Recently I started a series on how you can create financial invulnerability — a sense of financial security that is so strong, so certain, you feel invulnerable to anything that might come your way.
Step 1 was to start building a 1 month buffer in your bank account, as the start of an emergency fund.
But as you do that, your bank balance will naturally begin to grow, which will make you wonder, “How much of this money is actually OK to spend?”
I suggest keeping the 1 month buffer in your primary checking account, since its whole point is to act as a cushion. But then you have the inevitable question of, what money belongs to your buffer and what is safe to spend?
That’s why step 2 is to make a plan for your money.
Here are the posts in the financial invulnerability series so you can jump between them as necessary:
- Step 1: Stop living paycheck-to-paycheck
- Step 2: Make a plan for your money
- Step 3: Save for your true expenses
Why Your Money Needs a Plan
You might rebel against the idea of bringing any kind of structure to your money. You want to be free to spend what you want to spend, when you want to spend it.
I get that, and have occasionally felt the same.
But there is actually great freedom in bringing structure to your finances.
How I Was Introduced to Budgeting
Let me tell you a bit about my situation growing up, first.
My mother was… very bad with money. We live in a low cost of living area, and she made a good bit to comfortably put us in the middle class. But, she just managed it horribly.
She was never able to save money. Every penny in the bank was up for being spent. It was not unusual that she would go out and make some large purchase, only to complain when some bill came due a week later that she wasn’t expecting (but really should have been expecting). There were even a few times when the electricity or gas would get shut off because she forgot to pay it, or simply couldn’t.
She was a bit of a negative role model for me in that way: I knew I never wanted to handle money like that, and so I set out very early to learn how to manage money responsibly. And so it was that I was introduced to the idea of budgeting, as early as 2007 when I had a bit of my own money to manage.
It might sound like I’m criticizing her and I’m really not trying to. She was never taught effective financial principles and so she managed it in the only way she knew how. I just knew I needed to learn to do better.
The pendulum has probably swung a bit too far in the other direction for me, as I’m a meticulous saver and don’t like to spend a lot (just ask Christine).
Yes, Your Money Needs Structure
I tell the above story because it’s not uncommon to see a pile of cash in your bank account and not know what to do with it — or to feel a bit too free to spend it.
We all know someone (or may be that person ourselves) who receives their paycheck, splurges on some big purchase or a fun night out, then by the time the next paycheck comes barely has any money left over.
Step 1 of this series should take care of some of that at least and reduce the risk of overdraft, since there will be a growing cushion in the bank account. But there’s still the same amount of, let’s say, spendable money from month-to-month despite that growing cushion.
You might sincerely ask, “What’s the problem with spending all my money each pay period?”
Well, nothing, as long as you never want to get ahead or never anticipate financial emergencies.
But I can think of a few reasons why you might not want to spend every penny:
- What if your car breaks down and needs repair?
- What if someone in your family needs to go to the hospital and your insurance doesn’t cover all the costs?
- What if your pet gets sick and needs to go to the vet?
- What if you’re invited to a wedding and suddenly need to come up with money for a gift?
- What about that thing called Christmas that comes around every year, and now you need to buy gifts for everyone, spend on decorations, and a million other random expenses? (Note: not a big fan of the holidays in case it wasn’t obvious.)
- What if you’d like to buy a house one day and get a good rate on a mortgage, so would like to have a large down payment?
- What if you want to retire one day and social security won’t be enough to live the lifestyle you want?
When you spend every penny now, you are literally robbing your future self. You are preventing your future self from having the experiences he or she would like to have.
It’s Not About Restriction
It’s easy to dislike budgeting because it feels restrictive — like someone or something is telling us what we’re allowed to do with our money.
But it’s not that at all. It’s about your priorities, and remaining true to those priorities by reflecting them in your budget.
If one of your priorities is to go on vacation next year, then you need to be sure you’ll have enough money for that trip. If you spend all your money now and each paycheck, then come time for that vacation, you don’t have enough and so can’t have the experience you wanted to have. Or, worse, you decide to do it anyway and just put it on your credit card, causing yourself to go into debt.
Instead, imagine every month for the next 10 months you set aside $150. When that vacation came around next year, you’d have a stress-free $1,500 available and just sitting there to be spent. Sure, maybe you had to cut back a bit in the meantime, but if your priority was really to go on that vacation, then that wouldn’t really bother you. You’d understand that lower priority items wouldn’t get as much funding until your vacation was fully funded, and so it’d feel like freedom and empowerment, not restriction.
That’s the power of a budget: you get to decide what’s truly important to you, given the amount of income you have flowing in now, and decide how to allocate that income to your various priorities accordingly.
Give Every Dollar a Job
When I first was introduced to budgeting, I came across a budgeting methodology called YNAB (You Need A Budget).
The very first rule of that methodology is “Give every dollar a job” — basically what I’ve been discussing in this post.
That means you have no pile of random cash lying around. Every dollar — every cent even — is allocated for some purpose. You know exactly what’s safe to spend for what purpose, because it’s already been allocated in your budget.
You don’t necessarily need YNAB the software to do this for you: you can easily do it in Excel or whatever other method you prefer. But the software does make it a lot easier, and I suggest it to all my clients (both individuals and businesses alike).
But basically it works like this: say you receive $5,000 per month. Your budget might then look something like this:
You’d go category-by-category until the amount remaining was $0. If there’s not enough left for something you wanted, either you need to reprioritize or put that off to the future.
Then when you go to pay your electric bill, for example, you see there’s enough in the Electricity category to pay the bill so can pay it without worrying that there won’t be enough for something else.
Or when you want to have an easy dinner and just want to order in some pizza, you can look and see there’s enough in that category to do just that, and you can do it guilt-free. Your priorities don’t just have to be “responsible” things: they can be anything you want that is important to you.
Your budget basically creates order out of the chaos of having a pile of cash in your bank account.
Doing this forces you to be extremely honest with yourself. Your budget doesn’t lie: even if you have thousands in the bank, if the budget says there’s not enough for something, you know the money is allocated to something more important to you. Or, you choose to reprioritize and so reallocate the cash.
“But the LOA Says There’s Limitless Abundance”
Giving every dollar a job might feel very uncomfortable for those who are familiar with the law of attraction. It can feel like scarcity whenever there’s only so much money to go around, and not enough for everything you’d like.
It can be easy to think, “Well, those LOA teachers say that there is infinite abundance out there, so I’ll just spend this money and not worry about it.”
And this is such a careful balance to keep. Because, it is important that you feel abundant in order to attract more abundance in your life.
But, that doesn’t mean you can just treat your money as though there’s an infinite supply of it right now. I call that hope-based budgeting: spending freely now with the hope that more will show up later.
I believe first and foremost that the LOA requires radical honesty with yourself. You might not like the amount of money you have in the bank right now, but you have to make peace with it and be open to more coming to you.
What you don’t want to do is pretend that you have more than you have, and so make poor financial decisions that will come back to bite you later.
What making a plan for your money does is to make the most of what you have now, while still being open to more arriving in the future.
You can say, “OK, maybe I don’t have enough for that trip I’d like to go on yet, but the next time I manifest additional money, I know exactly where to allocate it in my budget.”
Your budget can be a tool for creating greater abundance, instead of the tool of scarcity you may have believed it to be before.
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