RPF0408-Budget_Categories
00:00:00.000 | You need a budget, and the new year is a great time for you to be starting and perfecting
00:00:07.000 | your budget. Conveniently enough, since today I'm talking to you about budgeting and sharing
00:00:13.740 | with you how I do my budget, today's show is sponsored by YNAB. You need a budget, the
00:00:20.240 | world's greatest personal budgeting software. Get a free 34-day trial at radicalpersonalfinance.com/ynab.
00:00:29.880 | Today's show is also sponsored by Libsyn, the podcast host that I use and the podcast
00:00:34.300 | host or media host that I recommend you use. Get your first month of service for free using
00:00:40.400 | the promo code radical, Libsyn, L-I-B-S-Y-N.com. Use the promo code radical. It is a new year
00:00:47.400 | and budgeting, I'm sure, is one of those things that's at the top of your to-do list.
00:00:59.840 | After all, budgeting is essential at every stage of wealth. Today I'm going to share
00:01:03.460 | with you some specific tactics, including even the categories that I use for my own
00:01:10.380 | personal budget.
00:01:27.760 | Welcome to Radical Personal Finance, the show dedicated to serving you with the knowledge,
00:01:31.800 | skills, insight, and consistent daily encouragement that you need to live a rich and meaningful
00:01:37.880 | life now while working on your plan for financial freedom in 10 years or less. My name is Joshua
00:01:42.880 | Sheets and I'm your host. Thank you for being with me today. Today we're going to
00:01:46.320 | be very, very practical. Yesterday's show was a little bit about big picture, RVs and
00:01:51.640 | all that. Today, let's teach you how to budget for an RV or anything else that you want.
00:01:58.640 | As we begin the new year, I hope that many of you are taking a fresh look and fresh,
00:02:05.640 | dedicating yourselves afresh to the nuts and bolts of finance. It's important to always
00:02:12.160 | remember that as fun as it is to think about new subjects and as fun as it is to learn
00:02:17.480 | about new ideas, oftentimes those ideas are more interesting than they are useful and
00:02:23.120 | practical.
00:02:24.760 | Although I'm a huge fan of interesting and even esoteric ideas, I want to stay practical
00:02:30.320 | because the fundamentals of finance are always, always important and you need to consistently
00:02:37.320 | execute on them in order for you to be able to accomplish your goals. The basic fundamental
00:02:45.920 | skill that you need to build wealth is the skill of budgeting. If you are not excellent
00:02:52.920 | at your budgeting, no matter how much or how little you earn, you will wind up spending
00:02:58.920 | all of it. And because you wind up spending all of it, you'll be in a situation where
00:03:03.620 | it's unlikely for you to be able to build wealth.
00:03:07.320 | Remember there are three things that are instrumental in your wealth building journey. Your income,
00:03:13.800 | the level of it, how high, how low, your expenses, how high and how low, and your investments.
00:03:20.800 | But in order to manage your income and your expenses, you need a budget. Now, I have talked
00:03:28.400 | in many shows about budgeting and I've talked about different approaches for budgeting.
00:03:34.400 | Budgeting is one of the most freeing things in the world and I can't do any better than
00:03:38.360 | – I don't know who to ascribe it to, but I can't do any better than the saying that
00:03:43.220 | often goes around the personal finance world that a budget is simply telling your money
00:03:46.200 | where to go instead of wondering where it went. If I knew who originated that phrase,
00:03:50.160 | I'd give them credit, but I don't. But that's really it.
00:03:53.200 | Now the cool thing about budgeting is that you get to decide the budget. You don't
00:04:00.200 | have to accept somebody else's budget. You get to decide. And budgeting is so exciting
00:04:06.960 | because it's going to be reflective when done properly. It's going to be reflective
00:04:13.800 | of your goals. That's what budgeting should be. Budgeting is a way of your getting to
00:04:20.800 | your goals. If you want something, you can budget for it. You get to decide what you
00:04:33.940 | want and then you get to figure out how to budget your way there. Budgeting is so, so
00:04:40.940 | powerful.
00:04:41.760 | Now in today's show, I'm going to tell you a little bit of my mindset and specifically
00:04:45.260 | how I categorize my budget accounts. And there are many ways that you can use a budget, some
00:04:50.740 | of them more effective than others. For the sake of simplicity, you can budget using a
00:04:57.740 | piece of paper and a calculator. You don't even need a calculator if you paid attention
00:05:01.440 | and practiced your addition and subtraction tables such that you can do that manually.
00:05:06.220 | A piece of paper is really all you need. You can budget using the old favorite of an envelope
00:05:11.580 | system where you budget using cash and envelopes for all of your spending. That's great. You
00:05:16.860 | can budget using any number of a suite of software options that are available. You can
00:05:22.220 | use Quicken. You can use Microsoft Money. You can use all kinds of online options. There's
00:05:28.580 | Mint. There's Personal Capital. There's all kinds of tools. There are dozens and dozens
00:05:33.540 | of them. There are apps that you can get for your smartphone. You can use spreadsheets.
00:05:39.060 | I've done an interview with Peter Polson from Tiller. Tiller is a great option. I know many
00:05:42.940 | of you are using that, using Google Spreadsheets and automatically importing your data into
00:05:47.380 | that. You can do it in Excel. I've budgeted for years using Excel.
00:05:51.540 | I don't care about the method. I'm going to share with you the categories that I use.
00:05:58.180 | I think these categories are helpful. I use YNAB. If you are interested, go back and listen
00:06:04.100 | to some of the past episodes of the show. Go and listen to number 246 if you want to
00:06:08.620 | hear a little bit of my story with budgeting. That episode was called "You Need a Budget
00:06:12.380 | and Here's the Best Way for You to Make One." That was an interview with Jesse Mecham, who
00:06:15.660 | is the founder of YNAB. I use YNAB because it's just simple and it works really well.
00:06:19.820 | It works with how my brain works. It does for me the two major functions that I want
00:06:26.700 | to have done in a budgeting system, which are tracking and budgeting. Again, tracking
00:06:35.260 | and budgeting. Big difference between these two things. There are many ways for you to
00:06:42.860 | track your money, to simply create a spreadsheet or an accounting of where it went. Almost
00:06:51.700 | all budgeting tools will do this well. For example, years ago I used Microsoft Money.
00:06:57.540 | Microsoft Money does a great job with this. Quicken does a great job with this. Spreadsheets
00:07:01.540 | do a great job with this, of tracking where the money went. Here at the beginning of 2017,
00:07:08.700 | an exercise I strongly encourage you to engage in is to do a complete review of all of your
00:07:14.740 | expenditures of 2016. Do this complete review based on categories. Go back and think about
00:07:25.060 | what you did, what you spent, and make sure that these categories are reflective of your
00:07:29.380 | goals and of your values. That's very important. Do that review. But that's all a tracking
00:07:37.820 | function. A budgeting function is a way for you to allocate the resources that you now
00:07:44.500 | have in an appropriate manner so that at the end of 2017, you'll be in a position that
00:07:53.780 | is closer to your goals than farther away. A budgeting function is a way of using the
00:08:01.680 | resources you have and properly allocating those resources. And it's most valuable if
00:08:09.420 | this can be done in a flexible way. Now, if you want more philosophy on budgeting, go
00:08:15.060 | to radcopersonalfinance.com/archive and just search that page for budget. You'll find all
00:08:19.860 | kinds of past shows about budgeting. But today I'm going to tell you how I approach mine.
00:08:25.700 | Now again, I use YNAB. And here's what I do. I keep two different budgets, two completely
00:08:31.080 | separate accounts disconnected. And the reason I do this is because I want to have a different
00:08:35.580 | mindset depending on which of those budgeting activities I'm engaged in. I keep one budget
00:08:44.500 | for business and one budget for personal. As a business owner, all of my revenue comes
00:08:53.900 | in under the category of business. Now, of course, my revenue is derived from various
00:08:58.540 | lines of business, various types of business activities, but it all comes in under the
00:09:02.900 | characterization of business. At this stage of my entrepreneurial journey, I can keep
00:09:11.220 | it this simple. Perhaps at a later stage, I will need to do what many of you will do,
00:09:15.620 | which will be have complete separate budgeting systems for each of your businesses that are
00:09:21.700 | completely distinct. Your bookkeeper, your accounting team will maintain those and you'll
00:09:25.660 | just simply review the reports for each of those. But I'm not in that stage myself yet.
00:09:30.500 | So I maintain all of my business activities under one simple budget called business. Then
00:09:36.580 | I maintain all of my personal activities under one simple category called personal. Now,
00:09:42.580 | little tip for you. If you only have employment income, in the United States, this would be
00:09:51.780 | only income that's reflected on a W-2, tax income verification form. If you only have
00:09:59.020 | income that's reflected of your work as an employee, then you can maintain a simple personal
00:10:04.380 | budget. But you probably shouldn't only have employment income. You probably should have
00:10:14.260 | your own version of a business/investment budget and a personal budget. Almost each
00:10:23.320 | person should have some kind of side business that's related to your career, that's related
00:10:30.220 | to the career that you're moving towards, or that's related to an additional way for
00:10:35.580 | you to earn money. And so you can emulate and copy my approach of having a business
00:10:40.860 | budget and a personal budget. Now, the reason I keep these separate is because I want to
00:10:44.100 | have a different mindset in each of these. First of all, I want to be clear to myself
00:10:49.620 | that whenever possible, I want to have as few expenditures in the personal budget as
00:10:56.900 | compared to the business budget. I want to constantly keep in front of myself the idea
00:11:03.900 | that if possible, I want to associate any expenses with the business with the business.
00:11:11.620 | And I don't want to forget about those expenses. Having done a significant amount of budget
00:11:17.460 | consulting with just normal people who are just getting started in business or even who've
00:11:22.260 | been established for a few years, one of the biggest errors that I find is they don't maintain
00:11:29.520 | separate business accounts, business records, and business books. Rather, they keep everything
00:11:34.180 | integrated. And friends, if you are doing that, I hate to make dogmatic statements when
00:11:42.900 | they are uncalled for, but man, I can't think of a single circumstance in which you're not
00:11:48.620 | wrong for doing that. If you're running a business or have some sort of business activity,
00:11:56.340 | you must maintain separate records because you are walking past all kinds of important
00:12:03.980 | business tax deductions because you're not accustomed to paying attention to the little
00:12:08.980 | things. And if you have a separate business budget, you're almost automatically, you can't
00:12:16.420 | maintain a separate business budget unless you have a separate business checking account.
00:12:20.100 | And if you have a separate business checking account and you do as I do where you have
00:12:23.860 | two debit cards sitting in your wallet, one is for business, one is for personal, if you
00:12:28.220 | do that, then you'll be in a situation to where you're paying attention to your expenditures.
00:12:34.420 | Now, point of clarification for those of you who are just getting started, to have a separate
00:12:39.460 | business checking account does not require you to actually sign up for a business checking
00:12:47.380 | account. All you need is a separate checking account which you mentally classify as a business
00:12:55.720 | account. I hold in my hands my wallet and here I have two blue debit cards that are
00:13:02.820 | right in the front of my wallet. I bank with USAA so these have pretty blue, they're pretty
00:13:09.660 | blue and they've got this military star on them and a red line down them and they're
00:13:13.220 | identical. They are absolutely identical and the reason they're identical is because I
00:13:17.400 | use personal checking accounts. I just have two of them. One is for me and the other is
00:13:25.420 | for my business but they both are registered as Joshua J. Sheets. To differentiate the
00:13:32.740 | cards, you can draw on them with a marker. I've done that. I actually use this little
00:13:36.780 | engraving tool that I use to engrave all of my items. It's a little metal tip and I can
00:13:42.540 | write on metal and on plastic so I have here business scrawled on the front of it and so
00:13:48.260 | that way I always know which is which and I just carry these two debit cards right in
00:13:51.660 | my wallet and if it's a business expense, I swipe the business one and if it's a personal
00:13:55.500 | expense, I swipe the personal one. But this simple practice, if you just did that this
00:14:00.540 | year, many of you would save you hundreds or thousands of dollars because it will start
00:14:06.900 | to get your mindset thinking differently. Very simple example, you might go to lunch
00:14:13.620 | with somebody and if you go to lunch with somebody, then you might be tempted to pay
00:14:20.280 | for their lunch. That would be a good idea. But if you don't have that business debit
00:14:26.380 | card right there or business credit card, you can do the same thing with a credit card.
00:14:29.300 | If you don't have that business card right there, you may not remember that that's a
00:14:34.260 | properly deductible business expense. You can deduct 50% of your meals and entertainment
00:14:40.580 | expenses when you are engaged in business-related meals and entertainment with clients, prospective
00:14:47.740 | clients, etc. And so if you're there with somebody talking about your business, don't
00:14:51.960 | let the lack of that business card keep you from the tax deduction that you are rightfully
00:15:03.820 | entitled to. Just a simple example, but man, I tell you, I see this all the time. Now,
00:15:11.020 | that's the first reason I like to keep two different, well, that's the first reason on
00:15:14.620 | my list here of why I like to keep two different budgets, simply that it keeps you in the mindset
00:15:18.820 | of thinking, "Is there a way that I can move some of these expenses that are personal and
00:15:24.780 | non-deductible over to the business expense column?" Here's the simple answer. If you're
00:15:32.740 | wondering if you can deduct something, it comes down to this. If the expense is related
00:15:41.420 | to the ordinary and necessary expense that's related to your business activities, it is
00:15:48.660 | a deductible activity. Now, of course, you can go and research with greater specificity
00:15:54.340 | any particular category, but that's basically the doctrine. All ordinary and necessary business
00:16:00.020 | expenses that are related to your business will be deductible in some form or another.
00:16:07.820 | But another reason why I like to have the two categories separated is just simply so
00:16:13.300 | that I can have different mindsets when I'm looking at them. For example, with the personal
00:16:19.020 | category, which I'll go over my budget categories for you, with some categories I want to look
00:16:24.420 | at them and say, "I want to be ruthless and get these categories expenditures as low as
00:16:29.620 | possible." With some category expenses, I want to have a more moderate mindset. Good
00:16:35.900 | example, personal, let's say, consumption items that are not related that don't bring
00:16:40.940 | me pleasure. Well, I want to look at those items on my personal budget. I want to be
00:16:44.820 | as ruthless as possible about lowering those expenses. But personal category items that
00:16:51.940 | are quality of life expenses, let's say that it involves something I want to do with my
00:16:57.100 | family, building family memories, vacation expenses, things like that. I'm not necessarily
00:17:02.420 | trying to say, "How ruthless can I be and how low can I get that?" I'm trying to say,
00:17:06.820 | "How can I get maximum value for the money?" If it were a goal for me not to spend any
00:17:12.860 | money in this particular category, then I would just not go on vacation. But the goal
00:17:17.900 | is a quality of life goal. And so I want to look at that with a little bit more balance.
00:17:22.860 | Now on the business side, if I want to look at a category that's simply an expense, I
00:17:26.300 | want to ask myself, "Is this an expense that's generating revenue or is this an expense that's
00:17:31.340 | just simply taking money out? It's just necessary." I want to be absolutely ruthless with the
00:17:38.340 | expenditures that are just necessary and I can't really get out of them and they're not
00:17:42.780 | generating any revenue. Perhaps an example would be fees or business licensing costs,
00:17:49.420 | things like that. Got to do them. How can I get out of them? But they're not generating
00:17:53.980 | revenue. They're useless to me. Now that's different than an expense that might be a
00:17:57.540 | revenue generation tool. And in business, I want to look carefully at those expenditures
00:18:02.940 | that are generating revenue and not necessarily diminish them. I probably want to maximize
00:18:08.180 | them. And I want to rank them in order of what's the most productive use of money to
00:18:12.660 | the least productive. I want to do my best to calculate how productive this particular
00:18:16.780 | category is. But I want to spend money pretty freely on anything that's bringing me customers.
00:18:25.780 | I might even want to invest heavily a significant amount of my profits into an area that's bringing
00:18:36.060 | me customers. The most obvious example here would be an advertising campaign. Let's say
00:18:41.500 | that you have a consistent way which through the use of advertising, you can bring new
00:18:48.220 | customers into your business. Well, if you have that and if the lifetime value of the
00:18:56.100 | customer is substantially higher than the cost of acquisition of that customer, then
00:19:00.900 | you are well served to put as much money into that advertising campaign or those advertising
00:19:06.900 | projects as that category will bear. Don't pull back based upon some kind of idea that
00:19:13.980 | I'm going to be frugal here. Being frugal with an advertising strategy that produces
00:19:18.900 | consistently high results is the wrong solution. And interestingly, in order to do this is
00:19:25.660 | I'll point out some of the business metrics that you need to actually be aware of. Let
00:19:29.020 | me give you a very simple but very powerful example. Let's say that the average transaction
00:19:35.580 | between you and your customer, the first transaction with a customer is $30. Okay, they're going
00:19:43.420 | to bring you $30 of revenue into your business as a customer. So therefore, you should look
00:19:50.520 | at that and you should calculate how much you can afford to spend for the acquisition
00:19:56.940 | of that customer. Now, trick question here. Should you look at that category and say,
00:20:07.180 | "Okay, I've got $30. If I take that $30 over here and invest it in some place other than
00:20:13.580 | my business, I could achieve, let's say, an X percent rate of return. So I'm going to
00:20:19.700 | get 30 plus X. So in order to calculate the cost of my spending the $30, I should take
00:20:25.140 | the $30 minus X and that's how much I should spend on acquiring that customer." Something
00:20:30.940 | like let's say I should spend $25 to acquire the customer. Is that the proper analysis
00:20:38.260 | or do you need more information? The answer is you need more information because you don't
00:20:46.060 | look at the initial sale. You look at the average lifetime value of a customer. The
00:20:53.020 | most important calculation for you as a business owner is to calculate... That was too strong
00:20:57.820 | of a statement. An important number for you to know as a business owner is the total lifetime
00:21:05.780 | value of a customer. Let's say that you calculate that the average initial transaction with
00:21:12.820 | the customer is $30. But yet that average customer will return to your business a total
00:21:17.820 | of 10 times over the course of their time with you. So therefore, the total value, the
00:21:26.260 | lifetime value of the customer is $300. Would it be crazy for you to spend $50 in order
00:21:35.540 | to acquire a customer on an initial basis whose total lifetime value to you is $300?
00:21:44.260 | Wouldn't be crazy at all. Now you need good data to be confident of that number because
00:21:50.940 | if you're going to spend $50 to get a $30 customer transaction, that's going to lead
00:21:55.140 | to some losses in the initial stage until those later sales come in. But if you have
00:22:00.700 | that data and you know the number, you could spend $100 to acquire a $300 customer. That's
00:22:07.500 | what business does. Business prints money. It prints money because if you can find a
00:22:12.980 | way to spend $100 and get $300, you've now printed $200 of profit or of at least additional
00:22:21.460 | revenue subject to the margins in your business to calculate your profit.
00:22:25.340 | I hope you get the point. The point is that when you look at different budget categories,
00:22:29.220 | you need to isolate an expenditure and figure out if it's something that you should want
00:22:34.420 | to do more of, meaning I want to have a high expenditure in this area. If I have a proven
00:22:44.580 | marketing plan, I want to put as much money into that proven marketing plan as possible.
00:22:50.620 | Every dollar that I have, I'll allocate into that marketing plan because I know I'm printing
00:22:55.700 | money or is this a category where I want to be careful and cautious recognizing the value
00:23:04.580 | and return trade-off of this category. Vacation, we want to take a nice vacation. I want to
00:23:10.060 | make this certain memory with my family. This is important to me. I'm willing to spend this
00:23:13.660 | amount of money. I'm not trying to do it super cheap, but I'm also just making an
00:23:18.420 | intentional decision. Or is this a category where I just want to cut as ruthlessly as
00:23:24.780 | possible? This is my internet bill. I need 20 megabits per second at download speed and
00:23:31.100 | whoever gives it to me, I'll take it. It doesn't matter whether it's the cable company or the
00:23:34.500 | phone company or the internet company that's beaming it down from the satellite or from
00:23:39.460 | the hot air balloon tethered above my town. I just need the internet access. It's a commodity.
00:23:48.140 | You've got to pay careful attention to those categories and good budgeting will give you
00:23:56.180 | the indications.
00:23:58.460 | Now with regard to business budgeting, I'm going to end my comments there. I hope that
00:24:04.980 | you can see if you're a business person. Most likely, many of you are not doing your own
00:24:10.500 | bookkeeping. Some of you are, but I at least encourage you to isolate the categories in
00:24:15.220 | your business and try to look at them very carefully and to understand what type of expense
00:24:22.660 | this is. Is this something I want to do more of as much as possible? Because even if you
00:24:27.020 | want to do as much as possible, that doesn't mean that you can spend an unlimited amount
00:24:31.140 | of money in an area. Best example to stay with is advertising. There's a point of diminishing
00:24:37.460 | returns. There are markets that you can buy advertising in and then at times you saturate
00:24:43.380 | those markets. So even though you may have mountains of cash sitting there, you can't
00:24:48.180 | find the inventory, the ad inventory, the number of billboards are not available. You
00:24:53.180 | can't buy the commercials. You can't buy the targeted clicks. You can't spend enough money
00:24:58.260 | in that category.
00:25:00.020 | So just because you want to spend as much money as possible on something like marketing
00:25:04.220 | and promotion, doesn't mean that you'll always be able to spend as much money. So take your
00:25:08.700 | business books and whether you do this officially or whether you just do this mentally, separate
00:25:14.660 | each category into should I spend more or less so that when you're looking at the books,
00:25:21.500 | you can get clear on them. There's a major fallacy to think that, "Well, I can just spend
00:25:28.620 | freely in business expenses." No, there are business expenses you still want to minimize
00:25:32.900 | because the point of business is to make a profit. So you want to be ruthless with those
00:25:37.500 | business expenses that aren't bringing you revenue.
00:25:41.300 | There are some business expenses that are that middle zone. You might not technically
00:25:46.100 | need to hire this particular job function done. But at your stage in entrepreneurship,
00:25:52.820 | it's not something that you enjoy doing and it would be significant quality of life. Hey,
00:25:57.520 | if you're going to pay – it's going to get you a 50 percent tax deduction based upon
00:26:01.060 | your business tax rate, your personal tax rate, et cetera, go ahead and hire it done.
00:26:06.260 | It's not a must do it but I'm also not cutting things to the bone. You negotiate leases,
00:26:12.260 | hardcore. Get those as low as possible. You bring in employees from time to time to make
00:26:17.400 | your life easier and to free up more time and to make your business run more smoothly.
00:26:21.500 | But you don't go all in on those expenditures and expenditures that make you revenue, you
00:26:27.660 | go all in.
00:26:29.340 | But that's where I'm leaving my comments on business and I'm going to share with you
00:26:31.540 | now my personal categories because – for my personal budget because those will be more
00:26:37.300 | applicable to a broader range of you. So for the rest of this conversation, we're going
00:26:42.100 | to say that I've earned a dollar of income and that shows up as personal income. It's
00:26:46.900 | been transferred over to my personal budget. For you, that means the money may be coming
00:26:52.300 | in as a paycheck or it might come in as profits from your business. I don't care here about
00:26:57.260 | the characterization. I don't care whether this is a dollar of investment income or wages
00:27:02.220 | or dividends. I just care that it's a dollar of income in the personal budget. Now, we're
00:27:05.540 | going to budget it.
00:27:08.140 | And we're going to talk first about what do you do. Do you pay yourself first? Before
00:27:12.780 | I continue that, I want to do here just a fairly obvious ad for YNAB. Again, I use the
00:27:19.540 | YNAB software. I use YNAB for that business budget. I use YNAB for that personal budget.
00:27:24.300 | Go back, please, and listen to episode 246 of the show, which again is called You Need
00:27:28.420 | a Budget and Here's the Best Way for You to Make One. But I reached out to YNAB. YNAB
00:27:32.020 | was the number one most recommended product when I talked about bringing sponsors on to
00:27:36.940 | Radical Personal Finance. So many of you said, "Get YNAB. We love YNAB."
00:27:42.060 | Now, for the previous probably eight to nine years, I've done all my budgeting with an
00:27:48.020 | Excel spreadsheet. I'm very good with Excel. I'm very good with spreadsheets because I've
00:27:52.500 | always had an irregular income. And the problem that I had, which was difficult to solve,
00:27:57.260 | was that I never knew how much money I would have at any particular month. So I could never
00:28:00.720 | do that simple budget that many people imagine where they sit down and they say, "Okay, I
00:28:04.580 | got a check that's $2,000 twice a month. So on the first of the month, I'm going to take
00:28:08.420 | my $2,000. I'm going to put it on a sheet of paper and I'm going to spend it down the
00:28:11.700 | page until it's zero." That's great. I never figured out how to do that because I didn't
00:28:16.580 | know if I was going to have a $2,000 check on the first of the month, a $0 check on the
00:28:20.700 | 15th of the month, and an $8,000 check on the first of the month, the following, followed
00:28:25.020 | by two months of no income. How do you do it? It's really tough.
00:28:29.180 | Well, when I finally found YNAB again and tried it, I was blown away at how good it
00:28:34.660 | was. And the reason it's so good is that YNAB allows you, nay encourages you, nay forces
00:28:41.180 | you, to budget every dollar that you have in your checking accounts. And you can't spend
00:28:48.260 | the money unless you've budgeted it. But if you need to adjust the budget, you can adjust
00:28:51.980 | it at any time. And it is so good, so good especially for irregular incomes because you
00:28:58.460 | can look and you can budget different categories and you can make adjustments, et cetera.
00:29:02.460 | Now, it's hard for me to do much more than that, to explain that much more in just a
00:29:07.340 | short little ad here, but it's really, really good. Now, sign up, get a free 34-day trial
00:29:12.660 | at radicalpersonalfinance.com/ynab, Y-N-A-B, acronym for you need a budget. Try their free
00:29:19.900 | 34-day trial, but try it on two conditions. Number one, please go through my affiliate
00:29:23.860 | link so that I get a commission on the download of your software. And number two, during that
00:29:31.060 | 34 days, watch the YNAB tutorials or take the classes and follow their instructions.
00:29:39.740 | They will teach you exactly how to use the software. And it's not as intuitive as say
00:29:43.860 | other tracking programs that you've used in the past, but it's way more powerful. Not
00:29:49.460 | as intuitive, doesn't mean it's hard to learn, but it's way more powerful. So take their
00:29:54.460 | classes, do their webinars, take their courses. At the end of 34 days, if you like it, you
00:29:58.820 | can buy it. It's a few bucks a month, what, $4 a month, $5 a month, $4, something like
00:30:02.180 | that. If you don't like it, you didn't spend a dime. radicalpersonalfinance.com/ynab.
00:30:09.580 | Question, should you pay yourself first? This is a concept that's often thrown around. And
00:30:17.260 | the idea here is the first thing you should do is save money. And this is a valid concept.
00:30:24.340 | Very few people ever actually save money because they have too many expenses that come before
00:30:30.420 | they're able to save. They got too much month and not enough money. And I have observed
00:30:36.340 | it to be true that generally the only people who save money are those who proactively,
00:30:42.700 | consciously choose to save money and save money right off the top, right up front. So
00:30:48.420 | the way it works, if you were paying yourself first would be you'd earn a dollar and you'd
00:30:52.460 | decide how much am I going to save? Let's say you were going to save 10 cents of that
00:30:57.460 | dollar, 10%. So you'd set aside those 10 cents and then you'd figure out how to live on the
00:31:02.580 | remaining 90%. That's the idea of pay yourself first. Now, should you do that? Well, obviously
00:31:10.660 | I don't have a problem with that practice, but I don't actually personally think that
00:31:14.940 | you should pay yourself first. I like to practice the principle or habit of pay yourself second
00:31:26.100 | and give money away first. And so for me, the first category is going to be giving.
00:31:30.220 | Now there are a few different aspects of giving. I'm not here today to tell you how much of
00:31:34.740 | your money you need or should give away. That's up to you. You've got to decide that. That
00:31:40.860 | number may change throughout your lifetime, but it should be a part of your budget. Giving
00:31:46.440 | money away in a way that gives you very little benefit, if any, is a very, very healthy practice.
00:31:56.260 | And if you don't give away 10 cents out of a dollar, I find it very hard to believe you'll
00:32:01.580 | give away a million out of $10 million. Giving is a practice, giving is a habit. I find it
00:32:10.140 | quite astonishing and humorous when people often say, "Well, if I had X number of dollars,
00:32:16.300 | then I would give away such and such." But yet sometimes these same people never give
00:32:27.660 | away their money, never give away their time, never give away their skills, never give away
00:32:34.580 | anything. And I've observed that more money just makes you more of who you are. So I think
00:32:40.620 | a really healthy practice from the very beginning of your financial life, or if it's too late
00:32:46.900 | for that today, for you to start and practice, is to always give money away. Very important.
00:32:53.720 | Now I think of giving in three different categories. There's the giving of gifts, gifts such as
00:33:00.700 | birthday gifts to your children or to family members or to friends, Christmas gifts, just
00:33:06.940 | special gifts that you want to give to somebody. Things such as, "Hey, we know that so and
00:33:13.660 | so, this family is going through a hard time, so let's give them a gift certificate so they
00:33:17.180 | can enjoy a nice dinner out." Or, "Let's pick up the tab for a younger couple who would
00:33:21.140 | really appreciate that when taking them out on a nice dinner out again, or send them away
00:33:27.300 | on a nice family vacation or whatever." These are gifts. So I think of gifts as being very
00:33:31.220 | important. We've just come through Christmas. Christmas is obviously for most people, probably
00:33:36.860 | the biggest budget category of gifts all year, and you've got a budget for this money that
00:33:42.980 | you're going to spend on gifts. So I like to keep a category under my giving marked
00:33:49.900 | gifts. That way we have a budget available, birthday parties, et cetera. I've got, let's
00:33:56.180 | see, 12, 13, 12, 10. I guess I've got 10 nieces and nephews on my side of the family. So birthdays
00:34:02.940 | come around pretty regularly. Every few weeks it seems there's another birthday party. So
00:34:08.020 | these things require gifts.
00:34:10.260 | The next category of giving is what I think of as systematic contributions and support.
00:34:16.100 | For many people, this will involve a tithe that you pay to your church, or this will
00:34:21.860 | involve systematic support that you give to a family member who's depending on your income,
00:34:28.980 | or this may involve organizations, charities, ministry organizations that you choose to
00:34:34.900 | systematically support on an ongoing basis. So I think of that as systematic contributions
00:34:40.100 | and support.
00:34:42.140 | And then category number three, I just call ad hoc financial contributions to others.
00:34:49.020 | The idea here is I want to have an account ready that's available so that when I see
00:34:55.260 | an opportunity to give money to somebody in need, I have it budgeted. I've learned that
00:35:02.540 | this particular practice can be one of the most freeing things you can do. That way when
00:35:06.560 | you get the GoFundMe page that was just shared on Facebook for somebody in need, et cetera,
00:35:11.300 | you don't have to wonder, "Oh, can I afford it?" You just go to your budget and you look
00:35:14.500 | in your ad hoc financial contributions number and see how much money's there, and then go
00:35:19.040 | ahead and make your donation based upon how much is there and how much you feel you'd
00:35:22.740 | like to give.
00:35:24.400 | I think these are three useful categorizations to make under giving money. And here would
00:35:30.380 | be some of the value of having these broken out as categories, especially in the context
00:35:34.760 | of your year-end financial review and planning for the next year. If you look at the amount
00:35:40.420 | of money that you spend on gifts for family, birthday gifts, Christmas gifts, et cetera,
00:35:46.080 | you might look at that and ask yourself, "Am I getting a lot of value from this? Is the
00:35:50.740 | person I'm giving to giving a lot of value for this?" This would be the type of category
00:35:55.500 | that I would look at carefully because there's no stated percentage that's the right number
00:36:01.500 | to give. Should you give away 3% of your income as your birthday gift budget or your Christmas
00:36:12.280 | gift budget? This is one of those things where you want to look at it and analyze the value
00:36:18.300 | that you're getting or the value that the person is getting based upon the dollars you're
00:36:22.220 | spending. And you might look at it and you might find, "You know what? We're spending
00:36:27.900 | all kinds of money on plastic toys for children who don't need plastic toys. Maybe we could
00:36:33.300 | take that same money and we could spend it in a way that is more useful to the child.
00:36:39.320 | Maybe instead of spending the money on plastic toys, we could spend the money to open an
00:36:43.360 | investment account and buy the person a share of stock each year for their birthday in a
00:36:47.900 | company that we think that they'll like. Or maybe we can take it and instead of buying
00:36:53.020 | a plastic toy, maybe we can buy a one-ounce silver coin and perhaps each year of their
00:36:59.180 | life we'll give them a one-ounce silver American Eagle if they're from the United States. We'll
00:37:03.300 | give them a one-ounce silver American Eagle from the beginning of that particular year."
00:37:09.260 | So then a simple plan like that could be that you sit down and you count the number of nieces
00:37:13.580 | and nephews that you have and each year you just buy a box of silver coins from the U.S.
00:37:18.420 | Mint. You go ahead and get them and now you've got your birthday present squared away and
00:37:22.420 | you've enhanced your personal silver coin collection at the same time, which who knows
00:37:26.580 | could wind up being useful to you as an investment practice. Let's say you spend 500 bucks on
00:37:33.660 | a box of silver coins at the beginning of the year and it's your way of having gifts
00:37:37.080 | ready to go and it's a way of making sure that you also have some additional silver
00:37:42.940 | lying around. You'll wind up with extra coins at the end of the year. For some of
00:37:47.220 | you that's a useful conversation piece. It's a way to teach people and it could be
00:37:50.500 | a cool collection. How cool would it be if you arrived at the age of 21 and you looked
00:37:57.740 | back and you had a silver American Eagle for each year of your life? Maybe at some point
00:38:01.860 | in time you can transfer that to gold if you're wealthier. It's fun to have collections of
00:38:06.540 | things like coins. Or maybe you look at that gift that you're giving and you say, "Well,
00:38:12.220 | I've got my favorite nephew Joey and I was going to give him this plastic toy. But you
00:38:17.300 | know what I'm going to do instead? I'm going to go ahead and I'm going to schedule a day
00:38:20.220 | and Joey and I are going to go fishing and I'm going to pay for the fishing trip instead
00:38:25.100 | of the plastic toy." It doesn't matter. You've got to figure out. There's an age at which
00:38:32.340 | a child wants a plastic toy and there's an age at which a fishing trip would be valuable.
00:38:35.980 | But you can look at that and by having it distinguished in your budget as gifts, it
00:38:40.620 | gives you the opportunity to plan to get the maximum value from it. Perhaps you're a grandparent
00:38:48.100 | and each year you're spending thousands of dollars on Christmas gifts. But yet you notice
00:38:54.900 | how in our modern culture the toys are abundant and the novelty wears off. Is there a way
00:39:01.340 | that you can take those thousands of dollars and translate that into something different?
00:39:09.060 | Perhaps renting a Christmas cabin in the mountains of North Carolina and financing all of those
00:39:16.340 | things including a day at the local ski resort. Perhaps that would be a way of building a
00:39:23.220 | really nice family tradition. By having it broken out, you can look at this category
00:39:30.220 | for what it is and for what it should be, which is a maximization of value. You're not
00:39:37.020 | necessarily trying to see how little you can give, but you're not necessarily trying to
00:39:43.980 | see how much you can give. This is one of those maximization of value categories.
00:39:49.420 | Now at some stages of life, you might look at this category and just recognize that,
00:39:53.700 | "Man, this is blowing our budget. We can't do this." I've counseled with young couples,
00:39:59.860 | young families, and this can be extremely challenging for parents of young children
00:40:04.220 | because you may, depending on the size of your child's social circle, you might wind
00:40:10.020 | up at a different birthday party every few weeks. If in your cohort of parents, it's
00:40:14.940 | expected for you to give birthday presents that are on the $30 level. If you wind up
00:40:19.180 | at a birthday party, say 30 weeks out of the year, which would not be unreasonable if your
00:40:25.260 | child has 20 friends in their class, times $30 each, that's $600 a year. For a young
00:40:31.860 | family, that could be a substantial amount of money.
00:40:35.140 | So for you at that stage of life, this may be a category at which you home in and say,
00:40:39.620 | "You know what? We're just going to change. We're going to give a craft, or we're going
00:40:43.700 | to give a favorite book, or we're going to figure out a way to reduce this." Or we may
00:40:47.540 | not give a present at all. Totally reasonable option. So that's the category of gifts.
00:40:57.300 | What about systematic contributions and support? This is a category that you'll have to
00:41:01.820 | judge yourself. For example, those of you who are engaged in the practice of tithing
00:41:07.340 | to your church. Tithing is generally practiced as 10% of your income is given to your local
00:41:12.720 | church right off the top. Well, if you practice that, that's very simple for you to take your
00:41:18.740 | income and calculate and say 10% goes right there into the local church. So that's not
00:41:26.620 | a category that you try to increase or decrease. That's not something you're trying to save
00:41:30.940 | money. You're making a voluntary choice to send 10% of your income to your local church
00:41:35.740 | as a tithe. Or perhaps you look at this and include in this organizations that you support.
00:41:42.620 | Well, you should know this as expressed as a percentage of your budget. Perhaps you're
00:41:47.700 | supporting a political organization that's seeking to advance a cause that you feel passionately
00:41:53.900 | about. Or perhaps this is an organization that is involved in doing some kind of work
00:41:59.620 | elsewhere in the world that you feel is important. Certainly this is a category where you want
00:42:05.580 | to analyze it and decide if the company or the organization or the church or whomever
00:42:12.740 | is doing a good job with it. But again, it's not necessarily a minimization thing. You're
00:42:20.220 | seeking to have it funded. Now, if you don't give all of that to one organization, then
00:42:25.460 | you may want to choose and say, "Well, I need to make sure that I have this budget." And
00:42:29.180 | so each year you're picking and choosing the organizations. I think a really healthy practice
00:42:33.860 | is if you're going to give money to an organization, a political organization, charitable organization,
00:42:40.060 | you should expect results from that organization. And you should plan to give for a short period
00:42:47.260 | of time expecting results. Now, this doesn't really work if you're giving $50 a year to
00:42:52.580 | the local chapter of blah, blah, blah. But if you're giving substantially, let's say
00:42:57.860 | that you are a major donor, you should give with the intention of getting results. And
00:43:04.580 | there should always be a question in that organization's mind if they're going to get
00:43:08.420 | your money. And you should make it clear, "You're only getting my money if you're getting
00:43:12.860 | results." So have this as a category.
00:43:15.500 | Moving more quickly, ad hoc financial contributions to others. Please, I just ask you to put this
00:43:19.740 | in practice. Set aside an amount of money in your budget that's always available to
00:43:25.220 | give to others. This, perhaps more than anything I've yet said, has the potential to revolutionize
00:43:35.300 | your finances. Because when you always have money available to give, you start to see
00:43:43.480 | opportunities to give. If you're strapped, you'll often just bumble past those opportunities
00:43:51.480 | and not recognize them for what they are. But if you have a pile of money burning a
00:43:59.860 | metaphorical hole in your pocket, you start to look at people in need a little bit different.
00:44:06.680 | So I beg of you, if you were going to take anything from this, set aside a giving account
00:44:11.500 | in your budget and make sure that it's funded at an appropriate level for you. And make
00:44:18.140 | sure that it's not all spoken for in advance. Don't just track the money that you give.
00:44:25.860 | Proactively budget the money and do it in a way that will allow it to accumulate little
00:44:30.300 | by little so you can experience the joy of being a giver. Talk to wealthy people. You
00:44:37.820 | go do your own research and find out the impact that giving has made in their life. I think
00:44:47.860 | you'll find it substantial. Now let's move on to saving and investing.
00:44:51.860 | Before we do, sponsor of the day number two today is Libsyn. Libsyn is short for Liberated
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00:48:38.280 | Now let's talk about savings and investments. I'm going to move quickly through the rest
00:48:43.860 | of these categories and also through this one. Just simply to say this, I think you
00:48:49.300 | should allocate your savings and your investments in some way that you've intentionally chosen.
00:48:59.980 | This is a little bit difficult to manage in budgeting software because some of you, your
00:49:04.380 | savings and investments will be done before the money shows up in your checking account.
00:49:09.500 | That's great. For example, your 401(k) contributions may be deducted or your health savings account
00:49:15.220 | contributions may be automatically contributed. Or perhaps you're investing in your business
00:49:20.580 | heavily, and so your business is growing and you know that's a good investment, but you
00:49:26.700 | can't really see that in your personal savings.
00:49:30.140 | Don't fall into the trap of trying to say that budgeting software and your ability to
00:49:35.320 | use it should be reflective of all of the information. Many of you have an interest
00:49:41.740 | in knowing what percentage of your income are you saving. That's really good. And you
00:49:45.100 | may have a goal such as I want to save half of my income. Really good goal. But you may
00:49:49.740 | not be able to get your budgeting software to display that information. Remember, budgeting
00:49:54.740 | software is not an income statement. So if you want to calculate what savings rate you
00:49:59.080 | have, build an income statement. Do that separately. That's something that doesn't need to be
00:50:03.180 | automated. Just use your budgeting categories to fill that in.
00:50:06.740 | I do think savings and investments should be allocated between different approaches.
00:50:11.300 | Here are some ideas. You could allocate this based upon short-term savings and longer-term
00:50:18.260 | savings. That's a big deal. Shorter-term savings, longer-term savings. You could allocate this
00:50:24.700 | based upon savings for spending versus savings for wealth or savings for investments. If
00:50:33.500 | you're saving for a new item, just did the show on RVs, when I was saving for an RV,
00:50:38.820 | that's not an investment. I wouldn't characterize that as an investment. That's a consumption
00:50:43.740 | item. But it's something I'm saving for. And so you want to indicate that. That's different
00:50:49.400 | than saving for wealth. That's different than a 401(k) contribution or money that I'm saving
00:50:54.260 | for real estate down payments on rental houses or money that I'm saving to start a business.
00:50:58.540 | So give your savings a name and understand the nature of the savings. Understand what
00:51:07.100 | it's earmarked for. A major focus with savings should be that there should be a goal associated
00:51:13.380 | with it. One more categorization for you to consider would be, should I save for passive
00:51:18.200 | investing or should I save for active investing? Here I'm not referring to passive investing
00:51:24.860 | in the sense of index funds. I'm referring to this in the sense of saving and investing
00:51:29.740 | in a way where someone else is managing it and you're not. Probably a good idea, too,
00:51:36.040 | if you have an abundance of income, to always have some amount of money that's going into
00:51:40.420 | savings that's being managed by someone else. Mutual fund manager is managing it or an investment
00:51:45.180 | broker or somebody is managing the money. That's passive. That's different than active,
00:51:50.260 | such as starting a business. I think both are important. So with children, I'd like
00:51:56.540 | to see them save half of their money for passive investing and half of their money for active
00:52:01.340 | investing. So half of it goes into mutual funds. Half of it is always available as,
00:52:06.060 | "Hey, this is your business seed money. Look around. What opportunities do you see
00:52:09.060 | in the marketplace?" Now, is there any science behind this? No, of course not. These are
00:52:12.820 | just numbers. But the idea is there's concepts and concepts are powerful. So give your savings
00:52:20.440 | a name. Don't try to make it all show up in the budget category. If you're maxing your
00:52:25.700 | 401(k) and that's the biggest thing that's the most important to you, fine. But you should
00:52:32.060 | put in savings a name. This is one of my favorite things also about YNAB, the budgeting software,
00:52:38.540 | that you can add or take away categories at any time. So you can give little savings goals
00:52:43.100 | categories. If you wind up putting too much money in them, it's easy to clean them out.
00:52:49.600 | You might have a category for RV and you might have a category for a new horse and you might
00:52:54.860 | have a category for annual vacation. Well, when you get to annual vacation time and you're
00:52:59.660 | sitting down and you're calculating, you might say, "Well, let's spend a little bit less
00:53:03.140 | money on the annual vacation. Let's throw that towards the RV." Or, "Let's go ahead.
00:53:08.660 | RV is not so important. Let's take the annual vacation." So the net takeaway I want you
00:53:13.180 | to have for savings and investing is give your saving and investing goals names, names
00:53:18.260 | that are powerful to you, names that are going to draw you toward it, not, "Oh, I'm saving
00:53:22.300 | money." If you're saving for financial independence, write on there, "Financial independence,"
00:53:28.020 | and make it powerful. Make your goals strong so they call to you, so they pull you through
00:53:33.300 | the difficult times.
00:53:36.940 | So those are the first two categories on my budget. And I like to keep them at the top
00:53:41.940 | because I'm paying others first and paying myself second. There's no smooth way to say,
00:53:48.540 | "Pay yourself first, give first." I guess I could say that. "Give first, pay yourself
00:53:52.660 | second." I like to have those at the top, all those categories at the top of my budget.
00:53:57.260 | That way I never forget. We don't want to forget.
00:54:02.260 | Now what else? The next category that I have is a category for monthly bills. Again, personal
00:54:07.700 | budget, monthly bills. And monthly bills are payments that I've agreed to that are going
00:54:14.780 | to be the same every month. Rent, electricity, things like that. Bills over which I have
00:54:22.460 | no direct control on a monthly basis. Bills that I know just about how much they're going
00:54:28.140 | to be. I can't change my rent on a month-to-month basis.
00:54:31.380 | And I personally, for my personal budget, I like to have a subcategory for each and
00:54:35.940 | every bill. So internet is different than phone, et cetera. So the benefit of this is
00:54:43.180 | now putting my hat on, I look at these bills and I think, "Is there any benefit to me
00:54:48.780 | of this bill? And can I get this as low as possible?"
00:54:53.340 | Not all categories do you want to be as low as possible. I could probably spend less money
00:54:58.540 | on rent than I'm spending now, but I don't want to live in the apartment that I could
00:55:03.220 | rent for less money than I'm renting now. I could spend more money on rent than I'm
00:55:07.580 | renting now. And at some point I might want to live in that apartment for more than what
00:55:12.180 | I'm spending now.
00:55:15.740 | That's different than internet. Now, my internet bill is primarily associated with my business,
00:55:21.940 | but perhaps for you it's not. Perhaps your cable bill. There's no problem to you looking
00:55:27.220 | at the cable bill and saying, "Eh, I'll just go with whoever's cheapest." And you want
00:55:31.500 | to have this set out so that from time to time you can do price shopping. Probably at
00:55:35.340 | least once a year you should tackle each of these budget categories and seek to minimize
00:55:40.300 | the expense.
00:55:43.540 | But they're monthly bills. So at the beginning of the budgeting month when the money comes
00:55:46.820 | in we're just going to make sure they're funded in time for the draft. If you're using an
00:55:51.060 | automatic draft or in time to send out the check. Now, that's different. I keep a separate
00:55:55.320 | category called everyday expenses. Everyday expenses are things over which I have direct
00:56:00.380 | control. Good example, food. Under food I maintain two categories. One, groceries, and
00:56:08.380 | one, restaurants. For you, you might have different categories. Some of you should have
00:56:13.780 | a category on there for coffee. Some of you should have a category for alcohol. And you
00:56:18.540 | should break it out because if you're looking down and you're recognizing, "Hey, I spent
00:56:22.620 | $500 on restaurants," but you realize you only had about two meals, you probably spent
00:56:26.780 | it on alcohol. So you should have a budget on there for alcohol so that you have things
00:56:31.340 | on there.
00:56:32.380 | But everyday expenses are budget categories that are quickly changeable. So we want to
00:56:37.500 | keep a sharp eye on them and we want to adjust them on an ongoing basis. So simple ones,
00:56:44.100 | we all do food, groceries, and restaurants. Restaurant bill doesn't want to be zero, but
00:56:49.180 | you also need to know how much it is compared to how much you're spending on groceries.
00:56:55.740 | Next one is fuel, car fuel. Again, you can change that. Clothing, a couple of unique
00:57:00.420 | ones that I carry. I have a budget category called dog expenses. I have two dogs. I find
00:57:06.820 | them to be expensive. So I crack all of their expenses as dog expenses. And you may want
00:57:13.340 | to do something similar.
00:57:14.780 | Now that does require a certain amount of discipline. You may go to Costco and you might
00:57:19.300 | find yourself buying groceries, tools for your shop, alcohol, and dog food. So when
00:57:27.180 | you come home, be diligent about breaking that $600 bill out and putting it into its
00:57:31.820 | proper categories. I have a category here called kid expenses. Now this is primarily
00:57:38.460 | my personal experimentation as a personal finance guy. I don't buy for an instant that
00:57:45.060 | kids are all that expensive. All of the nonsense about it costs a hundred or however many hundreds
00:57:51.060 | of thousands of dollars to raise a child is just absolute baloney. Kids are not that expensive.
00:57:57.300 | They really don't. You'll spend as much or as little on children as you choose to spend
00:58:00.620 | or as much or as little as you have. But I do like to track that so I know. And that
00:58:05.140 | way it gives me insight into the types of things that are related to kids. So I track
00:58:09.700 | their clothing. I track any expenses that are associated with them, any medical expenses
00:58:13.740 | or any entertainment expenses, things like that. If it's something that I wouldn't
00:58:17.940 | do or wouldn't involve myself with if I didn't have children, then I go ahead and
00:58:22.860 | put it under child expenses. That just is for me for more fun than anything else, partly
00:58:28.220 | as to see whether I'm right or wrong about my opinion on the cost of children. Obviously
00:58:33.300 | that category is not all inclusive. Obviously that doesn't include something like groceries.
00:58:40.780 | I'm not breaking my groceries out based upon how much each of my kids eat, but it's
00:58:44.860 | valuable for me to know. One important everyday expense item that I have is something called
00:58:49.340 | reimbursable expenses. And that's anything I spend that I'm expecting to be reimbursed
00:58:54.220 | for. I believe you should have probably an extra budget category for this because it's
00:58:58.140 | easy to lose track of the reimbursements that you're entitled to. If you're buying
00:59:01.820 | something for somebody, have it as your category. You might find yourself in a situation where
00:59:05.940 | you're spending all kinds of extra money and you're not really budgeting for that,
00:59:09.660 | but you know it's going to come in in a couple of days. I've done this many times,
00:59:12.060 | so I just maintain a category, reimbursable expenses, with the goal of zeroing out as
00:59:16.220 | quickly as possible. A couple of other major categories, one would be asset expenditures.
00:59:22.020 | I find it useful to differentiate between consumption expenses associated with an asset
00:59:29.180 | versus asset expenditures. Best example I can think of would be a car. I keep a fuel
00:59:35.680 | budget and a car insurance budget separate from the vehicle category. The reason is I'm
00:59:44.500 | never going to get the money back that I'm spending on fuel. So fuel is one of those
00:59:47.700 | things that I want to look and evaluate. I'm not going to get the money back that I'm
00:59:50.820 | spending on car insurance. So car insurance is one of those categories that I want to
00:59:56.940 | just shop around from for time to time. But if I'm buying a vehicle, I might be buying
01:00:03.140 | that vehicle because I have a need and it's not exactly something that's the cheapest
01:00:08.220 | thing now, but it might still be a good idea. An example, a few months ago I bought another
01:00:12.780 | minivan. I don't think I've said it on the show before. I bought another minivan a few
01:00:16.420 | months ago. Why did I buy another minivan? Well, I didn't need one. I already had a perfectly
01:00:20.980 | serviceable minivan, but I came across a good deal on the type of minivan that I would like
01:00:28.220 | to have in my family. I know that it's very valuable to have a backup minivan. I know
01:00:33.180 | that the value of the vehicle as compared to the cost of the vehicle was very, very
01:00:39.020 | high. So I now have two minivans. My first minivan was a Hyundai Entourage that I bought
01:00:43.700 | a number of years ago. I paid an inexpensive price for it, but that vehicle has a lot of
01:00:47.780 | miles on it. It's over 200,000 miles and it's had various mechanical problems and I expect
01:00:52.340 | it to have mechanical problems in the future. One of the challenges with buying used cars,
01:00:56.860 | especially cheap used cars, is the inventory of used cars is often very thin. And if you're
01:01:04.120 | buying a car when you need one, it can be hard to get the selection that you need. If
01:01:11.780 | you've got to buy a car today, you're probably not going to be able to get a great deal on
01:01:16.820 | the perfect car for you, at least not in the used market. That's what new cars, new car
01:01:22.700 | dealerships and what used car dealerships specialize in. If you're going to need to
01:01:26.100 | go and buy a great car today, you can trot right out to the dealership and they have
01:01:30.580 | the selection, but you're going to pay more. It's hard to figure out which country road
01:01:34.740 | do I drive down in order to see the ideal car that's reliable and that's inexpensive
01:01:38.880 | and parked on the side of the road. You can't predict that. So what I have learned with
01:01:42.140 | some expenses such as cars, when I come across them, I need to buy them. So previously we
01:01:48.020 | had two cars. I had this little old Toyota Corolla that I bought, same type of thing.
01:01:50.980 | It was for sale. I didn't particularly have to have it, but I recognized the value of
01:01:55.420 | it, went ahead and bought it, paid 500 bucks for it. But now with a third child on the
01:01:58.780 | way, that doesn't work as my backup car. And having children, it's important to me to have
01:02:04.580 | a backup car at this point in time. There have been times where my van was in the
01:02:08.780 | shop and as a single person or as a couple, it's easy to have Uber as a backup. Moving
01:02:15.700 | around with three car seats is a little harder to use Uber as a backup. I have a good family
01:02:20.840 | network for backup cars, but I like to have a backup car. So I came across an opportunity
01:02:26.000 | to buy a Toyota Sienna, 10 years old. I got a great deal on it. It's one of the most reliable,
01:02:32.780 | consistent cars, 150,000 miles. That is my perfect car. A minivan that's 10 years old,
01:02:38.620 | very reliable make and model, well cared for, few scratches and dents and dings, perfect.
01:02:44.180 | That's what I want. And so I bought it. Didn't have to have it, didn't need it, but I bought
01:02:51.780 | it because I saw the value over the coming years. And the cost of owning a car like that
01:02:55.780 | is minimal from a depreciation perspective. So what's the point of this? Point is that
01:03:01.140 | I didn't plan to spend the money that I bought it for. I bought it for $3,000. I didn't plan
01:03:06.900 | to spend the $3,000 in that month. So if I'm just looking at vehicle expenditures and I'm
01:03:15.140 | analyzing vehicle costs, I'll see a huge $3,000 bump. And if I'm just pulling my hair out
01:03:21.860 | about, "Oh, I spent this $3,000 and I didn't need to do that." That's different than me
01:03:27.780 | looking and saying, "This was an asset purchase. This was me buying an asset." Now that vehicle
01:03:35.100 | today I could go out and I could sell it in a week or two in the private market for more
01:03:40.860 | than $3,000. Maybe not a ton more, but I could go and sell it for more. So I want the value
01:03:49.180 | of this to be recognized. This was a balance sheet item. This wasn't a consumption item.
01:03:52.660 | It's not an income statement item. It's a balance sheet item. So how do I do that? Well,
01:03:56.060 | I just keep it simple. I just have on there one for asset expenditure, vehicle expenditure.
01:04:01.320 | Now I'm also going to include on that, I'm going to include there the cost of the vehicle
01:04:04.900 | purchase. And depending on the level of complexity, I might have vehicle repairs and maintenance.
01:04:10.420 | Because I want to know, same thing, when I buy a car, I want to go ahead and see if there's
01:04:13.740 | anything that needs to be done. Let me go ahead and fix it. I might spend another few
01:04:16.600 | hundred dollars getting everything just perfect. So that way I know it's reliable. I know everything's
01:04:21.420 | fixed. If it needs new tires, if it needs oil changes, if it needs brakes, get all that
01:04:24.260 | stuff done so the vehicle is ready to go. Well, those are asset expenditures. And so
01:04:30.060 | I'm of course being careful with them, but I'm not trying to get it as cheap as possible.
01:04:33.580 | If I were just trying to get it as cheap as possible, I wouldn't have bought the car.
01:04:37.660 | But then I might wind up in a situation next year where my other car breaks down and now
01:04:42.220 | I don't have a car and I don't have my backup car and I don't have the second car and now
01:04:46.360 | what do I do? So I need to plan ahead. So I characterize balance sheet items separately.
01:04:53.560 | Do the same thing with something like my motorhome. I did just announce, talked about the motorhome.
01:04:58.540 | That was something that I purchased, but I keep it on there as an asset expenditure.
01:05:03.540 | It's a balance sheet item. It's something that has value that I could sell. My goal
01:05:07.980 | of course when buying something like that is to get a good deal, but the good deal is
01:05:11.900 | not necessarily measured the same way that other expenses are. A good deal is not necessarily
01:05:16.500 | the cheapest item. Rather, a good deal is going to be the cheapest item that does the
01:05:23.440 | job as compared to the value of the item in the resale market. So I might search and figure
01:05:29.300 | out here's what I think is a good deal. Then I'll go ahead and purchase the item and I
01:05:35.300 | want to track any expenditures on that item that are related in the world of business
01:05:40.260 | would be depreciable – sorry. Yeah, expenses that are not directly associated with consumption
01:05:48.860 | but that are just associated with the repair and the maintenance and the upkeep.
01:05:52.900 | So with my RV, I needed to fix the generator. I tried to fix it myself a couple of times.
01:05:57.620 | I couldn't do it. So that's categorized under there. So now I have good records. Now
01:06:02.020 | I can look at that and I want to analyze how much is this motorhome costing me? How much
01:06:06.780 | is this second minivan actually costing me? How much am I spending? That's going to
01:06:11.580 | include all those categories. But then also when it comes time to sell, I can look at
01:06:16.500 | it and see how much money I have in it. I can try to figure out is there a way that
01:06:21.620 | I can sell this for what I have in it, sell this for a minor loss, sell this for a profit
01:06:26.700 | even. So I find this simple practice to be very helpful to keep from deluding myself.
01:06:33.300 | People often delude themselves into thinking that they're getting great deals because
01:06:36.020 | they don't track things. If with your vehicle, you don't have a spreadsheet that includes
01:06:41.760 | what you spent on it and what you paid for repairs, you might say, "Oh, I bought it
01:06:45.300 | for $30,000. I sold it for $25,000. I only lost $5,000 on it." But what you actually
01:06:49.940 | did was you bought an unreliable vehicle and you spent $5,000 repairs on it and you actually
01:06:54.020 | – you get the point. I don't need to belabor it. So I keep those separate.
01:06:58.900 | Similarly, with other types of durable goods, let's say that you're purchasing – I
01:07:05.660 | found this when I bought a new house. You need certain types of tools and things for
01:07:10.980 | that new house in order to help you. So it's helpful to have sometimes a category that's
01:07:15.740 | related to something like durable goods such as a shovel, wheelbarrow, etc. These are valuable
01:07:22.300 | items to have when owning a house. But they're also items that can last you a lifetime when
01:07:28.700 | properly cared for. So you wouldn't expect to have to go out and buy another shovel next
01:07:33.740 | year. If you bought a house and you just had an all-inclusive Home Depot budget, it just
01:07:40.580 | said Home Depot. It doesn't tell you anything about your behavior. You may be choosing to
01:07:44.620 | buy those durable items that are buy-it-for-life type of things.
01:07:48.660 | So think about your categories so that with the goal of making better decisions about
01:07:53.980 | your expenses. All spending is not bad. The goal is not always to spend the least amount
01:08:00.900 | of money. The goal is to get the maximum value for the money based upon your goals, based
01:08:05.740 | upon the type of lifestyle that you're trying to live.
01:08:08.620 | To wrap up, let's talk about medical and taxes. I think here, there are different approaches
01:08:15.820 | you can take. I tend to just keep things under medical and dental. But I want to give you
01:08:21.180 | some possible expenses that you should consider. I do have one or two of these subcategories.
01:08:27.820 | But for example, here are some things to consider.
01:08:31.180 | Preventive care versus non-preventive care. You might be making a choice to invest in
01:08:39.460 | your health in a way that you think is proper. You might be choosing to spend money on higher
01:08:48.900 | quality food or better nutrition or gym memberships or any similar associated things. Is the goal
01:08:58.980 | to always spend the least amount of money possible? Well, probably not because if it
01:09:05.540 | were, you may not buy higher quality food. You may not purchase nutritional supplements.
01:09:12.420 | You might just not do those things because you say, "Well, I'm trying to spend the least
01:09:15.660 | amount of money possible."
01:09:17.420 | But if you recognize that these types of things are investments, investments into your health,
01:09:24.100 | and if you're making wise decisions about those investments, who's to say you should
01:09:28.940 | try to minimize that? So it might be helpful to have a category that's called preventive
01:09:32.980 | care, recognizing that it's an investment. Now, that's different than saying, "Okay,
01:09:39.540 | I've got medical expenses that I need to track that are associated with other medical expenses
01:09:46.180 | or dental expenses," some more type of thing.
01:09:49.500 | So break these out in a way that makes sense to you and that's helpful to you because,
01:09:53.460 | again, goal is not always least amount of money possible.
01:09:56.860 | Finally, taxes. Taxes are relatively simple. You don't need to do a ton here other than,
01:10:01.460 | of course, if you're paying taxes, calculate them and try to keep some separate accounting
01:10:06.780 | for them, real estate taxes, income taxes, if you are subject to any other types of taxes
01:10:12.540 | that are easily itemized. Very, very valuable.
01:10:15.980 | As we've talked many times on the show, the place that you live will have a major influence
01:10:20.620 | on your tax burden. It might sound to you, a long-time listener of Radical Personal Finance,
01:10:26.140 | obvious that if you choose to live in one state versus the state next door to that state,
01:10:31.140 | the difference in the tax rate may lead to your having an extra million dollars at retirement,
01:10:35.980 | but that's not obvious to most people. Why not?
01:10:39.380 | Why do they not recognize that if they moved from a high-income tax state to a no-income
01:10:43.600 | tax state or a low-income tax state, that would give them an extra five to say $10,000
01:10:48.460 | a year if they're six-figure income earners and medium families, etc.? Why do they not
01:10:53.700 | recognize that? Well, many times because they've never bothered to track it. They've never
01:10:58.720 | bothered to budget for it.
01:11:01.140 | Think about how insidious this is. The income taxes are automatically pooled right off the
01:11:06.140 | top. See, the government knows the power of taxation right off the top. It was a major
01:11:13.180 | improvement in the tax system when they switched to having the employers pay the taxes in or
01:11:18.440 | out of the top. It collected far more tax revenue and it changed the IRS agents from
01:11:25.940 | being a foe, "I got to pay these people money," to being a friend. Many people look at the
01:11:29.900 | government as their sugar daddy. "Oh, I get a tax refund. I can get some money. I'm really
01:11:34.100 | looking forward to my tax refund. Let me get my taxes done so I get my tax refund."
01:11:36.940 | Well, this is not for you. You need to know the numbers. So that way, you'll make an intentional
01:11:47.140 | choice. If you want to live in California because the trade-off for high income taxes
01:11:54.500 | is low property taxes and great climate, you can make that choice intentionally. And then
01:12:01.140 | you can feel confident about it. If you want to live in Texas because you have no income
01:12:06.940 | taxes, low property taxes, but you have to deal with Texas, you can make that choice.
01:12:13.420 | If you want to live in Illinois or New York or Florida, you can decide what you're doing
01:12:21.180 | based upon why you're doing it. And you can adjust. If you want to live in California
01:12:26.660 | because you have great climate, that may require an adjustment in another area of your budget.
01:12:32.180 | But you can make that decision intentionally. Thus, you'll feel confident with it.
01:12:41.700 | So itemize the tax dollars. Figure out where they should be. And then that way, you'll
01:12:45.580 | be able to, I think, get far more benefit from them.
01:12:52.220 | Those are my categories that I use. Those are the categories, subcategories, etc. Your
01:12:57.260 | categories may be different, but I wanted to explain how I got to those. I don't claim
01:13:01.740 | they're perfect. I don't claim they're an ideal model for you. For some of you, that
01:13:06.340 | may be so overwhelming. And the stage of budgeting you are is just to figure out, "How do I not
01:13:11.300 | be late on my power bill?" Start there.
01:13:15.540 | Your budgeting system can, will, and should change over time. Mine certainly has. Do not
01:13:25.340 | expect that budgeting is always going to be the same. It's not. There are changes in the
01:13:31.420 | past. If you want to listen to another episode on budgeting, go back and listen to episode
01:13:35.940 | 273 called "Three Budgets You Should Establish for 2016," time, money, and food. And in that
01:13:40.820 | budgeting show, I discussed the major stages of budgeting. I talked about how you'll go
01:13:47.100 | through different stages and purposes for budgeting. And I really think this is valuable.
01:13:52.860 | So go back and listen to that show for that as well, because budgeting will look different.
01:13:59.020 | You must always budget, but you must not always budget the same. You must always budget, but
01:14:10.380 | you must not always budget the same. One stage, you're budgeting for cash flow. Another stage,
01:14:15.900 | you're budgeting for big picture control. Another stage, you're just budgeting for maintenance
01:14:19.340 | to make sure you're on track.
01:14:21.580 | That's it for the show today. Remember the sponsors of the day, Libsyn and YNAB. Again,
01:14:25.140 | free 34-day trial of the YNAB software, radicalpersonalfinance.com/ynab. Also use promo code radical at libsyn.com.
01:14:31.860 | If you would like to support the show directly, not by supporting the sponsors, please consider
01:14:35.340 | becoming a patron of the show. Radicalpersonalfinance.com/patron. Radicalpersonalfinance.com/patron, as always.
01:14:43.500 | Links to all of these things in the show notes for today, which pops up right on your screen
01:14:47.340 | or on the blog page for today's show. In addition to that, if you would like to work with me
01:14:52.140 | personally on a consulting basis, I'd be happy to work with you as a consultant. You can
01:14:57.220 | book a phone call with me at radicalpersonalfinance.com/phonecall. Also, I have been doing some high level
01:15:05.100 | business coaching and personal finance coaching. This would only be appropriate to you if you
01:15:10.140 | earned in excess of six figures, but if you're interested in details of that, email me, joshua@radicalpersonalfinance.com.
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