Why budget and why it’s not boring at all!
First off, let me start by saying that I hate boring life, boring people, and doing boring stuff. So, why do I choose to write about something seemingly so dull as budgeting? Contrary to popular belief, knowing your expenses, budgeting, saving, and investing do not stop you from living an interesting life – just the opposite!
Let me start by telling you a little funny story about my daughter (she was around 5 yo at that time) and her cousin. Almost 30 years ago we were spending our holidays at some resort at the Black Sea and, as everyone who has had even one summer vacation there can confirm, the evenings with the kids are difficult because going for a walk after dinner easily turns into a nightmare due to the children’s constant nagging: “Buy me this” or “Buy me that.” Of course, the normal response of the parents is, “We don’t have enough money” or something similar, but:
- Kids are not stupid at all!
- They don’t have a concept of money or so we thought!
So, after having spent a few such evenings with our daughter and her cousin (also a girl), my wife decided to try a very cunning experiment. She allocated some small amount of money to each of them every evening and let THEM decide on what little “thing” they would like to spend this amount. Please, note that they were allowed to save the day’s allowance for the next day or for a few days more in order to be able to buy something bigger. Well, imagine our surprise when things turned around almost immediately. Instead of constantly nagging us (“Buy me this, buy me that”), they started asking the seller for the price, then consulted each other and said, “Nah, it’s very expensive…”. How about that?! Well, long story short, on the last day they both had considerable savings which they decided they would spend when we returned home.
Now, these lessons taught my daughter Maria (the boat’s name Marisha is her pet name) basic budgeting and since then she applied it throughout her whole life – during school years as well as when studying abroad, and now she taught budgeting to her husband and her son (poor souls :)).
In modern times, everyone speaks about delaying rewards and avoiding instant gratification. Well, budgeting is exactly that: putting your life goals on paper (or envelopes, or an app), turning these goals into numbers (almost every goal has a financial amount behind it), and then adhering to them. Now, I hear some people arguing that not everything is about money in this world, but I would rather not agree with them. Vacations, good food, a good concert, hiking, good coffee, books, healthcare for you and your parents, good education, your house, your car, your boat (ugh…). I don’t want to enter into philosophical discussions here, I would just suggest that instead of thinking about some abstract things that don’t have a price tag attached to them, maybe it’s better to hear my arguments here.
Another short story from one sailing with some friends in Croatia during 2017. One of the guys asked me, “OK, tell us how can we afford to stop working like crazy and afford a slower life.” I immediately asked them how much they spend on a monthly and yearly basis. Their first response was, “What? We don’t know…” They thought it was not necessary to know, but then I explained that if you ever want to live a life with less stress, the first step is to know your expenses and to “own” them. This means that you have to take responsibility for spending money on a certain purchase, no matter what. It’s a matter of simple math – if you don’t know how much you spend every month, how can you forecast your future expenses such as buying a new car, house, new laptop or a phone, or a vacation, or paying the hospital bill for your Mom?
So, my first recommendation here is to start tracking your expenses (if you’re not doing that already). You can use a Google sheet here if you like, I’ve been using one myself. I will also recommend an app that I use now (shown to me by my daughter, see?). It does not matter how you do it, the important thing is to start doing it for at least 3 months, and then it becomes automatic and fun (?!). Knowing your monthly expenses will allow you to reach the next step before starting investing, which for me goes hand in hand with budgeting – building your 6 months emergency fund. In my view, it’s imperative that we have money to continue our life for at least 6 months without any income because we could get fired, sick, or stranded on a deserted island (not such a bad idea).
So, how exactly do we budget?! Well, the simplest system invented is the so-called envelope system, and I’ll briefly explain it here. Imagine for every type (or category) of spending or saving in your life you have a real or virtual envelope where you put some cash. Of course, now cash is used less and less often, but just bear with me for a moment. Imagine you spend 450 EUR on groceries every month, or 250 EUR for fuel for the car, or 250 EUR per year for insurance on your house, etc. Or you’re saving towards the goal of 2000 EUR for your vacation somewhere. Every such “category” has a separate envelope – real or virtual in some bank. By the way, banks such as Revolut have this ability to create virtual saving boxes built in their app (more about it in a minute). It does not really matter how exactly you do it – app or spreadsheet or cash, the importance comes from the discipline it instills and also of the gratification when you achieve a certain financial and life goal.
Now, the app I use is called You Need a Budget! (YNAB for short), and it’s wonderful. I’ll provide a link for you to subscribe if you like – they offer a 34 days trial and then you have to pay. It’s not free, but it’s worth every cent in my opinion. In the beginning, their concept is a bit difficult to grasp, but once you get it, it all becomes really fun! Also, they have ton of videos explaining their budgeting method, and it’s easy!
Let me talk a bit about a functionality of Revolut I find really attractive. Imagine you follow the envelope system and you have created many virtual boxes for different expenditures you expect this month or at some future date – maybe many months or even years ahead. Instead of keeping these funds in paper envelopes you can put them in so called savings boxes which allow you to earn between 3% up to 5% annually (depending on the currency) on the funds you save towards a certain goal. How cool is that? Its implications are twofold:
- It somehow keeps you from spending that money because you’ve saved it and earn some percentage on it (I call this “hiding money from myself”).
- It earns some money, even though the amounts are small. You can put your 6 months emergency fund there or the down payment you’re saving for your future house, etc.
The good things about these savings boxes in Revolut is that you can put and withdraw funds everyday and you get a daily interest based on the amount you’ve saved there. This is not a deposit though! So, it’s not protected! It’s pure money at risk. Still, it’s invested in so called money market funds, and I consider them low risk investments. They currently offer such accounts in EUR, GBP, and USD.
Now, let’s talk about the credit cards. I used to have three of them!!! I did not need them at all, but I used to consider them a sign of prosperity and financial well-being. Nothing could be further from the truth. Now I keep only one card only for renting a car from time to time, and to be honest I am thinking of ditching it altogether next year. It’s just not worth it. Anyway, most of the rental car companies now accept debit cards, you just move the funds for the deposit from your saving box in Revolut to your main account, so they can block it for the duration of the rental, and then when you return the car, you move the deposit back to your saving box. It’s that simple. Why are credit cards so bad actually? We can talk for hours about the psychological side of the “freedom” they give you to spend money you don’t have etc., but I will focus on one aspect only. If you don’t return the money you’ve spent during the month, at the end of the period the bank will charge you at least 16-18% interest! They love it when you do impulse spending on your credit cards because they earn so much money from you that way.
Now, this broader concept of impulsive spending applies to everything – groceries, clothes, electronics, etc. It’s not easy to get rid of it completely because it has become so easy to overspend, but you can take some simple measures. For example, I always go grocery shopping with a shopping list. There are so many apps for that, and most of them are free. You just plan ahead what you’d like to buy, you do it, and you get out of the shop. The same applies for online shopping, etc.
I personally avoid going to expensive restaurants because:
- I don’t feel comfortable there
- I will spend money I can spend on something more fun.
- Generally I’ll have better food or at least I’ll have a better time by inviting my friends over to my house and have fun cooking for or with them.
One very important aspect of money spending is that we tend to categorize our funds. Imagine you receive some unexpected income – for example bonus from your employer or someone returns some long forgotten loan or something like that. Unfortunately, usually we mentally categorize these funds as not so important as our other income, and we tend to spend that money more easily and more quickly. I can give you many examples, but one very prominent example is that most of the people who win the lottery go broke after less than 10 years. So, my advice is, if you’re lucky enough to get some unexpected money, either invest it immediately or put it in a savings box (as described above) towards some future goal (in other words, hide it from yourself).
The next topic will probably be a bit extreme for some people, but I hope you read it anyway and try to get my point. I buy something only if I have the money to do it. I don’t get loans, I don’t lease cars, computers, or phones. If I did not save enough money for the thing I want, I just don’t buy it – it’s that simple. All those deals in the shops – buy now, pay later in installments are pure and simple scam, a way to get your money on some impulse buy. Ask yourself, “Why else would they offer it?” They are not doing charity, they’re banks or companies working for profit. I am not saying we should stop buying stuff, I am just saying that we should buy only what we can afford and not spend money we don’t yet have.
Let’s look at an example here. My previous Mac needs to be replaced and since I knew it in advance, I started saving money three years ago (usually the companies will amortize the computer equipment in 4 years). So, now I had enough funds to buy my next Mac and I charged it on my debit card because I had the funds ready. Similarly, my annual house insurance payment comes in July, but I have saved a certain amount in this category every month, and now I’ll be able to easily pay for it next month when it is due. The good thing about using an app such as YNAB is that it handles these monthly calculations for you, but after all you can do it by simple math. For example, if your house insurance is 250 EUR per year, it’s roughly 20 EUR per month that you need to save. It’s not difficult at all. If you need to save for a new laptop for example and it’s 1700 EUR, then you need to divide 1700 by 48 months or whatever period you decide.
One important purchase in everyone’s life is a house. Contrary to popular belief, I don’t consider buying a house where you live with your family as an investment. There’s an ongoing argument whether it’s better to buy or rent, and I’ll not start it here. Also, as a person that earns money from renting some properties – I like having tenants :). What I mean here is that if you and your family feel better when having your own house or apartment, then go for it! Just don’t lie to yourself that it’s an investment. On the other hand, if you buy real estate and manage to rent it successfully for more than 4% annually after taxes, kudos to you! That’s an investment! So, buying your house is an emotional, social, and safety decision, but financially it does not make sense to me. I know that you can argue about capital appreciation, but the surveys and research shows that in the long term, capital appreciation does not beat inflation.
Part of my monthly budget goes towards investments. I try to invest between 10-20% of my monthly income (which generally comes also from investments) into other investments. I try to do it as automatically as possible. I use a platform (in addition to the other platforms I described in my previous post) called Mintos. It’s an EU-regulated platform where you can invest in personal loans, real estate loans, bonds, and also ETFs. Their ETF is slightly more expensive than if you invest individually, but it’s not anything crazy. The good part is that you can invest in these individual instruments starting from 50 EUR. Also, since Mintos is regulated, your funds are secure up to 20,000 EUR.
OK, some links are due here:
If you want to open an account with Revolut, please use this link:
https://revolut.com/referral/?referral-code=eugenib8mk!JUN1-24-AR-H1
If you want to use YNAB, please use this link:
https://www.ynab.com/our-free-34-day-trial/?utm_source=customer_referral&utm_campaign=mobile_share
If you want to use Mintos, please use this link:
https://www.mintos.com/en/l/ref/1MQ7DA