If the word “budget” does not make you jump for joy, you are not alone. Financial Planning and budgeting can be scary. Budgets exist to track, control, categorize and ultimately limit your spending. Although they can provide us with greater control and—eventually—freedom, budgets are based in concepts of scarcity and limitation. Some people like to debate financial planning vs. Budgeting.
Budgets are the monetary equivalent of diets. Instead of limiting and restricting food, budgets limit and restrict spending. And while diets—and budgets—can produce results deemed desirable, nobody really likes dieting.
Is there a different way to think about managing our money that might produce desirable results—without a sense of deprivation? We think so! In this article we (Kim Butler and Kate Phillips) share ideas of how to manage your spending with a prosperous mindset! To learn more about budgeting and thinking differently, read our Ultimate Guide to Financial Planning Myths.
Spend MORE on What Matters!
Budgets are usually about tracking and restriction… counting calories or carbohydrates or “points,” or eliminating certain foods, depending on the diet system. And perhaps you have noticed, the more restrictive a diet is, the harder it is to stick to!
Kate likes the 80/20 or 90/10 rule: eat healthy most of the time. Then don’t worry or beat yourself up about occasional indulgences. This might actually help you in the long run, since you won’t feel so deprived.
Kim points out, from a habit standpoint, it’s preferable to ADD the “good stuff” rather than restrict what you don’t want. Instead of restricting bread, ADD more vegetables. ADD fresh fruit instead of banning dessert. To drink less soda or coffee, ADD more water. Prioritize what’s important and the rest will naturally fall in line.
What might this advice look like in the financial realm? Kate challenges clients to look at money through the lens of what they wish to spend MORE on.
In one exercise, Kate offers a “Passion-Based Spending” worksheet that encourages people not just to think of how MUCH their expenses add up to… but the general PURPOSE of each expense. Is it a need or necessity? A want? A convenience? Or does the expense represent a dream and true desire?
Example: Food is a need. Without it, we have no energy and cannot sustain ourselves! So food will always be an expense.
Foie gras and champagne is a want. Nobody “needs” to eat fancy food—although you may enjoy it and there is nothing wrong with that!
Fast food is a convenience. From a need-based standpoint, it provides calories and satisfies hunger, although it may be lacking in nutrients. It probably also costs more to stop by Starbucks for a latte and breakfast sandwich than it does to make coffee and eggs at home. (Though you you may enjoy the experience or run out of time to make breakfast at home.)
A meal might also represent more than sustenance. It might satisfy a much deeper desire. Eating lunch (complete with French chocolate mousse!) at the Effeil Tower with a loved one or enjoying dinner following a cooking class with friends and a renowned chef might represent a dream or passion!
Now, here’s the point: I (Kate) have had lunch at the Eiffel Tower (with my mother, daughter, and chocolate mousse!). I have also enjoyed a fantastic cooking class and dinner with friends in Italy. These experiences were important to me, and years later, these memories still make me smile. But I never would have arrived at the Eiffel Tower or the Amalfi Coast of Italy had I not gotten clear on those desires.
I had to clarify my priorities so I could prioritize my spending accordingly.
Since I love to travel, I have decided to spend MORE on vacations (or conferences in desirable locations). And while I enjoy eating out just about anytime, anywhere, I especially enjoy local, fresh food in a scenic or memorable location. Therefore, I happily scramble eggs for breakfast and limit dining out or Starbucks trips. This leaves me MORE money to spend on travel—complete with memorable dining experiences!
The same principles can apply in almost every area of life. What’s truly important to you—and are you spending accordingly?
Maybe you really want a luxury car, new furniture, the experience of ziplining above a jungle or starting a non-profit animal shelter. Whatever inspires you—make it a priority! That will lead you to spend less on other things—often with little effort.
When we stop depriving ourselves of what we really want and give our dreams and true desires attention, it’s so much easier to stay on track! So don’t let allow expectations of how “most people” spend money determine your financial priorities. Who cares if—as Time Magazine reported—the average American spends $1,092 per year on coffee and another $1476 per year commuting. It’s meaningless and it’s not my normal. I usually enjoy coffee at home and “commute” to my office down the hall.
I try to “spend more” on the things I truly care about: travel, charities, and savings. Then, easily and automatically, I spend less on the things that are of lesser importance. Money is transferred automatically out of my checking account (via automatic payments) to support my necessities (housing, utilities, insurance) and my priorities. Then, the money remaining is for “everything else.”
The truth is, I meet people all the time who “wish” they could enjoy trips to France, Italy, Bali, the Caribbean, Hawaii, etc. Some of them earn more money than I do—and rarely travel! The money seems to disappear on lattes, happy hour drinks, hefty car payments, the latest technology, the cable bill and a hundred other expenses and conveniences that, if asked, may not even rank on their list of passions and priorities.
So pay no attention to how others spend their money. Decide what matters to you—your dreams—and spend MORE on that!
Save First—and Spend the Rest!
Kate’s Passion-Based Spending dovetails with Kim’s “un-budget” philosophy. Kim likes to focus on saving first—after which you spend the rest however you wish! (We are oversimplifying just a tad… but that is the main idea.)
It’s a “one-step budget”: Pay Yourself First! Take the first 10 to 20 percent (more, if you can) of your income off the top. Dedicate that towards your long-term savings.
This creates your “emergency/opportunity fund” that provides you with a lifetime of benefits. And just as Kate says to “spend more on what matters”—we want you shifting your focus from “emergencies” to opportunities as quickly as possible!
Your long-term savings can:
#1: Provide your family a safety net of 3-12+ months of expenses. This is the first job of your savings. The exact figure will depend on your comfort level, your ability to save and your need for a safety net. (A commissioned salesperson, employee with fluctuating hours, or anyone subject to “lean years and green years” can benefit from a higher level of savings.)
#2: Grow money tax-deferred or even tax-free. The savings vehicle we recommend allows you to handily beat or even multiply the returns you would earn at a bank or any other “safe money” haven. Beating inflation and avoiding unnecessary taxes should be your savings goal!
#3: Build equity that can be used for future investments and income-generating activities. This could include investing or expanding a business, purchasing rental real estate, etc. This is the second job of your savings—after your safety net is secured.
#4: Allow you to invest in the success of your family. We wrote a whole book about this! Perpetual Wealth describes how to use “Family Financing” to develop the human potential of your children and grandchildren. (Learn the 4 Cornerstones of Family Financing.)
#5: Create safe and substantial income in your later retirement years. As we detailed in our last article, single premium immediate annuities for those age 70 and beyond can be an ideal solution for creating reliable cash flow you can never outlive.
#6: Provide “living benefits” such as long-term care benefits or cash in the event of a terminal illness. In certain situations, you may be able to receive a portion of what would have been a future death benefit should your circumstances require it.
#7: Create a legacy for the people and causes you care about. Your savings account, brokerage account or IRA will only be worth the balance—minus taxes—to your heirs and beneficiaries. In contrast, our recommended vehicle to store cash typically delivers a greater legacy benefit (many multiples greater)—typically tax free!
You have probably figured out from the benefits that we are talking about dividend-paying whole life insurance—our favorite place to store cash for long-term savings! As a long-term savings vehicle, dividend-paying whole life out-earns bank rates and makes your family finances more efficient through tax advantages, guaranteed growth and the ability to borrow against your savings while it grows. To find out more about the living benefits of life insurance and how it can provide an ideal foundation for a family’s finances, we recommend our primer on the topic, Live Your Life Insurance.
There is also an advantage to having short or medium-term savings in a savings account at a bank or credit union. A savings account is idea for “everyday emergencies” such as a vet bill or car repair. And you’ll want to save up for periodic expenses such as holiday gifts and vacations.
Some people find it helpful to have a dedicated account for a special purpose, perhaps labeled as “my Caribbean vacation” or “living room furniture.” Some people keep envelopes, jars, or a box for short-term savings. (Of course, it won’t earn any interest, but if it helps you save, that’s the important part!)
Others like doing everything online, perhaps using apps to track their progress. Just make sure you have a system to prevent the money you’ve saved for a particular purpose to be absorbed by “general expenses.”
Whatever system or vehicle you use to track spending and save money, remember to focus on your priorities. What are your dreams and true desires? How can you direct more money towards what matters to you? Depriving yourself of things you really want is a formula for frustration, but aligning your spending with your passions infuses your finances with the power of intention!
How We Can We Help
Partners for Prosperity offers alternatives to typical financial planning, including alternative investments and savings vehicles outside of the Wall Street/Big Bank environment. We also provide articles and podcasts each week to inform you and keep you on track!
Sign up for your complimentary Prosperity Accelerator Pack to find out more about our philosophy of Prosperity Economics and how we help clients. Then schedule an appointment to learn how to apply prosperity principles to your finances!
Want to know more about Passion-Based Spending? Email Kate for a worksheet you might find helpful.
—Kim Butler and Kate Phillips