Four Ways a Budget Will Make Your Life More Fulfilling

“Do you have a budget?” I asked. My friend smiled slightly and answered, “Kinda…I mean, I pay my bills every month so I use that as a way for me to see where my money is going at least.”

I suspect this is the way many people answer this question. But this isn’t budgeting. Budgeting is by far the most important piece of your finances. It is the tool that will control your impulsiveness (did someone say Black Friday?) and give you freedom in the end! Trust me, I know this from experience.

A “benchmark” by Dictionary.com’s definition is

any standard or reference by which others can be measured or judged

An example of this is a benchmark software that is used to compare the computing power of two completely different laptops. Since the software sets a standard, both computers can be equally compared.

A budget is essentially the benchmark for your finances.

It is where your finances can be measured month after month so you can compare normal behavior with where you want to be.

Well known leadership guru, John C. Maxwell, says this about budgets:

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

That’s what we want – a way of telling our money where it goes. A plan. And it doesn’t who you are or how much money you make, you need a plan for your money. 

So what exactly are the four ways a budget will help your life feel more fulfilling?

1. A budget will show you exactly where your money is going

When you make a budget, you will get to see exactly where your money is going. Start by going through your bank or credit card statements. List them out in categories like giving, housing, transportation, food, entertainment, insurance and debt. What categories are the largest? What are you most surprised about when you look at your spending?

A coworker of mine recently told me that his bank app broke down his spending so he could see it. You know what he found? He was spending upwards of $300 alone on restaurants per month! What! 

Fulfilling Way #1: Awareness

2. A budget will help you design a plan to pay off student loans (or other loans)

Since you now have a benchmark for your finances, you can use it to determine a plan to pay off your loans more quickly. If you were my friend in the previous section, I suspect you could drastically reduce spending in the restaurant category. Think about it. You could knock down the amount on your student loans (or maybe a mortgage) by over $3000 extra per year if you dedicated yourself to a plan. That adds up quick. Especially in interest saved.

Fulfilling Way #2: Freedom

3. A budget will help you set up a plan for saving 

You know how you’ve been telling yourself you can start saving when you receive the next paycheck? Well, this will make you do it! Savings fall into a few categories. One is saving an emergency fund, another is saving for general expenses (college, a car, a home) and the last is saving for retirement. If you don’t have a plan for saving already, make it happen. Get an emergency fund. Start saving for a house. Get involved in the 401(k) program at work.

In his book Profit First, Mike Michalowicz outlines his business plan where he says you must pay yourself first from revenue. That ensures you get paid and then you must figure out the rest of the expenses accordingly to fit with the rest of the revenue. I think this is how your budget must be. Savings is important. If you have trouble saving, have it automatically withdrawn from your paycheck or account into another account (like your 401(k)). Then you make the rest of your personal revenue work for the rest of your expenses. Don’t have enough? Cut something. Like restaurants 😀

On another note, I’m a Christian so my first thing I do is withdraw for giving. But savings is second and it’s taken straight out of my paycheck and put in another account.

Fulfilling Way #3: Security

4. A budget gives you a plan for giving

What do you value around you that needs financial support? Church? A nonprofit you believe in? A budget allows you to put your money where your mouth is!

As a Christian, I greatly value the work of my local church. So Bailey and I give regularly as a way to help them with the finances they need and as an act of faith on our part. Having a budget lets us know how much we can sacrifice. It’s not about giving what’s left over at the end of the month (that you didn’t use on restaurants). It’s about giving first and knowing how much we can put into other categories.

Fulfilling Way #4: Sacrifice

Side note: A budget will give you the freedom you didn’t think you had

I like to spend money but I also like to focus my saving. I can honestly say I would feel bad eating out at Chipotle if we didn’t already have a set amount of money we agreed at the beginning of the month would be for eating out. (Why all the restaurant examples? I love food. It’s as simple as that.)

People think that having a budget will take away the freedom they had before they had a budget. I am here to tell you that isn’t true! You didn’t have freedom before. It just appeared like freedom because you weren’t focused with your finances or were going into consumer debt.

Budgeting isn’t hard! It just takes some time. Don’t get frustrated with it. Just set up a general budget, track your purchases and income, then refine it the next month. It will work the kinks out if you are focused. Stay disciplined and it will work. I guarantee it!

What should I use to budget?

I personally like budgeting apps. I think they’re convenient. A few that are great possibilities are Everydollar, YNAB, and Mint. They all are available as apps for your phone but they also provide the convenience of being able to be used on your computer browser as well. Personally, I use Everydollar and have loved it.

You wanna Become the Expert? Master the Simple and a budget definitely qualifies as part of the Simple. And the essential.

How do you keep track of your money? Do you budget and does it work for you? I want to hear from you in the comments!

-Caleb

I wrote a lot more about finances in my book Graduated and Clueless. Check it out here!

Money Growth: How Much Should I Invest for Retirement?

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I had a low-key babysitting job when I was twelve but that income was entirely active income. Not a cent of it grew without me doing anything. I had to actually provide a service to someone in order to add to my piggy bank (ok, it was actually a doggy bank).

Retirement, however, is a passive form of income. When money is invested in something like a 401(k), it grows passively. Meaning, you don’t have to do anything. (For more information about a 401(k) and its tax benefits, check out my blog post.) You don’t have to do anything to make it grow aside from investing it in the right places. If you invest in a 401(k), you literally make money while you’re asleep. How ’bout that!

But how much do I need to invest in order to have a successful retirement?

First of all, the fourth “baby step” of the Dave Ramsey plan (if you have read my book, you’d know I’m a fan) is to put 15% of your gross income into retirement. That means 15% of your overall income, including your spouse’s, goes into your 401(k) after paying off all your debt (so that you pay off debt with more intensity).

Fifteen percent is generally agreed upon in the investing world to be the amount that will provide a reasonable retirement nest egg. However, depending on whose advice you’re taking, this amount does not include the money that is contributed as an employer match. If your employer matches 5%, don’t put yours at 10% and call it good. Do the full 15% of your income. That way, the employer match will just be icing on the cake when you hit retirement. Now, 15% feels like a lot (it is, especially for young people). You will likely have to work your way up to it. Currently, Bailey and I aren’t contributing 15% because we are also cash-flowing her school and are saving for a house. But 15% is the goal.

 

Let’s look at a pretend real-life example of how much to invest.

Let’s assume that you, at age 22, just graduated debt-free and your overall income is $50,000 per year. By the 15% rule, you would be putting $7500 into retirement per year ($625 per month). If you invested that at an 8% return and never got a raise (not likely), you would have $2,669,622 by the time you turned 65. The best part is that $2,347,122 was growth from interest! And that’s not even including employer matches. That’s remarkable!

That amount of contributions may be unrealistic for you. I know it is for us currently. If you could only afford $100 per month to put into your 401(k) at an 8% return and never increased the amount you contributed, you would still have $427,139 by the time you turned 65.

There is a very high likelihood that you will get a raise and that you’ll be able to contribute more than $100 per month (plus, in today’s money, $427k won’t get you very far in retirement). To put you just over $1,000,000 (making you a millionaire if you are debt free), you would only have to contribute $250 per month. Again, your contributions would equal only a fraction of the full nest egg when you reached retirement. Then, in retirement, you would (hopefully) be able to live off of the yearly dividends that your retirement account produces in interest.

On a $1,000,000 account, assuming 8% interest, that would provide an $80,000 income. Plus, it’s quite possible to get higher than 8% in interest!

 

Chris Hogan, a retirement expert, says this in his book Retire Inspired: “Retirement is not an age. It’s a financial number.” I like that quote quite a bit because we’ve been seasoned to believe that we have to put 40+ years into a job we don’t like (jobs and passion is for another blog post) in order to live comfortably for the last 20 years or so of our lives. But according to Chris, if we know what financial number we are shooting for, we can retire earlier.

On Chris’s website, he has an excellent tool to calculate your R:IQ (Retire Inspired Quotient). In it, all you have to do is answer some simple questions about your goals and desired living arrangements and it’ll give you an amount of savings you should shoot for and the amount you would need to invest monthly to hit it. Check it out here!

What are you doing to save for retirement? What are your concerns about the subject? I want to hear from you in the comments!

-Caleb

How to Avoid Being Old and Broke (And How a 401k Can Help)

cash-cent-child-1246954I wasn’t very good at saving as a kid. Money burned a proverbial hole in my pocket. I liked to get gum when we went to the grocery store because it felt good to spend a dollar. To this day, I tend to be a spender. In fact, in our budget, Bailey (my wife) and I call the money allocated to spending as our “blow funds” because it is for us to literally blow on anything we want. What makes me different from when I was as a kid is that I actually have a budget now to control that spending urge. I’m more future-focused! And part of being focused on the future is saving for retirement. That’s where the 401(k) comes in.

What is a 401(k) anyway? It is a saving system that allows you to invest money you earn so that it can exponentially grow for the future. This is how it works.

A 401(k) is offered by most employers. If one signs up for a 401(k), it gives the individual the opportunity to put a percentage of each paycheck into a retirement account. For me, I have my employer put 10% from each paycheck into my 401(k). This is called an investment because it will grow within the account. Generally speaking, one can expect a 7-10% rate of return on their 401(k) if the money is invested into good growth-stock mutual funds.

This is where the big bonuses of a 401(k) come into the conversation. They have major tax benefits! There are two kinds of 401(k)s: traditional 401(k) and Roth 401(k).

The traditional 401(k) is tax-deferred. This means that one defers paying tax to a later date and thus, the money put into the account is pre-tax. So when an employer directs 10% from an employee’s paycheck into the traditional 401(k), no tax is paid. In retirement, however, taxes must be paid when withdrawals are made.

The Roth 401(k) is similar but the employee pays tax before the employer directs the hypothetical 10% of the paycheck into the account. This means the money used is post-tax.

But when money is withdrawn in retirement, it is not taxed.

Let’s make this easy. Say you are able to save enough for retirement that your 401(k) is able to grow to $1,000,000 (which really doesn’t take much saving). Generally speaking, over a 40-year period with a 10% rate of return, you would have contributed 8% of your savings and the rest of it would be growth. So..

Contributions: $80,000

Growth: $920,000

Total: $1,000,000

With a traditional 401(k), your contributions would be pre-tax. Thus, you wouldn’t be taxed on your contributions, but when you retired, you would be required to pay taxes on the entire $1,000,000. This means that if you were in a 10% tax bracket, you would lose $100,000 to taxes and would have only $900,000 left.

With a Roth 401(k), your contributions would be post-tax, meaning you would pay taxes on only the contributions. If we assumed once again that you were in a 10% tax bracket, you would pay $8000 in taxes on your contributions but wouldn’t have to pay anything on the growth.

Here’s a summary on taxes paid:

Roth 401(k): $8,000

Traditional 401(k): $100,000

Now tell me, which would you rather pay? And which 401(k) do you think is better?

In some coming blog posts, I’ll cover the amount we want to save for retirement and what we can expect in growth.

I want to know in the comments, are you saving for retirement? What are your dreams for your “golden years”? Bailey and I want to travel. Let me know what you think!