should be the same.
So you have to run the numbers. It’s like getting on the scale.
There are many free places on the web to run basic calculations on retirement planning, college, planning etc.. An example is www.financialcalculators.com.
If you would rather a financial planner run the numbers and put together a comprehensive plan you should hire one. Search www.cfp.net (that is what I do for a living, Pro Financial Group)
Your goal is to figure out how much money you need as lump sum, then how much you have to save on a monthly basis to accomplish your goals. (3rd party websites are not endorsed by IFS securities)
Nuts and Bolts
If you are following along, now is the time to figure out what you need to save per month to accomplish your goals and objectives. Putting your actual expenses down on paper may reveal several areas of misuse of your money. You won’t believe it until you see it!
Is the amount you need to save less than your monthly take home pay? I’m scared to ask—- Is it more?
What percentage of your total income is it? More than 15%? More than 50%?
If you have to save more 50% of your income to reach your goals,, something has to change.
You need to either make more money or change your goals.
Once you see where your money is going, you can choose how to spend your money more wisely. Everything is a choice. The more expensive car is ok, as long as you know where the money is going to come from to pay for it. The choice is yours! Today you are CHOOSING not to save for your future.
That is the truth…
In this day and age unless you are earning significant wealth it is typically not feasible to save 50% or more for your future. A more realistic percentage for the “average joe” is 10-20%. (that includes 401k)
Take that hard dollar you need to save and FORCE YOURSELF to save it every month.
You can split the savings over all your paychecks in a month.
But SAVE IT FIRST.
And leave yourself whatever is left over to SPEND.
By doing this, your lifestyle should magically adjust to the dollars you have to support it. Word to the wise, you will get into trouble if you use your credit cards to keep up the same lifestyle you had before saving. All this will do, is like dieting, lead to 0 growth.
You will just end up having to pay off the credit cards with all the money you saved. NET EFFECT 0.
Let’s recap and add a twist.
Step 1 Save
Step 2. Spend
Step 3 Track what you are spending.
Budgeting is Over! SST forever!
- Tracking can help you to anticipate financial problems down the road. Holidays, layoffs, emergencies—things come up. Having a handle on your monthly cash flow will help you absorb those shocks much more easily.
- Running the numbers will help you recognize the need for change! Get all your family members on board. This will take a group effort.
- Seeing your net worth rise will become motivation
- SST will help you meet your long-range financial objectives without cramming you in a financial box!
The ultimate goal is to reach financial success. That is different for every person. A budget is too general and doesn’t connect to your goals. The Save Spend Track Strategy is designed to motivate you to save first for your future. It also gives you more control over your cash flow. Spend money how you would like—it’s all your choice!
Next time someone says you need a budget; tell them there is a better way!
As always, you can consult with me to discuss your cash flow issues.
Look for future posts on the best ways to save more money and check out my recent post on rebalancing your investment portfolio.
Thanks for stopping by and I hope you achieve financial success!
-Jared S. Friedman
(previously posted September 16, 2016)
