There are times when the writing here at a Better Financial Blog gets a little tricky. We serve clients of all walks of life, all level of income, and at varying stages in their investment efforts. It can become difficult at times to write posts that span this audience. But during those times I am reminded of something that a trusted friend told me long ago. Long before I even entered into this line of work. He said that the fundamentals of anything worth mastering can never be heard too much. His point was that the fundamentals are such because they build the very foundation of the thing that we are trying to master.
How to budget and save money. That question is why I even bring the above up. I get asked how to budget and save money in my dealings with my clients, potential clients, and friends or family that may or may not be clients but always try to look for some insight from my experience. Believe it or not the question of how to budget and save money comes not only from those just getting started on their financial plan, or from those who have maybe been recently derailed, but also from clients and acquaintances who have been saving for years. Admittedly this latter group’s perspective is slightly different, but the core of the question over how to budget and save money is the same. And ultimately it comes down to a single element. Cash flow.
Control is what people first think of when considering how to budget and save money, but it isn’t necessarily control that is at the heart of the issue, but rather the mastery over the nature of cash flow. Understanding the details of where every penny is headed in your day to day, and more importantly the nuance of how those pennies flow, provides the individual with a greater sense for what their cash flow truly represents. What does discretionary spending look like, what is the tolerance for minding cash flow in any one direction or another, how are monthly expenses managed. What I try to do with my clients is not try to exercise control over their cash flow but rather to increase their confidence and knowledge of their cash flow. These 5 steps help to answer the question of how to budget and save money.
Monthly Reconciliation: Even my most financially successful clients can fall into a trap where they are not habitually reconciling their cash flow each month. When they do they quickly discover the categories of their expenses at a much more discrete level, allowing them to direct their money better towards their financial goals.
Automate Payment While it is a common cliché to say ‘pay yourself first’ it is not often said how one should pay themselves. If a certain amount of income is not automatically placed towards savings each month then the likelihood that it will ever make it there decreases. Automating payment to oneself is the best way to answer the issue of how to budget and save money.
Feel the Budget: It would be easy to say the answer to how to budget and save money is to actually have a hard copy of the budget up on the refrigerator that you use as your monthly compass or guideline. But too many drop this habit more quickly than a new year’s resolution. Instead what successful savers tend to do is to commit to a period of time where they live strictly by the budget in a way where they learn what it feels like. Three months is what my clients say it typically takes. Once the ‘feeling’ of living in the budget is established this instinct tends to keep people on track.
Have a savings plan I know sounds obvious, but when people want to know how to budget and save money, the best approach is to actually have a plan. And it is not enough to have a plan that is static in nature, rather it should be laced with contingencies, and a pragmatic look on factors that are uncontrollable like taxes, inflation or interest rates.
Do Not Isolate: Savings plans should not be an approach where the different techniques are completely isolated from one another. Savings must act in concert. So while obviously it is wise to have differentiating investments, those investments must operate in a complimentary fashion.
These five steps should help anyone learn better how to budget and save money regardless of how mature they currently are in their current habits. It is more like fitness than it is say just knowing how to ride a bike. The latter, as is commonly said, is mastered one time. The former, however, is something that continues with commitment.
photo credit: HeedingtheMuses