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What Everybody Ought to Know About Budgeting

Well, it’s finally here. The moment you’ve all been waiting for… a global pandemic! Wait that’s not right…

The situation that is taking place currently in the world is mind-boggling. We have people not knowing where their next paycheck is coming from and for most Americans that is going to be a problem.

Forecasts are showing that in the month of April alone, there will be anywhere from 500,000 to 5 million people laid off from work. To give you some reference, the worst month regarding job losses during the financial crisis was in March of 2009 where we saw 800,000 (according to CNBC).

😲 The Unsettling Truth

When I say “most Americans” let me tell you the statistics behind that phrase. As I’m sure you’ve seen on my homepage, 78% of Americans live paycheck to paycheck. This means that over three-quarters of our working population do not have money saved up for a rainy day. Let alone the many rainy weeks we have ahead of ourselves during this pandemic.

Another statistic to look at is from a December 2017 study of American households done by the Federal Reserve Boards’ Survey of Household Economics and Decision-making. This survey of 12,000 Americans found 40% of adults could not cover an unexpected expense of $400 without selling something or borrowing money.

When I was first presented with these facts, I honestly was beyond surprised. I’ve always been a pretty intentional buyer and am pretty frugal overall, so for me, I could never see this as a part of my reality. I also couldn’t believe it because the United States is the best country in the world to grow your wealth and become successful.

Before I go further, I must say that I understand there are various socioeconomic hurdles the marginalized demographics in this country have to jump through to be able to achieve large levels of success. These cannot be discredited for what they are. However, I believe there is something plaguing nearly all Americans that needs to be addressed.

🇺🇸 American Consumer Culture

We have a serious spending problem in this country. In the FINRA Investor Education Foundation’s Financial Capability in the United States 2016 report, it was found that Americans are increasingly happy with their financial situation, yet the amount of spending proportional to the average American’s income has increased slightly.

In this study, it was found that only 40% of America spends less than their income. That means 60% of Americans spend equal to or more than their income. This is a crazy statistic when you think about it.

Maybe it’s the way my parents taught me and how I was raised, but the thought of spending more than I had has always sounded like the wrong thing to do. Maybe my parents only taught me that because they grew up in immigrant families who were frugal due to years of conditioning from their lives as farmers in Italy and Greece.

Even with all of that in mind, however, I believe the amount of overspending in this country is a problem. When the most financially successful country in the world has more than half of its population on the verge of being broke, then maybe it’s time the people look at themselves in the mirror.

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💕 Instant Gratification

The average American, as shown by the statistics, grows up in a consumer culture unphased at the thought of spending all the money that’s in their pocket. When I was growing up, you would see kids who receive $5 and immediately wanted to go spend it on candy or some small toy.

As people get older this habit then turns into spending money on small things that people find cute, funny, or cool when they are out grocery shopping, looking to update their wardrobe, or shopping online.

People get their tax refunds and immediately think of ways they would spend that money. The same can be said for bonuses at work. The average American is more caught up with how they are going to spend that money rather than simply saving it or investing it in the stock market.

Yet in the same token, I would probably be a multi-millionaire by now if I had been given a dollar for every time somebody said the phrase “I can’t afford that”, “that’s too expensive” or “I wish I had more money”.

Based on the various forms of research I’ve done on health and wellness and the psychology of our current consumer culture, it’s become clear to me that people spend as a habit rather than giving themselves something they actually will enjoy.

People don’t think long term as to whether a purchase decision will actually be a good thing or not. They impulse buy things they never end up using and then wonder why they don’t have money to spend on the big-ticket things they really want and bucket list items they actually want to do.

Buying the little things on a daily basis not only adds up to a lot of money being spent on things you don’t need, but it is a bad habit to get into for your overall well-being.

I think this is something that is missed when people give out advice like, “it’s ok to spend money on the little things as long as you don’t waste money on big-ticket purchases”.

If you think about it conceptually and from a psychological perspective, if you train your brain to constantly buy things as if they have no price label and just because you want it, it’s going to be even harder to get yourself to not spend money on big ticket items as you accumulate the income to be able to buy those things.

Actually, in many cases, you may just put it on a credit card because you are so desensitized to the thought of buying things with money you don’t have.

The Coffee Expense Epidemic

Let me give you my favorite example. This will cover not only people spending money simply for the purpose of spending it but also to show you how much people could be saving over long periods of time. It will push forward my point that the average American does not think long term when it comes to their purchasing decisions, but at the same time wants more money.

So, to start this example off, I’m going to compare the average cup of coffee price when you make it at home versus buying it at a shop. Buying coffee can cost you anywhere from $1 to $5 per cup while brewing coffee at home costs about 16 to 18 cents per cup.

With some math taken from Business Insider’s article on this subject, you will find that someone who buys coffee will spend between $5 and $25 a week, which is about $20 to $100 a month. This adds up to a grand total of between $240 to $1,200 a year on coffee.

People who make coffee at home, on the other hand, spend around $45 a year on coffee. So, do you think the difference between $45 and $1,200 is a big difference? I would most definitely say so.

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A great video I watched on this topic, by one of my favorite content creators Graham Stephan, talks about this topic in-depth. He even gives a great explanation past the point of where most people get lost on how not spending money on coffee can actually have a huge long-term payoff.

When you look at it in the short term, let’s say you are spending $2.50 vs 20 cents on a cup of coffee. One of those is 12.5 times more expensive than the other. When you look at it from this perspective, can you really justify buying a coffee will bring 12.5 times greater of value to your life? I sincerely hope not.

The same can be found in anything you overspend on in your life. The reason self-made millionaires got to where they are is that they place emphasis on value and putting their money to its best use. This habit also sticks with them after they have made their money so they don’t end up spending it all.

As Graham says, “What gets results in finance much like in bodybuilding is discipline and consistency“. He goes further on to talk about how it’s ok to have a cheat meal every once in a while in order to keep your sanity, but doing it every day defeats the purpose overall.

My favorite thing he goes over in this video is the basic idea of investing $5 a day with the money you don’t spend on the little things. If you invested $5 every day for the next 45 years and got a 7% return adjusted for inflation, you would have over $550,000 when all is said and done.

So, the next time you think spending money on the little things doesn’t matter, just think about your retirement fund that is getting smaller with each and every purchase of overvalued goods.

One day you will want to stop working and the money will stop coming in. I for one would rather have home-brewed coffee when I’m working than cat food when I retire.

💰 Budgeting’s Negative Stigma

The common view of budgeting for most Americans is that it is living a life of deprivation. Restricting what you eat, what you wear and how you live in every way possible.

What budgeting really means is spending your money wisely and in a value-driven way. It means not living above your means so you can steadily increase those means over time and never be stressed about the thought of losing your job again.

By simply spending less money than you are making and strategically saving that money, you will achieve your financial dreams. Most Americans have a stagnant or slowly increasing income and as the statistics show, spend what they make or more. How in the world can you become financially successful with that lifestyle? Do you think you are magically going to fall onto a pile of a few million dollars walking down the street?

So, when you think to yourself that budgeting would be a bad thing and your life would absolutely awful, ask yourself a few questions. Is your life amazing now? Don’t you keep saying you wish you were rich? Are those needless purchases actually adding value or happiness to your life? The answer to all of these questions is most likely no.

I want to make it clear that budgeting will require sacrifice, discipline and hard work. It’s not a get rich quick scheme but it is still a get rich scheme. Saving or investing money will get you rich while spending money will not.

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Before I dive into all of the different ways you can save money, I want you to take a look around your home and in your memories for a few things.

Look at all the different things you have and ask yourself, has this added value to my life? Look at all of the little knick-knacks you haven’t used in months or even years. Now think of the ones you have thrown out before. It starts to add up quickly doesn’t it?

Now start thinking of the different foods that went to waste in your fridge or the bread you had to throw out because it was moldy. Think of all the times you said yes to the drink or dessert at a restaurant when you probably could have said no, not only for financial but health reasons as well.

Think of all the money you wasted on rent in that first apartment before you got your own house. Could you really not handle staying at home for another year or two with your parents? Was it really so bad that it was worth keeping you in debt for 5 or maybe 10 or more years?

😶 Practice Saying No

I’m sure earlier when I mentioned the concept of investing $5 a day a lot of you thought it was too much money and impossible. I hope by the things I listed above you realize you are probably wasting close to that each week on the little things that add up every day.

I’m not saying you can never do those things but what I’m suggesting is to view your life from a lens that those things are a treat. If you had treated yourself 2 times out of 10 instead of 8 and all that money was deposited into your bank account, investments, and retirement fund, I guarantee you would be just fine with that.

So, the next time you have the ability to do it, say no. Deny whoever is asking you to spend money on things you don’t need. Emphasis on the word “need” by the way. Make it a part of who you are and be proud of it. Change your mindset to that of someone who does not need to live above their means.

Doing this on a daily basis will also make you less stressed in wondering how you can afford unexpected expenses or being laid off from work. With the world stopping like it is and the government being forced to step in, I’m sure more than a handful of people know exactly what I’m talking about.

📱 Budgeting Apps

Finding apps today which will help you budget is really easy. There are a few to choose from but I’d like to share with you the ones that are my favorites.

  1. Clarity Money (what I use)
  2. Mint

Both of these are great applications that break down your spending habits into various categories. They both give you a great view of what you’re spending your money on and also allow you to set a budget.

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These apps can add up your accounts into the app and help you break down the different kinds of money you have into things like: cash, investments, budget and even debt if you have any.

There are ways to stay on top of your bills and even cancel subscriptions to applications and programs you may have forgotten you are paying for.

I highly recommend checking both of these apps out and utilizing them to further understand your finances and build a plan to help you start building a better life.

🤑 Great Ways To Save Money

Most great ways to save money stem from not spending money you don’t need to. So, here I’m going to give you some tangible ways to do that.

First of all, let’s talk about the best way to avoid making impulse purchases. It’s a simple rule you can use in any situation where you feel like buying something. Whether you see something in the store or online and want to buy it, sleep on that purchase decision.

If you had no intention of going into that store to purchase the item, then you obviously don’t need it. Not everything you happen to find is “fate telling you to buy it” as I’m sure some people would say.

If you sleep on the thought of purchasing that item and still can’t get the thought of it out of your head, then maybe you should consider buying it after some further research. However, I can guarantee you most of the time you won’t think to buy the item the next day.

Avoiding these impulse purchases is huge because most of the time they are things you really can live without and are not adding much value to your life. It’s kind of similar to that time when you were a kid and your parents would tell you no when you saw a toy in the store and wanted to buy it. Most of the time you lived just fine with the toys you already had at home afterward. So why not do that when you are an adult and it’s your own money that would be wasted?

Another way to avoid impulse purchases is to stay off of Amazon and other eCommerce sites. If you have the intention to buy something you need, that’s fine but end it there.

Often times people will get sucked into purchasing an extra item based on the suggestions that Amazon gives you or their own mindless browsing. Make sure this isn’t you and stay off of these sites as much as possible.

This is especially true with clothing sites as they often will entice people into buying clothes they find cute or attractive that they otherwise would not have known existed if they didn’t open up that website. Make sure to remember, if you never would have seen it, you would not have thought to buy it and it is therefore not needed.

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My last piece of advice to save money is a little harder to understand for many, but can still be followed. It’s the concept of “On Sale (≠) Free“.

I’m sure you understand the feeling of seeing a huge sale online, through a window, or on a rack at the store and think to yourself, “They are practically giving these away”. Guess what? They aren’t giving it away because you still have to pay for it.

Unless the item is something you have been intentionally saving up for, then avoid making impulse purchases on something just because it is very low priced at the moment.

Sales were created to trick you into buying things you otherwise wouldn’t. Do not let the stores psych you out and win in this situation. Stay strong and say no. In almost all cases you don’t need whatever they are selling.

📖 Learning From This Situation

I believe this coronavirus pandemic came to this world for a reason. I believe too many people failed to realize that the life they were living was too risky overall and that led to the situation we are currently witnessing.

Just look at how the markets reacted to the thought of everyone in America having to wait a few more days to receive a relief stimulus package all because they stopped working for a week or two.

It’s been great to see all these celebrities, sports stars and organizations step up to help out those in need, but let’s go above and beyond that starting today. If each and every one of us does our part to properly save our money, invest, and not overspend, then the next time we are in a situation like this we will all be better off.

While nobody knows if something like this will happen again, one thing is for certain, we need to be better prepared just in case it does.

With that being said, I wish all of you the best in these hard times and hope nothing but happiness and health to you and your families. Let’s hope that we can all learn something from this and come out better for it.