You need a budget, and the new year is a great time for you to be starting and perfecting your budget. Conveniently enough, since today I'm talking to you about budgeting and sharing with you how I do my budget, today's show is sponsored by YNAB. You need a budget, the world's greatest personal budgeting software.

Get a free 34-day trial at radicalpersonalfinance.com/ynab. Today's show is also sponsored by Libsyn, the podcast host that I use and the podcast host or media host that I recommend you use. Get your first month of service for free using the promo code radical, Libsyn, L-I-B-S-Y-N.com. Use the promo code radical.

It is a new year and budgeting, I'm sure, is one of those things that's at the top of your to-do list. After all, budgeting is essential at every stage of wealth. Today I'm going to share with you some specific tactics, including even the categories that I use for my own personal budget.

Welcome to Radical Personal Finance, the show dedicated to serving you with the knowledge, skills, insight, and consistent daily encouragement that you need to live a rich and meaningful life now while working on your plan for financial freedom in 10 years or less. My name is Joshua Sheets and I'm your host.

Thank you for being with me today. Today we're going to be very, very practical. Yesterday's show was a little bit about big picture, RVs and all that. Today, let's teach you how to budget for an RV or anything else that you want. As we begin the new year, I hope that many of you are taking a fresh look and fresh, dedicating yourselves afresh to the nuts and bolts of finance.

It's important to always remember that as fun as it is to think about new subjects and as fun as it is to learn about new ideas, oftentimes those ideas are more interesting than they are useful and practical. Although I'm a huge fan of interesting and even esoteric ideas, I want to stay practical because the fundamentals of finance are always, always important and you need to consistently execute on them in order for you to be able to accomplish your goals.

The basic fundamental skill that you need to build wealth is the skill of budgeting. If you are not excellent at your budgeting, no matter how much or how little you earn, you will wind up spending all of it. And because you wind up spending all of it, you'll be in a situation where it's unlikely for you to be able to build wealth.

Remember there are three things that are instrumental in your wealth building journey. Your income, the level of it, how high, how low, your expenses, how high and how low, and your investments. But in order to manage your income and your expenses, you need a budget. Now, I have talked in many shows about budgeting and I've talked about different approaches for budgeting.

Budgeting is one of the most freeing things in the world and I can't do any better than – I don't know who to ascribe it to, but I can't do any better than the saying that often goes around the personal finance world that a budget is simply telling your money where to go instead of wondering where it went.

If I knew who originated that phrase, I'd give them credit, but I don't. But that's really it. Now the cool thing about budgeting is that you get to decide the budget. You don't have to accept somebody else's budget. You get to decide. And budgeting is so exciting because it's going to be reflective when done properly.

It's going to be reflective of your goals. That's what budgeting should be. Budgeting is a way of your getting to your goals. If you want something, you can budget for it. You get to decide what you want and then you get to figure out how to budget your way there.

Budgeting is so, so powerful. Now in today's show, I'm going to tell you a little bit of my mindset and specifically how I categorize my budget accounts. And there are many ways that you can use a budget, some of them more effective than others. For the sake of simplicity, you can budget using a piece of paper and a calculator.

You don't even need a calculator if you paid attention and practiced your addition and subtraction tables such that you can do that manually. A piece of paper is really all you need. You can budget using the old favorite of an envelope system where you budget using cash and envelopes for all of your spending.

That's great. You can budget using any number of a suite of software options that are available. You can use Quicken. You can use Microsoft Money. You can use all kinds of online options. There's Mint. There's Personal Capital. There's all kinds of tools. There are dozens and dozens of them.

There are apps that you can get for your smartphone. You can use spreadsheets. I've done an interview with Peter Polson from Tiller. Tiller is a great option. I know many of you are using that, using Google Spreadsheets and automatically importing your data into that. You can do it in Excel.

I've budgeted for years using Excel. I don't care about the method. I'm going to share with you the categories that I use. I think these categories are helpful. I use YNAB. If you are interested, go back and listen to some of the past episodes of the show. Go and listen to number 246 if you want to hear a little bit of my story with budgeting.

That episode was called "You Need a Budget and Here's the Best Way for You to Make One." That was an interview with Jesse Mecham, who is the founder of YNAB. I use YNAB because it's just simple and it works really well. It works with how my brain works. It does for me the two major functions that I want to have done in a budgeting system, which are tracking and budgeting.

Again, tracking and budgeting. Big difference between these two things. There are many ways for you to track your money, to simply create a spreadsheet or an accounting of where it went. Almost all budgeting tools will do this well. For example, years ago I used Microsoft Money. Microsoft Money does a great job with this.

Quicken does a great job with this. Spreadsheets do a great job with this, of tracking where the money went. Here at the beginning of 2017, an exercise I strongly encourage you to engage in is to do a complete review of all of your expenditures of 2016. Do this complete review based on categories.

Go back and think about what you did, what you spent, and make sure that these categories are reflective of your goals and of your values. That's very important. Do that review. But that's all a tracking function. A budgeting function is a way for you to allocate the resources that you now have in an appropriate manner so that at the end of 2017, you'll be in a position that is closer to your goals than farther away.

A budgeting function is a way of using the resources you have and properly allocating those resources. And it's most valuable if this can be done in a flexible way. Now, if you want more philosophy on budgeting, go to radcopersonalfinance.com/archive and just search that page for budget. You'll find all kinds of past shows about budgeting.

But today I'm going to tell you how I approach mine. Now again, I use YNAB. And here's what I do. I keep two different budgets, two completely separate accounts disconnected. And the reason I do this is because I want to have a different mindset depending on which of those budgeting activities I'm engaged in.

I keep one budget for business and one budget for personal. As a business owner, all of my revenue comes in under the category of business. Now, of course, my revenue is derived from various lines of business, various types of business activities, but it all comes in under the characterization of business.

At this stage of my entrepreneurial journey, I can keep it this simple. Perhaps at a later stage, I will need to do what many of you will do, which will be have complete separate budgeting systems for each of your businesses that are completely distinct. Your bookkeeper, your accounting team will maintain those and you'll just simply review the reports for each of those.

But I'm not in that stage myself yet. So I maintain all of my business activities under one simple budget called business. Then I maintain all of my personal activities under one simple category called personal. Now, little tip for you. If you only have employment income, in the United States, this would be only income that's reflected on a W-2, tax income verification form.

If you only have income that's reflected of your work as an employee, then you can maintain a simple personal budget. But you probably shouldn't only have employment income. You probably should have your own version of a business/investment budget and a personal budget. Almost each person should have some kind of side business that's related to your career, that's related to the career that you're moving towards, or that's related to an additional way for you to earn money.

And so you can emulate and copy my approach of having a business budget and a personal budget. Now, the reason I keep these separate is because I want to have a different mindset in each of these. First of all, I want to be clear to myself that whenever possible, I want to have as few expenditures in the personal budget as compared to the business budget.

I want to constantly keep in front of myself the idea that if possible, I want to associate any expenses with the business with the business. And I don't want to forget about those expenses. Having done a significant amount of budget consulting with just normal people who are just getting started in business or even who've been established for a few years, one of the biggest errors that I find is they don't maintain separate business accounts, business records, and business books.

Rather, they keep everything integrated. And friends, if you are doing that, I hate to make dogmatic statements when they are uncalled for, but man, I can't think of a single circumstance in which you're not wrong for doing that. If you're running a business or have some sort of business activity, you must maintain separate records because you are walking past all kinds of important business tax deductions because you're not accustomed to paying attention to the little things.

And if you have a separate business budget, you're almost automatically, you can't maintain a separate business budget unless you have a separate business checking account. And if you have a separate business checking account and you do as I do where you have two debit cards sitting in your wallet, one is for business, one is for personal, if you do that, then you'll be in a situation to where you're paying attention to your expenditures.

Now, point of clarification for those of you who are just getting started, to have a separate business checking account does not require you to actually sign up for a business checking account. All you need is a separate checking account which you mentally classify as a business account. I hold in my hands my wallet and here I have two blue debit cards that are right in the front of my wallet.

I bank with USAA so these have pretty blue, they're pretty blue and they've got this military star on them and a red line down them and they're identical. They are absolutely identical and the reason they're identical is because I use personal checking accounts. I just have two of them.

One is for me and the other is for my business but they both are registered as Joshua J. Sheets. To differentiate the cards, you can draw on them with a marker. I've done that. I actually use this little engraving tool that I use to engrave all of my items.

It's a little metal tip and I can write on metal and on plastic so I have here business scrawled on the front of it and so that way I always know which is which and I just carry these two debit cards right in my wallet and if it's a business expense, I swipe the business one and if it's a personal expense, I swipe the personal one.

But this simple practice, if you just did that this year, many of you would save you hundreds or thousands of dollars because it will start to get your mindset thinking differently. Very simple example, you might go to lunch with somebody and if you go to lunch with somebody, then you might be tempted to pay for their lunch.

That would be a good idea. But if you don't have that business debit card right there or business credit card, you can do the same thing with a credit card. If you don't have that business card right there, you may not remember that that's a properly deductible business expense.

You can deduct 50% of your meals and entertainment expenses when you are engaged in business-related meals and entertainment with clients, prospective clients, etc. And so if you're there with somebody talking about your business, don't let the lack of that business card keep you from the tax deduction that you are rightfully entitled to.

Just a simple example, but man, I tell you, I see this all the time. Now, that's the first reason I like to keep two different, well, that's the first reason on my list here of why I like to keep two different budgets, simply that it keeps you in the mindset of thinking, "Is there a way that I can move some of these expenses that are personal and non-deductible over to the business expense column?" Here's the simple answer.

If you're wondering if you can deduct something, it comes down to this. If the expense is related to the ordinary and necessary expense that's related to your business activities, it is a deductible activity. Now, of course, you can go and research with greater specificity any particular category, but that's basically the doctrine.

All ordinary and necessary business expenses that are related to your business will be deductible in some form or another. But another reason why I like to have the two categories separated is just simply so that I can have different mindsets when I'm looking at them. For example, with the personal category, which I'll go over my budget categories for you, with some categories I want to look at them and say, "I want to be ruthless and get these categories expenditures as low as possible." With some category expenses, I want to have a more moderate mindset.

Good example, personal, let's say, consumption items that are not related that don't bring me pleasure. Well, I want to look at those items on my personal budget. I want to be as ruthless as possible about lowering those expenses. But personal category items that are quality of life expenses, let's say that it involves something I want to do with my family, building family memories, vacation expenses, things like that.

I'm not necessarily trying to say, "How ruthless can I be and how low can I get that?" I'm trying to say, "How can I get maximum value for the money?" If it were a goal for me not to spend any money in this particular category, then I would just not go on vacation.

But the goal is a quality of life goal. And so I want to look at that with a little bit more balance. Now on the business side, if I want to look at a category that's simply an expense, I want to ask myself, "Is this an expense that's generating revenue or is this an expense that's just simply taking money out?

It's just necessary." I want to be absolutely ruthless with the expenditures that are just necessary and I can't really get out of them and they're not generating any revenue. Perhaps an example would be fees or business licensing costs, things like that. Got to do them. How can I get out of them?

But they're not generating revenue. They're useless to me. Now that's different than an expense that might be a revenue generation tool. And in business, I want to look carefully at those expenditures that are generating revenue and not necessarily diminish them. I probably want to maximize them. And I want to rank them in order of what's the most productive use of money to the least productive.

I want to do my best to calculate how productive this particular category is. But I want to spend money pretty freely on anything that's bringing me customers. I might even want to invest heavily a significant amount of my profits into an area that's bringing me customers. The most obvious example here would be an advertising campaign.

Let's say that you have a consistent way which through the use of advertising, you can bring new customers into your business. Well, if you have that and if the lifetime value of the customer is substantially higher than the cost of acquisition of that customer, then you are well served to put as much money into that advertising campaign or those advertising projects as that category will bear.

Don't pull back based upon some kind of idea that I'm going to be frugal here. Being frugal with an advertising strategy that produces consistently high results is the wrong solution. And interestingly, in order to do this is I'll point out some of the business metrics that you need to actually be aware of.

Let me give you a very simple but very powerful example. Let's say that the average transaction between you and your customer, the first transaction with a customer is $30. Okay, they're going to bring you $30 of revenue into your business as a customer. So therefore, you should look at that and you should calculate how much you can afford to spend for the acquisition of that customer.

Now, trick question here. Should you look at that category and say, "Okay, I've got $30. If I take that $30 over here and invest it in some place other than my business, I could achieve, let's say, an X percent rate of return. So I'm going to get 30 plus X.

So in order to calculate the cost of my spending the $30, I should take the $30 minus X and that's how much I should spend on acquiring that customer." Something like let's say I should spend $25 to acquire the customer. Is that the proper analysis or do you need more information?

The answer is you need more information because you don't look at the initial sale. You look at the average lifetime value of a customer. The most important calculation for you as a business owner is to calculate... That was too strong of a statement. An important number for you to know as a business owner is the total lifetime value of a customer.

Let's say that you calculate that the average initial transaction with the customer is $30. But yet that average customer will return to your business a total of 10 times over the course of their time with you. So therefore, the total value, the lifetime value of the customer is $300.

Would it be crazy for you to spend $50 in order to acquire a customer on an initial basis whose total lifetime value to you is $300? Wouldn't be crazy at all. Now you need good data to be confident of that number because if you're going to spend $50 to get a $30 customer transaction, that's going to lead to some losses in the initial stage until those later sales come in.

But if you have that data and you know the number, you could spend $100 to acquire a $300 customer. That's what business does. Business prints money. It prints money because if you can find a way to spend $100 and get $300, you've now printed $200 of profit or of at least additional revenue subject to the margins in your business to calculate your profit.

I hope you get the point. The point is that when you look at different budget categories, you need to isolate an expenditure and figure out if it's something that you should want to do more of, meaning I want to have a high expenditure in this area. If I have a proven marketing plan, I want to put as much money into that proven marketing plan as possible.

Every dollar that I have, I'll allocate into that marketing plan because I know I'm printing money or is this a category where I want to be careful and cautious recognizing the value and return trade-off of this category. Vacation, we want to take a nice vacation. I want to make this certain memory with my family.

This is important to me. I'm willing to spend this amount of money. I'm not trying to do it super cheap, but I'm also just making an intentional decision. Or is this a category where I just want to cut as ruthlessly as possible? This is my internet bill. I need 20 megabits per second at download speed and whoever gives it to me, I'll take it.

It doesn't matter whether it's the cable company or the phone company or the internet company that's beaming it down from the satellite or from the hot air balloon tethered above my town. I just need the internet access. It's a commodity. You've got to pay careful attention to those categories and good budgeting will give you the indications.

Now with regard to business budgeting, I'm going to end my comments there. I hope that you can see if you're a business person. Most likely, many of you are not doing your own bookkeeping. Some of you are, but I at least encourage you to isolate the categories in your business and try to look at them very carefully and to understand what type of expense this is.

Is this something I want to do more of as much as possible? Because even if you want to do as much as possible, that doesn't mean that you can spend an unlimited amount of money in an area. Best example to stay with is advertising. There's a point of diminishing returns.

There are markets that you can buy advertising in and then at times you saturate those markets. So even though you may have mountains of cash sitting there, you can't find the inventory, the ad inventory, the number of billboards are not available. You can't buy the commercials. You can't buy the targeted clicks.

You can't spend enough money in that category. So just because you want to spend as much money as possible on something like marketing and promotion, doesn't mean that you'll always be able to spend as much money. So take your business books and whether you do this officially or whether you just do this mentally, separate each category into should I spend more or less so that when you're looking at the books, you can get clear on them.

There's a major fallacy to think that, "Well, I can just spend freely in business expenses." No, there are business expenses you still want to minimize because the point of business is to make a profit. So you want to be ruthless with those business expenses that aren't bringing you revenue.

There are some business expenses that are that middle zone. You might not technically need to hire this particular job function done. But at your stage in entrepreneurship, it's not something that you enjoy doing and it would be significant quality of life. Hey, if you're going to pay – it's going to get you a 50 percent tax deduction based upon your business tax rate, your personal tax rate, et cetera, go ahead and hire it done.

It's not a must do it but I'm also not cutting things to the bone. You negotiate leases, hardcore. Get those as low as possible. You bring in employees from time to time to make your life easier and to free up more time and to make your business run more smoothly.

But you don't go all in on those expenditures and expenditures that make you revenue, you go all in. But that's where I'm leaving my comments on business and I'm going to share with you now my personal categories because – for my personal budget because those will be more applicable to a broader range of you.

So for the rest of this conversation, we're going to say that I've earned a dollar of income and that shows up as personal income. It's been transferred over to my personal budget. For you, that means the money may be coming in as a paycheck or it might come in as profits from your business.

I don't care here about the characterization. I don't care whether this is a dollar of investment income or wages or dividends. I just care that it's a dollar of income in the personal budget. Now, we're going to budget it. And we're going to talk first about what do you do.

Do you pay yourself first? Before I continue that, I want to do here just a fairly obvious ad for YNAB. Again, I use the YNAB software. I use YNAB for that business budget. I use YNAB for that personal budget. Go back, please, and listen to episode 246 of the show, which again is called You Need a Budget and Here's the Best Way for You to Make One.

But I reached out to YNAB. YNAB was the number one most recommended product when I talked about bringing sponsors on to Radical Personal Finance. So many of you said, "Get YNAB. We love YNAB." Now, for the previous probably eight to nine years, I've done all my budgeting with an Excel spreadsheet.

I'm very good with Excel. I'm very good with spreadsheets because I've always had an irregular income. And the problem that I had, which was difficult to solve, was that I never knew how much money I would have at any particular month. So I could never do that simple budget that many people imagine where they sit down and they say, "Okay, I got a check that's $2,000 twice a month.

So on the first of the month, I'm going to take my $2,000. I'm going to put it on a sheet of paper and I'm going to spend it down the page until it's zero." That's great. I never figured out how to do that because I didn't know if I was going to have a $2,000 check on the first of the month, a $0 check on the 15th of the month, and an $8,000 check on the first of the month, the following, followed by two months of no income.

How do you do it? It's really tough. Well, when I finally found YNAB again and tried it, I was blown away at how good it was. And the reason it's so good is that YNAB allows you, nay encourages you, nay forces you, to budget every dollar that you have in your checking accounts.

And you can't spend the money unless you've budgeted it. But if you need to adjust the budget, you can adjust it at any time. And it is so good, so good especially for irregular incomes because you can look and you can budget different categories and you can make adjustments, et cetera.

Now, it's hard for me to do much more than that, to explain that much more in just a short little ad here, but it's really, really good. Now, sign up, get a free 34-day trial at radicalpersonalfinance.com/ynab, Y-N-A-B, acronym for you need a budget. Try their free 34-day trial, but try it on two conditions.

Number one, please go through my affiliate link so that I get a commission on the download of your software. And number two, during that 34 days, watch the YNAB tutorials or take the classes and follow their instructions. They will teach you exactly how to use the software. And it's not as intuitive as say other tracking programs that you've used in the past, but it's way more powerful.

Not as intuitive, doesn't mean it's hard to learn, but it's way more powerful. So take their classes, do their webinars, take their courses. At the end of 34 days, if you like it, you can buy it. It's a few bucks a month, what, $4 a month, $5 a month, $4, something like that.

If you don't like it, you didn't spend a dime. radicalpersonalfinance.com/ynab. Question, should you pay yourself first? This is a concept that's often thrown around. And the idea here is the first thing you should do is save money. And this is a valid concept. Very few people ever actually save money because they have too many expenses that come before they're able to save.

They got too much month and not enough money. And I have observed it to be true that generally the only people who save money are those who proactively, consciously choose to save money and save money right off the top, right up front. So the way it works, if you were paying yourself first would be you'd earn a dollar and you'd decide how much am I going to save?

Let's say you were going to save 10 cents of that dollar, 10%. So you'd set aside those 10 cents and then you'd figure out how to live on the remaining 90%. That's the idea of pay yourself first. Now, should you do that? Well, obviously I don't have a problem with that practice, but I don't actually personally think that you should pay yourself first.

I like to practice the principle or habit of pay yourself second and give money away first. And so for me, the first category is going to be giving. Now there are a few different aspects of giving. I'm not here today to tell you how much of your money you need or should give away.

That's up to you. You've got to decide that. That number may change throughout your lifetime, but it should be a part of your budget. Giving money away in a way that gives you very little benefit, if any, is a very, very healthy practice. And if you don't give away 10 cents out of a dollar, I find it very hard to believe you'll give away a million out of $10 million.

Giving is a practice, giving is a habit. I find it quite astonishing and humorous when people often say, "Well, if I had X number of dollars, then I would give away such and such." But yet sometimes these same people never give away their money, never give away their time, never give away their skills, never give away anything.

And I've observed that more money just makes you more of who you are. So I think a really healthy practice from the very beginning of your financial life, or if it's too late for that today, for you to start and practice, is to always give money away. Very important.

Now I think of giving in three different categories. There's the giving of gifts, gifts such as birthday gifts to your children or to family members or to friends, Christmas gifts, just special gifts that you want to give to somebody. Things such as, "Hey, we know that so and so, this family is going through a hard time, so let's give them a gift certificate so they can enjoy a nice dinner out." Or, "Let's pick up the tab for a younger couple who would really appreciate that when taking them out on a nice dinner out again, or send them away on a nice family vacation or whatever." These are gifts.

So I think of gifts as being very important. We've just come through Christmas. Christmas is obviously for most people, probably the biggest budget category of gifts all year, and you've got a budget for this money that you're going to spend on gifts. So I like to keep a category under my giving marked gifts.

That way we have a budget available, birthday parties, et cetera. I've got, let's see, 12, 13, 12, 10. I guess I've got 10 nieces and nephews on my side of the family. So birthdays come around pretty regularly. Every few weeks it seems there's another birthday party. So these things require gifts.

The next category of giving is what I think of as systematic contributions and support. For many people, this will involve a tithe that you pay to your church, or this will involve systematic support that you give to a family member who's depending on your income, or this may involve organizations, charities, ministry organizations that you choose to systematically support on an ongoing basis.

So I think of that as systematic contributions and support. And then category number three, I just call ad hoc financial contributions to others. The idea here is I want to have an account ready that's available so that when I see an opportunity to give money to somebody in need, I have it budgeted.

I've learned that this particular practice can be one of the most freeing things you can do. That way when you get the GoFundMe page that was just shared on Facebook for somebody in need, et cetera, you don't have to wonder, "Oh, can I afford it?" You just go to your budget and you look in your ad hoc financial contributions number and see how much money's there, and then go ahead and make your donation based upon how much is there and how much you feel you'd like to give.

I think these are three useful categorizations to make under giving money. And here would be some of the value of having these broken out as categories, especially in the context of your year-end financial review and planning for the next year. If you look at the amount of money that you spend on gifts for family, birthday gifts, Christmas gifts, et cetera, you might look at that and ask yourself, "Am I getting a lot of value from this?

Is the person I'm giving to giving a lot of value for this?" This would be the type of category that I would look at carefully because there's no stated percentage that's the right number to give. Should you give away 3% of your income as your birthday gift budget or your Christmas gift budget?

This is one of those things where you want to look at it and analyze the value that you're getting or the value that the person is getting based upon the dollars you're spending. And you might look at it and you might find, "You know what? We're spending all kinds of money on plastic toys for children who don't need plastic toys.

Maybe we could take that same money and we could spend it in a way that is more useful to the child. Maybe instead of spending the money on plastic toys, we could spend the money to open an investment account and buy the person a share of stock each year for their birthday in a company that we think that they'll like.

Or maybe we can take it and instead of buying a plastic toy, maybe we can buy a one-ounce silver coin and perhaps each year of their life we'll give them a one-ounce silver American Eagle if they're from the United States. We'll give them a one-ounce silver American Eagle from the beginning of that particular year." So then a simple plan like that could be that you sit down and you count the number of nieces and nephews that you have and each year you just buy a box of silver coins from the U.S.

Mint. You go ahead and get them and now you've got your birthday present squared away and you've enhanced your personal silver coin collection at the same time, which who knows could wind up being useful to you as an investment practice. Let's say you spend 500 bucks on a box of silver coins at the beginning of the year and it's your way of having gifts ready to go and it's a way of making sure that you also have some additional silver lying around.

You'll wind up with extra coins at the end of the year. For some of you that's a useful conversation piece. It's a way to teach people and it could be a cool collection. How cool would it be if you arrived at the age of 21 and you looked back and you had a silver American Eagle for each year of your life?

Maybe at some point in time you can transfer that to gold if you're wealthier. It's fun to have collections of things like coins. Or maybe you look at that gift that you're giving and you say, "Well, I've got my favorite nephew Joey and I was going to give him this plastic toy.

But you know what I'm going to do instead? I'm going to go ahead and I'm going to schedule a day and Joey and I are going to go fishing and I'm going to pay for the fishing trip instead of the plastic toy." It doesn't matter. You've got to figure out.

There's an age at which a child wants a plastic toy and there's an age at which a fishing trip would be valuable. But you can look at that and by having it distinguished in your budget as gifts, it gives you the opportunity to plan to get the maximum value from it.

Perhaps you're a grandparent and each year you're spending thousands of dollars on Christmas gifts. But yet you notice how in our modern culture the toys are abundant and the novelty wears off. Is there a way that you can take those thousands of dollars and translate that into something different?

Perhaps renting a Christmas cabin in the mountains of North Carolina and financing all of those things including a day at the local ski resort. Perhaps that would be a way of building a really nice family tradition. By having it broken out, you can look at this category for what it is and for what it should be, which is a maximization of value.

You're not necessarily trying to see how little you can give, but you're not necessarily trying to see how much you can give. This is one of those maximization of value categories. Now at some stages of life, you might look at this category and just recognize that, "Man, this is blowing our budget.

We can't do this." I've counseled with young couples, young families, and this can be extremely challenging for parents of young children because you may, depending on the size of your child's social circle, you might wind up at a different birthday party every few weeks. If in your cohort of parents, it's expected for you to give birthday presents that are on the $30 level.

If you wind up at a birthday party, say 30 weeks out of the year, which would not be unreasonable if your child has 20 friends in their class, times $30 each, that's $600 a year. For a young family, that could be a substantial amount of money. So for you at that stage of life, this may be a category at which you home in and say, "You know what?

We're just going to change. We're going to give a craft, or we're going to give a favorite book, or we're going to figure out a way to reduce this." Or we may not give a present at all. Totally reasonable option. So that's the category of gifts. What about systematic contributions and support?

This is a category that you'll have to judge yourself. For example, those of you who are engaged in the practice of tithing to your church. Tithing is generally practiced as 10% of your income is given to your local church right off the top. Well, if you practice that, that's very simple for you to take your income and calculate and say 10% goes right there into the local church.

So that's not a category that you try to increase or decrease. That's not something you're trying to save money. You're making a voluntary choice to send 10% of your income to your local church as a tithe. Or perhaps you look at this and include in this organizations that you support.

Well, you should know this as expressed as a percentage of your budget. Perhaps you're supporting a political organization that's seeking to advance a cause that you feel passionately about. Or perhaps this is an organization that is involved in doing some kind of work elsewhere in the world that you feel is important.

Certainly this is a category where you want to analyze it and decide if the company or the organization or the church or whomever is doing a good job with it. But again, it's not necessarily a minimization thing. You're seeking to have it funded. Now, if you don't give all of that to one organization, then you may want to choose and say, "Well, I need to make sure that I have this budget." And so each year you're picking and choosing the organizations.

I think a really healthy practice is if you're going to give money to an organization, a political organization, charitable organization, you should expect results from that organization. And you should plan to give for a short period of time expecting results. Now, this doesn't really work if you're giving $50 a year to the local chapter of blah, blah, blah.

But if you're giving substantially, let's say that you are a major donor, you should give with the intention of getting results. And there should always be a question in that organization's mind if they're going to get your money. And you should make it clear, "You're only getting my money if you're getting results." So have this as a category.

Moving more quickly, ad hoc financial contributions to others. Please, I just ask you to put this in practice. Set aside an amount of money in your budget that's always available to give to others. This, perhaps more than anything I've yet said, has the potential to revolutionize your finances. Because when you always have money available to give, you start to see opportunities to give.

If you're strapped, you'll often just bumble past those opportunities and not recognize them for what they are. But if you have a pile of money burning a metaphorical hole in your pocket, you start to look at people in need a little bit different. So I beg of you, if you were going to take anything from this, set aside a giving account in your budget and make sure that it's funded at an appropriate level for you.

And make sure that it's not all spoken for in advance. Don't just track the money that you give. Proactively budget the money and do it in a way that will allow it to accumulate little by little so you can experience the joy of being a giver. Talk to wealthy people.

You go do your own research and find out the impact that giving has made in their life. I think you'll find it substantial. Now let's move on to saving and investing. Before we do, sponsor of the day number two today is Libsyn. Libsyn is short for Liberated Syndication. Libsyn is the podcast host that I use to host my podcast.

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I think that podcasting is one of the most powerful electronic media communications of media possible. Now, not necessarily as a commercial endeavor like I'm doing it. Partly, many of you, it should be as a marketing component to your overall marketing for your business or for your personal brand. But it may even be something as a way of organizing, something that you're doing.

Perhaps you're involved with a local competition or club in some particular area. Well, why not go ahead and use the format and the simple format of podcasting as a way to do that. Libsyn will teach you step by step how to do it, how to set it up, how to use the simplest tools and how to get a podcast launched, a very robust podcast.

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Now, a little radical tip for you. You can actually possibly get as much as about 57 or 58 days for free. Here's what you do. When you sign up for Libsyn, sign up for their largest hosting package that they give because they give you whatever it is. The first month that they give you, they give you that month for free using the coupon code Radical.

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Libsyn.com, L-I-B-S-Y-N, Liberated Syndication, Libsyn.com, the best podcast host, the one that I use. It's what accounts for the fact that Radical Personal Finance since my first year has been rock solid. Get a free month free with the coupon code Radical. Now let's talk about savings and investments. I'm going to move quickly through the rest of these categories and also through this one.

Just simply to say this, I think you should allocate your savings and your investments in some way that you've intentionally chosen. This is a little bit difficult to manage in budgeting software because some of you, your savings and investments will be done before the money shows up in your checking account.

That's great. For example, your 401(k) contributions may be deducted or your health savings account contributions may be automatically contributed. Or perhaps you're investing in your business heavily, and so your business is growing and you know that's a good investment, but you can't really see that in your personal savings.

Don't fall into the trap of trying to say that budgeting software and your ability to use it should be reflective of all of the information. Many of you have an interest in knowing what percentage of your income are you saving. That's really good. And you may have a goal such as I want to save half of my income.

Really good goal. But you may not be able to get your budgeting software to display that information. Remember, budgeting software is not an income statement. So if you want to calculate what savings rate you have, build an income statement. Do that separately. That's something that doesn't need to be automated.

Just use your budgeting categories to fill that in. I do think savings and investments should be allocated between different approaches. Here are some ideas. You could allocate this based upon short-term savings and longer-term savings. That's a big deal. Shorter-term savings, longer-term savings. You could allocate this based upon savings for spending versus savings for wealth or savings for investments.

If you're saving for a new item, just did the show on RVs, when I was saving for an RV, that's not an investment. I wouldn't characterize that as an investment. That's a consumption item. But it's something I'm saving for. And so you want to indicate that. That's different than saving for wealth.

That's different than a 401(k) contribution or money that I'm saving for real estate down payments on rental houses or money that I'm saving to start a business. So give your savings a name and understand the nature of the savings. Understand what it's earmarked for. A major focus with savings should be that there should be a goal associated with it.

One more categorization for you to consider would be, should I save for passive investing or should I save for active investing? Here I'm not referring to passive investing in the sense of index funds. I'm referring to this in the sense of saving and investing in a way where someone else is managing it and you're not.

Probably a good idea, too, if you have an abundance of income, to always have some amount of money that's going into savings that's being managed by someone else. Mutual fund manager is managing it or an investment broker or somebody is managing the money. That's passive. That's different than active, such as starting a business.

I think both are important. So with children, I'd like to see them save half of their money for passive investing and half of their money for active investing. So half of it goes into mutual funds. Half of it is always available as, "Hey, this is your business seed money.

Look around. What opportunities do you see in the marketplace?" Now, is there any science behind this? No, of course not. These are just numbers. But the idea is there's concepts and concepts are powerful. So give your savings a name. Don't try to make it all show up in the budget category.

If you're maxing your 401(k) and that's the biggest thing that's the most important to you, fine. But you should put in savings a name. This is one of my favorite things also about YNAB, the budgeting software, that you can add or take away categories at any time. So you can give little savings goals categories.

If you wind up putting too much money in them, it's easy to clean them out. You might have a category for RV and you might have a category for a new horse and you might have a category for annual vacation. Well, when you get to annual vacation time and you're sitting down and you're calculating, you might say, "Well, let's spend a little bit less money on the annual vacation.

Let's throw that towards the RV." Or, "Let's go ahead. RV is not so important. Let's take the annual vacation." So the net takeaway I want you to have for savings and investing is give your saving and investing goals names, names that are powerful to you, names that are going to draw you toward it, not, "Oh, I'm saving money." If you're saving for financial independence, write on there, "Financial independence," and make it powerful.

Make your goals strong so they call to you, so they pull you through the difficult times. So those are the first two categories on my budget. And I like to keep them at the top because I'm paying others first and paying myself second. There's no smooth way to say, "Pay yourself first, give first." I guess I could say that.

"Give first, pay yourself second." I like to have those at the top, all those categories at the top of my budget. That way I never forget. We don't want to forget. Now what else? The next category that I have is a category for monthly bills. Again, personal budget, monthly bills.

And monthly bills are payments that I've agreed to that are going to be the same every month. Rent, electricity, things like that. Bills over which I have no direct control on a monthly basis. Bills that I know just about how much they're going to be. I can't change my rent on a month-to-month basis.

And I personally, for my personal budget, I like to have a subcategory for each and every bill. So internet is different than phone, et cetera. So the benefit of this is now putting my hat on, I look at these bills and I think, "Is there any benefit to me of this bill?

And can I get this as low as possible?" Not all categories do you want to be as low as possible. I could probably spend less money on rent than I'm spending now, but I don't want to live in the apartment that I could rent for less money than I'm renting now.

I could spend more money on rent than I'm renting now. And at some point I might want to live in that apartment for more than what I'm spending now. That's different than internet. Now, my internet bill is primarily associated with my business, but perhaps for you it's not. Perhaps your cable bill.

There's no problem to you looking at the cable bill and saying, "Eh, I'll just go with whoever's cheapest." And you want to have this set out so that from time to time you can do price shopping. Probably at least once a year you should tackle each of these budget categories and seek to minimize the expense.

But they're monthly bills. So at the beginning of the budgeting month when the money comes in we're just going to make sure they're funded in time for the draft. If you're using an automatic draft or in time to send out the check. Now, that's different. I keep a separate category called everyday expenses.

Everyday expenses are things over which I have direct control. Good example, food. Under food I maintain two categories. One, groceries, and one, restaurants. For you, you might have different categories. Some of you should have a category on there for coffee. Some of you should have a category for alcohol.

And you should break it out because if you're looking down and you're recognizing, "Hey, I spent $500 on restaurants," but you realize you only had about two meals, you probably spent it on alcohol. So you should have a budget on there for alcohol so that you have things on there.

But everyday expenses are budget categories that are quickly changeable. So we want to keep a sharp eye on them and we want to adjust them on an ongoing basis. So simple ones, we all do food, groceries, and restaurants. Restaurant bill doesn't want to be zero, but you also need to know how much it is compared to how much you're spending on groceries.

Next one is fuel, car fuel. Again, you can change that. Clothing, a couple of unique ones that I carry. I have a budget category called dog expenses. I have two dogs. I find them to be expensive. So I crack all of their expenses as dog expenses. And you may want to do something similar.

Now that does require a certain amount of discipline. You may go to Costco and you might find yourself buying groceries, tools for your shop, alcohol, and dog food. So when you come home, be diligent about breaking that $600 bill out and putting it into its proper categories. I have a category here called kid expenses.

Now this is primarily my personal experimentation as a personal finance guy. I don't buy for an instant that kids are all that expensive. All of the nonsense about it costs a hundred or however many hundreds of thousands of dollars to raise a child is just absolute baloney. Kids are not that expensive.

They really don't. You'll spend as much or as little on children as you choose to spend or as much or as little as you have. But I do like to track that so I know. And that way it gives me insight into the types of things that are related to kids.

So I track their clothing. I track any expenses that are associated with them, any medical expenses or any entertainment expenses, things like that. If it's something that I wouldn't do or wouldn't involve myself with if I didn't have children, then I go ahead and put it under child expenses.

That just is for me for more fun than anything else, partly as to see whether I'm right or wrong about my opinion on the cost of children. Obviously that category is not all inclusive. Obviously that doesn't include something like groceries. I'm not breaking my groceries out based upon how much each of my kids eat, but it's valuable for me to know.

One important everyday expense item that I have is something called reimbursable expenses. And that's anything I spend that I'm expecting to be reimbursed for. I believe you should have probably an extra budget category for this because it's easy to lose track of the reimbursements that you're entitled to. If you're buying something for somebody, have it as your category.

You might find yourself in a situation where you're spending all kinds of extra money and you're not really budgeting for that, but you know it's going to come in in a couple of days. I've done this many times, so I just maintain a category, reimbursable expenses, with the goal of zeroing out as quickly as possible.

A couple of other major categories, one would be asset expenditures. I find it useful to differentiate between consumption expenses associated with an asset versus asset expenditures. Best example I can think of would be a car. I keep a fuel budget and a car insurance budget separate from the vehicle category.

The reason is I'm never going to get the money back that I'm spending on fuel. So fuel is one of those things that I want to look and evaluate. I'm not going to get the money back that I'm spending on car insurance. So car insurance is one of those categories that I want to just shop around from for time to time.

But if I'm buying a vehicle, I might be buying that vehicle because I have a need and it's not exactly something that's the cheapest thing now, but it might still be a good idea. An example, a few months ago I bought another minivan. I don't think I've said it on the show before.

I bought another minivan a few months ago. Why did I buy another minivan? Well, I didn't need one. I already had a perfectly serviceable minivan, but I came across a good deal on the type of minivan that I would like to have in my family. I know that it's very valuable to have a backup minivan.

I know that the value of the vehicle as compared to the cost of the vehicle was very, very high. So I now have two minivans. My first minivan was a Hyundai Entourage that I bought a number of years ago. I paid an inexpensive price for it, but that vehicle has a lot of miles on it.

It's over 200,000 miles and it's had various mechanical problems and I expect it to have mechanical problems in the future. One of the challenges with buying used cars, especially cheap used cars, is the inventory of used cars is often very thin. And if you're buying a car when you need one, it can be hard to get the selection that you need.

If you've got to buy a car today, you're probably not going to be able to get a great deal on the perfect car for you, at least not in the used market. That's what new cars, new car dealerships and what used car dealerships specialize in. If you're going to need to go and buy a great car today, you can trot right out to the dealership and they have the selection, but you're going to pay more.

It's hard to figure out which country road do I drive down in order to see the ideal car that's reliable and that's inexpensive and parked on the side of the road. You can't predict that. So what I have learned with some expenses such as cars, when I come across them, I need to buy them.

So previously we had two cars. I had this little old Toyota Corolla that I bought, same type of thing. It was for sale. I didn't particularly have to have it, but I recognized the value of it, went ahead and bought it, paid 500 bucks for it. But now with a third child on the way, that doesn't work as my backup car.

And having children, it's important to me to have a backup car at this point in time. There have been times where my van was in the shop and as a single person or as a couple, it's easy to have Uber as a backup. Moving around with three car seats is a little harder to use Uber as a backup.

I have a good family network for backup cars, but I like to have a backup car. So I came across an opportunity to buy a Toyota Sienna, 10 years old. I got a great deal on it. It's one of the most reliable, consistent cars, 150,000 miles. That is my perfect car.

A minivan that's 10 years old, very reliable make and model, well cared for, few scratches and dents and dings, perfect. That's what I want. And so I bought it. Didn't have to have it, didn't need it, but I bought it because I saw the value over the coming years.

And the cost of owning a car like that is minimal from a depreciation perspective. So what's the point of this? Point is that I didn't plan to spend the money that I bought it for. I bought it for $3,000. I didn't plan to spend the $3,000 in that month.

So if I'm just looking at vehicle expenditures and I'm analyzing vehicle costs, I'll see a huge $3,000 bump. And if I'm just pulling my hair out about, "Oh, I spent this $3,000 and I didn't need to do that." That's different than me looking and saying, "This was an asset purchase.

This was me buying an asset." Now that vehicle today I could go out and I could sell it in a week or two in the private market for more than $3,000. Maybe not a ton more, but I could go and sell it for more. So I want the value of this to be recognized.

This was a balance sheet item. This wasn't a consumption item. It's not an income statement item. It's a balance sheet item. So how do I do that? Well, I just keep it simple. I just have on there one for asset expenditure, vehicle expenditure. Now I'm also going to include on that, I'm going to include there the cost of the vehicle purchase.

And depending on the level of complexity, I might have vehicle repairs and maintenance. Because I want to know, same thing, when I buy a car, I want to go ahead and see if there's anything that needs to be done. Let me go ahead and fix it. I might spend another few hundred dollars getting everything just perfect.

So that way I know it's reliable. I know everything's fixed. If it needs new tires, if it needs oil changes, if it needs brakes, get all that stuff done so the vehicle is ready to go. Well, those are asset expenditures. And so I'm of course being careful with them, but I'm not trying to get it as cheap as possible.

If I were just trying to get it as cheap as possible, I wouldn't have bought the car. But then I might wind up in a situation next year where my other car breaks down and now I don't have a car and I don't have my backup car and I don't have the second car and now what do I do?

So I need to plan ahead. So I characterize balance sheet items separately. Do the same thing with something like my motorhome. I did just announce, talked about the motorhome. That was something that I purchased, but I keep it on there as an asset expenditure. It's a balance sheet item.

It's something that has value that I could sell. My goal of course when buying something like that is to get a good deal, but the good deal is not necessarily measured the same way that other expenses are. A good deal is not necessarily the cheapest item. Rather, a good deal is going to be the cheapest item that does the job as compared to the value of the item in the resale market.

So I might search and figure out here's what I think is a good deal. Then I'll go ahead and purchase the item and I want to track any expenditures on that item that are related in the world of business would be depreciable – sorry. Yeah, expenses that are not directly associated with consumption but that are just associated with the repair and the maintenance and the upkeep.

So with my RV, I needed to fix the generator. I tried to fix it myself a couple of times. I couldn't do it. So that's categorized under there. So now I have good records. Now I can look at that and I want to analyze how much is this motorhome costing me?

How much is this second minivan actually costing me? How much am I spending? That's going to include all those categories. But then also when it comes time to sell, I can look at it and see how much money I have in it. I can try to figure out is there a way that I can sell this for what I have in it, sell this for a minor loss, sell this for a profit even.

So I find this simple practice to be very helpful to keep from deluding myself. People often delude themselves into thinking that they're getting great deals because they don't track things. If with your vehicle, you don't have a spreadsheet that includes what you spent on it and what you paid for repairs, you might say, "Oh, I bought it for $30,000.

I sold it for $25,000. I only lost $5,000 on it." But what you actually did was you bought an unreliable vehicle and you spent $5,000 repairs on it and you actually – you get the point. I don't need to belabor it. So I keep those separate. Similarly, with other types of durable goods, let's say that you're purchasing – I found this when I bought a new house.

You need certain types of tools and things for that new house in order to help you. So it's helpful to have sometimes a category that's related to something like durable goods such as a shovel, wheelbarrow, etc. These are valuable items to have when owning a house. But they're also items that can last you a lifetime when properly cared for.

So you wouldn't expect to have to go out and buy another shovel next year. If you bought a house and you just had an all-inclusive Home Depot budget, it just said Home Depot. It doesn't tell you anything about your behavior. You may be choosing to buy those durable items that are buy-it-for-life type of things.

So think about your categories so that with the goal of making better decisions about your expenses. All spending is not bad. The goal is not always to spend the least amount of money. The goal is to get the maximum value for the money based upon your goals, based upon the type of lifestyle that you're trying to live.

To wrap up, let's talk about medical and taxes. I think here, there are different approaches you can take. I tend to just keep things under medical and dental. But I want to give you some possible expenses that you should consider. I do have one or two of these subcategories.

But for example, here are some things to consider. Preventive care versus non-preventive care. You might be making a choice to invest in your health in a way that you think is proper. You might be choosing to spend money on higher quality food or better nutrition or gym memberships or any similar associated things.

Is the goal to always spend the least amount of money possible? Well, probably not because if it were, you may not buy higher quality food. You may not purchase nutritional supplements. You might just not do those things because you say, "Well, I'm trying to spend the least amount of money possible." But if you recognize that these types of things are investments, investments into your health, and if you're making wise decisions about those investments, who's to say you should try to minimize that?

So it might be helpful to have a category that's called preventive care, recognizing that it's an investment. Now, that's different than saying, "Okay, I've got medical expenses that I need to track that are associated with other medical expenses or dental expenses," some more type of thing. So break these out in a way that makes sense to you and that's helpful to you because, again, goal is not always least amount of money possible.

Finally, taxes. Taxes are relatively simple. You don't need to do a ton here other than, of course, if you're paying taxes, calculate them and try to keep some separate accounting for them, real estate taxes, income taxes, if you are subject to any other types of taxes that are easily itemized.

Very, very valuable. As we've talked many times on the show, the place that you live will have a major influence on your tax burden. It might sound to you, a long-time listener of Radical Personal Finance, obvious that if you choose to live in one state versus the state next door to that state, the difference in the tax rate may lead to your having an extra million dollars at retirement, but that's not obvious to most people.

Why not? Why do they not recognize that if they moved from a high-income tax state to a no-income tax state or a low-income tax state, that would give them an extra five to say $10,000 a year if they're six-figure income earners and medium families, etc.? Why do they not recognize that?

Well, many times because they've never bothered to track it. They've never bothered to budget for it. Think about how insidious this is. The income taxes are automatically pooled right off the top. See, the government knows the power of taxation right off the top. It was a major improvement in the tax system when they switched to having the employers pay the taxes in or out of the top.

It collected far more tax revenue and it changed the IRS agents from being a foe, "I got to pay these people money," to being a friend. Many people look at the government as their sugar daddy. "Oh, I get a tax refund. I can get some money. I'm really looking forward to my tax refund.

Let me get my taxes done so I get my tax refund." Well, this is not for you. You need to know the numbers. So that way, you'll make an intentional choice. If you want to live in California because the trade-off for high income taxes is low property taxes and great climate, you can make that choice intentionally.

And then you can feel confident about it. If you want to live in Texas because you have no income taxes, low property taxes, but you have to deal with Texas, you can make that choice. If you want to live in Illinois or New York or Florida, you can decide what you're doing based upon why you're doing it.

And you can adjust. If you want to live in California because you have great climate, that may require an adjustment in another area of your budget. But you can make that decision intentionally. Thus, you'll feel confident with it. So itemize the tax dollars. Figure out where they should be.

And then that way, you'll be able to, I think, get far more benefit from them. Those are my categories that I use. Those are the categories, subcategories, etc. Your categories may be different, but I wanted to explain how I got to those. I don't claim they're perfect. I don't claim they're an ideal model for you.

For some of you, that may be so overwhelming. And the stage of budgeting you are is just to figure out, "How do I not be late on my power bill?" Start there. Your budgeting system can, will, and should change over time. Mine certainly has. Do not expect that budgeting is always going to be the same.

It's not. There are changes in the past. If you want to listen to another episode on budgeting, go back and listen to episode 273 called "Three Budgets You Should Establish for 2016," time, money, and food. And in that budgeting show, I discussed the major stages of budgeting. I talked about how you'll go through different stages and purposes for budgeting.

And I really think this is valuable. So go back and listen to that show for that as well, because budgeting will look different. You must always budget, but you must not always budget the same. You must always budget, but you must not always budget the same. One stage, you're budgeting for cash flow.

Another stage, you're budgeting for big picture control. Another stage, you're just budgeting for maintenance to make sure you're on track. That's it for the show today. Remember the sponsors of the day, Libsyn and YNAB. Again, free 34-day trial of the YNAB software, radicalpersonalfinance.com/ynab. Also use promo code radical at libsyn.com.

If you would like to support the show directly, not by supporting the sponsors, please consider becoming a patron of the show. Radicalpersonalfinance.com/patron. Radicalpersonalfinance.com/patron, as always. Links to all of these things in the show notes for today, which pops up right on your screen or on the blog page for today's show.

In addition to that, if you would like to work with me personally on a consulting basis, I'd be happy to work with you as a consultant. You can book a phone call with me at radicalpersonalfinance.com/phonecall. Also, I have been doing some high level business coaching and personal finance coaching.

This would only be appropriate to you if you earned in excess of six figures, but if you're interested in details of that, email me, joshua@radicalpersonalfinance.com. Shop break-resistant glassware at wineenthusiast.com so you can spend more time and less time. I'll get the broom. Shop our Black Friday and Cyber Monday deals for the best prices of the season on wine storage, gifts, and more.

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