Learn to Budget (Part 1): Where do you start with a budget?
A video by Two Cents on YouTube. I really like watching them when trying to learn financial concepts lol.
I wrote this blog post the other day, and I got the feedback that it didn’t have anything to do with budgeting (the original title was “What do my wife and I do to help with budgeting”) between a couple. I realized that that Redditor was right, it kind of didn’t. So I decided to write this to share my experience of what it was like to start living together with my wife and what hurdles we had to overcome to reach the point we are now. Also, on how to make a budget.
This is about how you should consider the feelings of dealing with money, because I have heard over the years that the emotional / behavior side of money has far more influence than the mathematics side of it. It’s how Dave Ramsey came up with the debt snowball system of paying off debt vs the mathematically better debt avalanche system. If you want a great video to watch about how our emotions play with our money you should check out this video by the youtubers TwoCents. I really enjoy listening and watching them when trying to get a high level understanding of different financial concepts.
So with just TALKING ABOUT FINANCES AND LISTENING TO OTHERS OPINIONS ABOUT THE TOPIC, I too have come to believe that you first need to understand your own (and your S.O’s) relationship with money before your can even start looking at the math behind it. Because the harsh reality is that the math will always win. However, if you feel better cause you actively chose to learn about and save money and stuck to the path you chose from understanding yourself, then you’re already 80% closer to where you need to be with starting a budget.
Step 1: Consider Your History. Be HONEST with yourself and understand your relationship with money.
This is an important step if you are trying to start a budget. You need to take into consideration your history before you even start making a list of monthly expenses. This is even more important when you are trying to start a life with someone that you love because you can’t understand “US” if you don’t even understand yourself. You need to look deep and see why you do the things you do with money and understand that life has just taught you differently than others. Here are some examples of behaviors I’ve run into throughout the years.
1) WORK HARD PARTY HARD: I’ve known one of my best friends since elementary school. He and his wife are the definition of’ “work hard, party hard.” Together they easily pass $300,000 annually, but they used to spend more on their rent than my entire monthly budget. He wants to work until he’s 65 while saving slowly for retirement so that he can enjoy life to the fullest. His whole life he witnessed his mom work hard and save only to pass away without being able to enjoy it. That experience changed his relationship with money.
2) LONG TERM PLANNING: I personally have always been the guy that doesn’t mind short term pain for long term gains. I play mages / archers in games because their DPS (damage per second) usually outweigh fighters and tanks in a lot of MMORPGs at the end game. In MOBAs, I like to play characters with high farming potential and survivability even if they are bad at the beginning of the game. Basically, I like playing the long game and paying upfront for things. So planning ahead of time and looking 5 years down the line comes naturally to me. This was just part of my nature. This is because I like to have things work automatically for me when I am doing nothing and this was just something I did even when I was child.
3) I’M NEVER EVER F****** GOING BACK: When I was younger, I lived in my aunt’s house before my mother and I could rent our own apartment. My mom worked 3 - 4 jobs everyday. She did it so she could save money, provide for us, and invest in the future. Guess who had to wake up at 4 am everyday to help her on her morning delivery runs? Who helped carry sushi into the grocery market at 4:30 am so that she could stock the shelves? After school, who stocked our deli fridge with drinks and our candy rack with new boxes? Who played in the back of the commercial property until closing and then went to a baby sitter until 10 PM while waiting for mom to get done with her waitressing job. I witnessed what it took for first generation immigrants to survive. Not only did I witness it, I was part of our survival. This has affected me quite a bit, which is probably why saving for the future is much more important to me than the average person because I don’t want to put my kids through the same thing.
4) ANALYSIS PARALYSIS: My wife, by her own admission, has been very sheltered in her life and she has inherited a lot of her families ideals. Her family came from another country as refugees and they are all very conservative. They just want to depend on each other and what they have at the moment. However, the fear of change really makes them anxious and nervous about what the future might hold to the point where they fight against it many times. When my wife and I had to move up to the bay for my new job, I had to prove to my new father-in-law that I had the income and the ability to take care of his daughter (he made copies of my offer letter). At the same time, my new mother-in-law told me that my wife had to stay home for another year before my wife moved because my mother-in-law needed to teach my wife household chores. Now this example might be about big life decisions, but they have the same attitude towards money as well.
5) NO ONE TAUGHT ME AND NOW IT’S TO LATE: Yeah, it’s crazy that we go through high school and no one taught us how to budget or handle our finances. What does it means to take out loans? Credit cards, car loans, and mortgages are all different. I mean I was fortunate enough to have an AP (Advanced Placement) Government teacher that taught me when I was a Senior the true cost of mortgages. However, in my 17-18 year old mind, that only comes with buying a house. There is no way getting a car loan or a credit card is the same thing. Plus, when I finish college I’ll make enough to pay all of these things off, but I need student loans first. Before you realize it, you feel too far back to even catch up, the world seems like it’s closing in and you just give up and accept that loans will forever be part of your life and it’s no big deal. Or Maybe you feel like learning is too much trouble and you can worry about it later. It’s all the same.
6) WHAT ARE THEY GOING TO DO? COLLECT WHEN I’M DEAD?: Yup, had a community college professor once told me to get all the credit cards I could. SPEND AND LIVE LIFE TO THE FULLEST AND WHO CARES? (They didn’t have any children).
7) EVERYONE ELSE IS DOING IT: An old friend that I used to talk to a lot back in the day used this a lot. Everyone has a credit card so it can’t be bad, I’m just building my credit. Everyone else got a car loan for their new car, I deserve one too. Social Media is a big component of this, it’s easy to see everyone in their best moments and want the same thing. I didn’t even know Gender Reveal Parties were a thing until a couple years ago, but now it seems like everybody wants one. Everybody does everything and to keep up, they need to spend the money too.
There are limitless examples of how people live, but when it comes to finances I find a lot of people fall into the categories above. You might even have more than one. I put these examples up here to show you that everyone has a different perspectives when it comes to money and how to spend it. You need to understand yours before you even consider starting a budget. If you do that, the numbers will give you perspective so you can truly ask yourself. “Do I need this to make me happy?”.
Step 2: Make your goals
Once you take a look at yourself, you need to make your own goals. Do you want to retire early and only work on things you enjoy? If you want to take it slow, how much do you have to save to have the life you want? Do you want to see the Northern Lights? Travel through Asia and Europe?
Before the next step, you need to look at what you want from money and life. You don’t need to achieve these goals right away because a lot of them will probably be long term goals that could take years, but REALLY ASK YOURSELF AND CUT THE B.S. OUT: What would it take to make ME happy? Does the prospect of possibly getting fired and not having to worry about another job sound good? Do you want to live like the crazy billionaires and fly on private jets around the world? There are a bunch of goals out there that people think about that relate to money. Don’t worry about how to get there yet, just ask yourself what is the minimum it would take for you to be happy. I’ll go ahead and share mine.
Everyday Goal:
As it currently stands, what it would take for me to be happy would be to not have to worry about my family’s finances. This includes something happening to my income. I don’t mind living in a 2 bedroom 2 bath condo with my wife and 2 kids (probably 3 in the future). I don’t mind having only a single Honda Civic. I want to be by our best friends and families because my wife and I think family is SUPER important (Come on best friends are basically family). I LOVE to cook for my family rather than eating out, but sometimes I’m just to lazy to do it. So having little bit of eating out money would be nice too. Still, I could cook everyday if that was a sacrifice I had to make. Lastly, I want to be able to take them to Disneyland (HUGE DISNEY FAN, wife not so much :( ) once a business quarter, but I could settle for twice a year HAHA. The Zoo is also cool. Sea World and Legoland are down the street also. So maybe Disneyland twice a year with the others mixed in since it’s cheaper. That’s what would make me happy. HAHA! Something simple with all the important people near me, I could deal with and chill.
Long Term Goal:
I want to go see my uncle in Korea and visit different places of Asia for the FOODDDDDDDD!!!! Naples for pizza, I heard from my Italian brother that it was the best there. The Northern Light are a definite yes. The rest of Europe is just a nice to have honestly. However, the everyday goals are much more important than the long term goals at the moment.
P.S.: Make sure your goals are your goals. No one can touch them then, they can change over time if a different opinion has affected you. But you need to be good with what you want. Seriously, F*** every else and what they think of what you want. If they aren’t taking care of you some how at the end of the day, they don’t get to have a say.
Step 3: Talk it over with someone
Once you’ve reflected and have a couple goals in mind, I think it’s important to talk it over with someone. You’ll find someone that likes to talk about finances and you guys can learn and talk shop about it. It’s okay to just say, “I’m just starting to learn” too. It’ll keep you educated and it’s a fun way to pass the time. You’ll be surprised that half of the conversation isn’t about the math, but the emotions that you feel from it. Are you a natural spender or are you a natural saver? Should you spend money on that broken car? Should I buy a used one or a new one? There will be a TON of questions and insights you will have. You should bounce off of all sorts of people to get their opinions and see if it makes sense for you and your goals. THAT’S THE MOST IMPORTANT PART. Only share what you’re comfortable with. If you and your significant other are serious about each other, they should know where you stand. You should also get answers from a community that has traveled your path before.
I went out with a couple of co-workers once for a drink. This older guy and I got into it about finances, he was old enough to be my uncle. We shared our different opinions of leverage and property investing and how I thought having less leverage and less property was the better investment strategy. He argued that more leverage and more properties was better. This conversation went on for a couple hours. We weren’t mad at each other, it was just a chance to get a different perspective. I really appreciated how he never shot me down because he was older or had more experience either. When we both agreed to disagree and ended our conversation, we finally realized that everyone around else around us had been tuned into what we were saying the whole time. It honestly was a little embarrassing for me because I have a fear of public speaking like NO OTHER. Luckily, we were just very engaged with each other that I didn’t notice. After the next few days though, people came up to us in the lunch room and started asking about whether or not they should buy houses, in this economy, with this market, at this time of their lives.
Now it’s time for you to look at the numbers, unless you’re married or thinking about marriage. If you are, go to Step 4. If it’s three years later and you thinking about it, go back to step 4. LOL DON’T SKIP IT!!!!
Got a S.O.? If so, Step 4: Time to talk it over with Your S.O. and set up a time to revisit your goals
This is the hardest part for a lot of reasons. The feeling of totally sharing and being vulnerable to someone is rough. (Remember that time you first told someone you liked them? yeah kind of like that but with money). Maybe you find it embarrassing, because you’re in debt. But working with your partner to get though it is better than trying to hide it. Trust me, I have experience with my wife dropping a debt bomb on me. Hopefully, though you have the kind of relationship where you can talk about these kinds of things and joke about it later on.
If you are seriously about getting a budget down and are married or thinking about getting married then this is a talk you shouldn’t avoid. Share with them your financial and life goals and what about your past and experiences lead you to where you are financially. They should do the same. Find the commonalities between them and use that as your baseline. I’ll share my experience with my wife and how we came up with our first plan towards coming up with a budget, how we hit a test of it from a couples stand point, and how it made us more ready to look hard at the numbers.
The First Plan
As I mentioned above, one of my families ideals (on my wife’s side) was to be super dependent on only themselves. So as a result she wanted to keep our accounts separate, but I saw how that hurt my mom and stepfather in the long run and was super against it. We talked about a prep-up if that’s what her family was comfortable with, even though they wanted one we both decided that it wasn’t for us. After a while, we agreed that we would keep the accounts separate, but have a single account that was for shared expenses. It was a good compromise when starting out I thought.
The income from the point when we were married would go into the shared account and 25% of that persons income would go to the separate account for free spending money.
We talked about our debt, like my student loans worth about $45,000 and how we would address them by using our current savings to pay off what we could with a good emergency fund that was comfortable for the both of us ($5,000 only). So after, we would about be $40,000 in debt just starting out as a married couple. (Really 50k though because she hid more private loans to her family that was worth $10,000, but that’s a story for later).
We talked about paying the minimum on the student loans until we have a strong baseline and know what our month to month costs would be like since we were moving away from home. (Remember I just got a new job in the Bay Area, so we got married and left in less than a month).
The lesson here is to talk about your experiences and view on money. You’ll eventually find something that the both of you can agree on. Compromise a little it’s fine.
Boundaries
Boundaries. They are a thing. One of the pain points that my family (on the wife’s side) had with our first plan was “The income from the point when we were married would go into the shared account and 25% of that persons income would go to the separate account for free spending money”. My income and my wife’s income has a difference of about 4x at the time. So that would mean, when I got paid I would get $400 dollars in my free spending account and my wife would get $100 dollars when she got paid into our spending accounts. My wife told me that my father-in-law and sisters-in-law thought it was unfair. I was pissed to say the least. I mean they didn’t know how I spent the money (I still paid for all the dates and outings from this account because I still thought of it as our money. I would also use this chuck to pay for my student loans.), they just assumed that I was cheating our system at least that’s how I took it. However, my wife had my back. She told them that this wasn’t any of their business and this was what she and I agreed to and that she was happy with it. She got a good massage that night LOL.
The lesson here is to find something that you and your better is good with. No one else should get in the way of that and poisonous thoughts of how you should have more or less isn’t on them, but on the two of you.
Revisiting Our Plan
After about a year, my wife and I came to the conclusion that simplifying our expenses would be best for us as a couple. A year away from our families influence on both sides really helped us see how we like to do things. This is where we decided to talk about our goals at the beginning of every year and how to form our finances to help us hit those goals. Luckily, her goal of being self-sufficient as quickly as possible matched mine which made it easier for us to work together to combine our accounts and close the ones we no longer needed. We decided to have a unified “Fun” portion of our budget, where we ask each other if we can buy this things and it usually came about to 50/50 most of the time, but we viewed it as us gifting each other the little things if one spends more than the other.
We also realized that now is a good time to really focus on our goals and how to achieve them, which was when we finally started to look at the numbers.