The Adviser You Can Talk To Podcast
September 9, 2020
Think budgeting can’t be engaging and inspiring? Think again! The key is to keep it simple and find an approach that you can commit to.
The best budgets are streamlined and in sync with your financial planning goals. Listen to financial planners Andrew Busa and Diana Linn as they present three smart ways to boost savings and manage spending in your working years and after you retire.
Tune in to hear clear, actionable advice to help you build a budget that you can live with over the long term, including:
There’s no better path to financial peace of mind than with a sound, realistic budget—it’s a valuable tool, not a burden. These simple tips make it easy. Click above to find out more!
It’s easy to avoid budgeting but by investing a little bit of your time up front, you’ll be able to reach your goals faster, use your money more efficiently and live in retirement more confidently. Listen to this podcast to find out how.
Hello, this is Andrew Busa and I’m a financial planner here at Adviser Investments. We’re here with another The Adviser You Can Talk To Podcast. Today I’m joined by my colleague, Diana Linn and she’s a fellow financial planner at Adviser Investments.
Hey, Andrew. Thanks so much for having me today.
It’s good to have you on this episode. Today it’s all about budgeting and we are very excited.
Yeah. We’re excited to bring you this topic and we hope you really take away a few things from this podcast and we’re going to divide this up into two sections. The first is how to budget when you’re earning a paycheck. So that’s when you’re working.
Then how to budget when you’re in retirement because that’s really a different phase of life. You’re really paying yourself at that point from your portfolio. Kind of two different budgeting concepts we’re going to talk about there. Throughout the talk we’re going to mention different tools that you can use to make budgeting easier, as well as different budgeting methods.
And sort of how to use them.
Yeah, I love that we are diving into this today and I know that sometimes budgeting can have that negative connotation associated with almost like a diet. It’s something that you kind of dread it, you don’t want to talk about it, it’s something I don’t want to do but I probably should.
Much like a diet, we really want to help find that budgeting method that works for you because what works for me might not be the best that works for you. I love to cycle, Andrew you might like to run.
We just got to find what’s the right fit.
Yep, that’s a great point. The best diet is the one you stick to, right?
Sort of the same thing with budgeting and cash flow planning. As I said, we’re dividing this podcast into two parts. When you’re working and when you’re not working. We like to think of this really as an analogy as if you’re climbing a mountain and then descending that mountain, right? You want both phases of that to be done safely and done correctly and they both kind of have their own complexities to it. So we’re going to work on climbing that mountain first. That’s going to be your income earning years and budgeting and cash flow planning during that. Then we’ll talk about that retirement phase when you’re descending.
Andrew, we get to be like personal trainers here.
To help people get into that financial shape. Climbing up the mountain and then sliding down it smoothly so I’m excited.
Well it is interesting, I think there’s a lot of similarities between the two fields there, personal training and personal finance. I know that you have some background in both there.
So your expertise will be useful here. All right, so let’s get into this. I want to start by asking you this question, Diana.
Who needs a budget?
Well, everybody. I think everyone needs a budget.
Yep and I mean, I think you’re right but again, getting back to the idea of a negative connotation. Are there situations where especially you see a person needing a budget?
Well when I say I think everybody needs a budget, I mean let’s think of it, even if I have an income stream of I’m making over a million dollars a year but if I’m spending two million dollars a year, that’s a problem, right?
I think more specifically if you’re scraping the bottom of the barrel every month. So every month that checking account has dwindled back down to zero or you find yourself dipping into credit cards more often than not or if you’re saving for a specific goal like a down payment on a home, you want to take a large vacation, you’re saving up to send some kids from college, those are definite signs that, “Yep, okay, I need to get a little bit of structure here. I need to lay a foundation and get my arms, wrap it around my spending so to speak and get that budget in place.” So I think it has its place for everyone, wouldn’t you agree?
I totally agree with you and like you said in the introduction, one person’s budget is going to look different than someone else, as it should.
But I think it’s important just to know that it’s kind of the foundation of all of financial planning is having a handle on your cash flow and if you are planning for goals, like you mentioned, it’s impossible to reach them if you’re not able to save for them.
Right, well I mean Andrew I know you just bought a home.
I’m sure that your budget has changed a little bit. I have two small children that I’m saving for their extracurricular expenses as well as future college so different-
Different things for everyone.
To that end, let’s talk about three different methods of budgeting that might give the listeners some advice in terms of, if they don’t have a budget, how to create one and sort of where to go from here. The three methods we’re going to cover, the first is the 50/30/20 method. The second is the envelope method and third we’re going to talk about zero based budgeting.
So first, diving into the 50/30/20. Talk a little bit about this one.
Yeah, well what I like about the 50/30/20 is I think it’s very straightforward. When we say, “50, 20, 30,” we are thinking that 50% of your income that you’re bringing in each month is for that basic needs.
Everything from keeping the lights on, your groceries, your cell phone bill, it’s those basic every day expenses.
The 20% is supposed to be your savings. So that’s how much you’re saving for future retirement, any of those long term, short, medium goals that we’re discussing. Then the extra 30%, that’s your discretionary. That’s the dining out, the vacations, the shopping at the mall. I like that it breaks it down into those three specific categories but personally I kind of like to flip the way that it’s broken down. Instead of that 50/20/30, I really like to think of it as the 20/50/30.
I like that.
Yeah, well you know, 20%, I’ve always been a firm believer in that you’ve got to pay yourself first.
Putting that 20% aside before you’re really even tempted to touch it, so personally every two weeks when my paycheck hits my checking account I automatically slice off 20% into a savings account before I have even really kind of see it happen.
Then I’m not tempted to touch it. Then those 50%, that’s my basic needs. I’ve got kids, I’ve got to pay daycare and school and helping with the mortgage and the bills. Then what’s leftover is that 30% discretionary.
I think it’s important, too, that you mention 30% of this budget is discretionary.
Potentially things for you to spend that are fun. I think there is room in this budget for some wiggle room but let’s put some numbers around this for an example, right?
Let’s say that your take-home pay every month between you and your partner is $6,000. That’s what you’re making. Then kind of going by your framework here, the 20/50/30, so you’d be saving $1,200 a month, is that right?
That seems to be the math. I can grab my calculator.
Exactly. Then your housing, groceries, utilities, that’d be $3,000 a month and then your fun money comes out to be $1,800 a month.
Just to give you an idea. Then talk about debt, too, we didn’t mention that. Where does that fall in this framework?
Under which bucket would the debt fall into?
I guess the debt, it would depend on … For my mortgage, that’s a debt but that’s also part of my basic needs. That is a bill that I have to pay every single month. Then I guess if you think about your credit card debt, again that is a bill that you need to pay every month but those expenses most likely came from the discretionary and the fun. I think this is another wonderful point that you’re bringing up here that it’s also important while you’re thinking of these three big main subgroups that you’re also being mindful of what’s comprising each of those subgroups so that you’re not falling behind or the debt is escalating.
I think that is a good segue into if I were to ask you just to summarize the pros and cons of this budgeting method and who you think it’s right for, what would you say there?
Well what I really like about this method is that it’s simple.
It’s really simple to keep track of your expenses. You can build your savings really fast if you are disciplined in slicing off that 20%, not being tempted to touch it.
That 20% adds up a lot after every month and you’re compounding saving interesting.
Some of the cons, I think that it can lack a little bit of attention to detail. How we said if you’re only concentrating on the three main categories and not what sub-divides up each of those categories. Maybe that two-thirds of your discretionary allotment is on items that really should be more or should be less. There’s also a little bit of lifestyle creep that can come into play here. If you get a raise and so now you’re getting paid a little bit more every other week and you’re tempted to spend a little bit more in that discretionary so I don’t know, what do you think, Andrew?
I think you’re right. I think lifestyle creep for this particular method is one that you need to watch out for. I think it’s something where you do get that raise and if you’re not really understanding what your spending is, it’s very tempting to spend that extra income.
Mm-hmm (affirmative), mm-hmm (affirmative).
I think to that point, if this budget sounds appealing to you, I think the foundation is really tracking your spending. If you were going to use an app, something like Mint or Quicken, any app that allows you to track your spending, I think that’s key because that’s going to hopefully keep you honest and accountable for what you are spending.
Well I would also like to pop in and say that at Adviser Investments, we have a wonderful financial planning software that we use, Adviser Insights, and-
That’s a great point.
Part of that Adviser Insights is we have a wonderful money aggregation tool where you can link up your credit cards, you can monitor the buckets of your spending, it’s a great budgeting software so that’s something that … Speak to your adviser if you’re interested in taking a peek at that.
Yep, I think that’s a great plug for the Adviser Insights portal and I know that the spending tool with that is very powerful. If you haven’t been set up for that I’d definitely let your adviser know but I want to transition to the next budgeting method and that’s the envelope method.
I think, Diana, you talked about one of the cons of the 50/30/20 as being potentially a lack of attention to detail.
The envelope method has a lot of attention to detail, right? I know that you have some personal experience with this one and I’d love to hear you tell your story about that.
I do have some personal experience with this. I mean, that is absolutely true. I grew up in a household where it was really important to my parents that they didn’t take on any debt.
I was born in the ‘80s when interest rates were extremely high, my parents didn’t want to take out a mortgage at like, honestly, an 18% interest rate. We actually lived in the house while they were building it so all my pictures of my childhood I have Spackle on the walls and carpet scraps but it’s just something that’s always been instilled in me not to take on debt. My very first job out of college I made a huge $28,000 a year but of course I wanted to buy a new car.
I needed to save some money so not wanting to take on any debt I truly did this. I did not have direct deposit for my checking account. Every single Friday I would get my paycheck, I would go to the bank, get it fully cashed out. Like fully.
Come walking out with my couple of hundred dollar bills.
Then I’d go back home and in my closet of my tiny apartment I literally had an envelope for each expense. I had my rent that I had to pay each month, I had my groceries envelope, I had my cell phone envelope and then I had my savings so at the end of each week of my pay period, if I had any extra money left over into each of those envelopes it went into an oatmeal container, true story.
Quaker Oats oatmeal container.
Quaker, I hope.
That was my savings to eventually go towards a down payment on my car. So yes, I have used the envelope method.
That’s amazing. I think it’s a method where it sounds like it might not be sustainable for the long haul necessarily but what a way to avoid overspending, right?
Right. Well I mean I think that’s one of the things. When you are overspending and one of the things about a credit card is if you are going into debt, you’ve got to stop the hemorrhaging.
So with the envelope method, one of the beauties of that is you’re not on a line of credit. Once the envelope is empty, while you can dip into, maybe dip into your food envelope and spend a little less on food to help with their discretionary expenses, once the cash is out of the envelope there’s nothing else left to touch.
Wow, what a concept.
You know, not spending what you don’t have. It’s hard to wrap your head around in a way but I mean, what a way to avoid overspending kind of like we’re talking about. When I think about other pros to this method, tons of accountability, right?
This is a great way to build good financial habits, establishing that habit of living within your means, you’re not overusing a credit card like you mentioned. I know you like to say this one, you appreciate the value of a dollar, right? Literally.
Oh, absolutely. When you’re going into the store and you’re looking at a $20 T-shirt, it’s easier if you’re just putting it on a credit card and you’re not thinking about like, “Ah, it’s $20.”
When you’re living in this cash-only envelope method of budgeting and you’re looking in your wallet and I only have $20 left in cash, it really instills that, “Okay I worked five hours for that $20,” it’s a little bit harder to chalk it over than just spending it I feel like.
Yep, I totally agree and how about the cons of this method? Where do you see it falling short?
Well for me personally one of the cons was while it was wonderful that I wasn’t wracking up any credit card debt, I also wasn’t building any credit because I didn’t have that history with lenders of, “Oh, you’re lending me money and I’m paying you back.” That took a little bit of time and now in the hindsight of that, you need to have a little bit of balance of both. I think that’s one of the cons.
What do you feel, Andrew?
Well I think to bring it back to the kind of personal training metaphor, I think this is really more of a detox for your budget.
I think it’s not built for the long haul but it is a way just to kind of reset, bring you back to spending only what you’re making and really help to keep you honest. Remember, these first two methods that we’re talking about, this is under the viewpoint where you’re still working, right? You’re earning a paycheck-
With the 50/30/20, the envelope method, these are times in your life when you’re building that wealth. I think it’s important to remember that because this is, no matter what method of budgeting that works for you, what’s important is that you are able to save more efficiently.
I think the overall goal of budgeting is to help your money be more efficient for you.
Oh, I totally agree.
Because who doesn’t know where … Or rather, who knows where all their money is going all the time, right?
Well and I do think this is where another wonderful place where financial planning comes into play.
Sometimes we’ll … I know Andrew you and I both, sometimes you build a plan for a client and they’re just totally blown away. “Oh, I thought I only spent $30,000 a year but jeez, come to find out yeah, you’re right, I am spending $50,000 a year.”
Sometimes that’s a nice catch-all, too. If you don’t have a budget in place right now and you go through the financial planning process and maybe you’re not quite on that trajectory or that right track yet to hit the goals that you have in mind. This can kind of be a nice reset. “Okay, I do need to get some structure in place and then move forward.”
Yep, for sure. Let’s move on to the third budgeting method to think about in your income or earning years. This is the zero-based budgeting. Really the idea of giving every dollar a job. I kind of like to think of this one as being a modernized version of the envelope method. In a way it’s sort of adapted electronically kind of rather than physical envelopes, you’re bucketing your money into different categories.
Yeah, I like that. I think that’s right. Yeah, totally.
Yeah so first let’s kind of talk about how this one works because this might be unfamiliar to people. I think the first step is to write down your monthly income, write down your monthly expenses. Sometimes that’s easier said than done but I think listing out all the categories … We have a really good tool for that, actually, that we can send you if you’re interested to help you organize your expenses. You’ve written down your income, you’ve written down your expenses, now you want to subtract expenses from income and you want the result of that to be zero, right? In a sense that you know exactly where all of your income is being spent.
Right, meaning that every dollar has a job.
Maybe dollar number one’s job is that’s my coffee budget. Dollar number two’s job is in my mortgage. Dollar number three is part of my savings. Every dollar has to be accounted for somehow. There’s not just that Quaker Oatmeal container that I use with just like, a surplus building up so to speak.
Right. Right, right, exactly. You might find that as you try this exercise for yourself, you’re probably going to find that you’re either in a little bit of a deficit or you have a surplus, right?
It’s going to be rare, I think from what I’ve read, it usually takes folks at least a few months of doing this before they start to really get down to that income minus expenses equals zero. Another thing to throw in here is that in that expense category, that includes savings, right?
It’s sort of everything that you’re doing with your money is inside of that expense number. So for example-
So what about unexpected expenses? Is that a category, too?
That is a good question. Yeah, so within this zero-based budgeting, there is that miscellaneous category that is definitely one to be aware of because that’s sometimes where a lot of the dollars are going where you don’t know where they’re going.
Yeah, I’ve got two small kids. Money evaporates.
I need that miscellaneous expense.
Yep, absolutely. There is room in this method for that. I think the key is, again, that you’re not coming out with a deficit every month and if you are, then that’s just an opportunity for you to figure out where can you be more efficient, where can you cut down a little bit? On the other end, let’s say that you go through this exercise and you find hey, you have a $200 surplus at the end of every month.
Well like you said, instead of putting that in the Quaker Oatmeal jar, at that point what you want to do is decide how to allocate that $200. Are you going to allocate that towards a goal or are you going to use it to pay down debt? Literally like you said, every dollar needs a job.
What would you say the pros are of this budgeting method?
Well it’s almost like you’re the boss of your money, right?
You can micromanage exactly where your money is going and I think this method has the accountability of the envelope method, but it also comes with a little bit more flexibility. There are these apps out there such as You Need A Budget or EveryDollar I know is another popular one where once you get your accounts hooked up to this, your credit cards and whatnot, it’s pretty easy for you to reallocate money from one category to another.
How about the cons?
What about the downside? Yeah.
Well let’s hear the cons from you.
Well I think one of the cons would be is it sounds like there’s a little bit of extra leg work up front, right?
You’re getting one of these apps or you’re enrolling in one of these programs and then you’ve got to really kind of dive in. You got to start to dissect.
I know that also for example my credit card has one of these types of apps so to speak. When I log in I see all my transactions, I can see that pie chart of, “Okay, I’m spending X amount of dollars at the grocery store,” but then when I dive in a little bit deeper I may see some of those expenses that are categorized as my grocery expenses might not actually be. Maybe I withdrew money at the ATM at the grocery store or got cash back.
There’s a little bit of that up front of getting everything into order so I think that could be a con for some people.
Yep. Yeah. This one takes work.
Just takes that time.
This takes work and it’s sort of every month you need to be on top of it. Whereas with the 50/30/20, that one’s more big picture. I think that one’s more macro budgeting. This one is a little bit more micro where you’re kind of dialed into your spending patterns on a monthly basis, I think. If you’re able to stick to this one, this one certainly has a lot of power. It’ll allow you to save pretty quickly once you really get rolling with it but it will take a few months, I think, to really get up to speed.
That’s our overall talk on budgeting when you’re working, right? So we talked about the 50/30/20, the envelope method as well as zero-based budgeting. If we then shift ahead to talk about budgeting while you’re retired, because I think this is another important note to hit on because in your retirement years you’re not earning a paycheck from your job but budgeting still has a place, right?
Right. It’s a totally separate phase, yep.
Remember, we’ve climbed the mountain. We’re at the mountain-top, right? We’ve earned, we’ve accumulated, now it’s time to retire. This is a big financial moment for everybody. This is a huge milestone and now it’s time to descend the mountain. You’ve got to get down safely. How do you start by thinking about this one when you talk to clients?
Well I think of it as you’ve just had this huge life event happen, right?
You’ve spent your whole life up until this point saving for that retirement and now you’re here.
I think the first step is really thinking about what do you want that next phase of your life to look like? Are you going to continue to spend and save the way you have been up into this point or is this what you’ve been working so hard for? Are you going to be a little bit more lax and maybe increase your travel budget or you’re going to dine out with friends more? Spend more time with family? I think that’s the first step, wouldn’t you agree?
I totally, totally agree.
I mean, I think hopefully you have been budgeting during your working career because it’ll make it easier for you to sort of retire more confidently because you know what your lifestyle needs are and you’ll be able to work with your financial planner and say, “Hey, I’m spending X per month. This is what I have in assets. Do I have enough, right, at the end of the day?” Budgeting during your working career will make it easier for you to retire with a little bit more peace of mind.
I think when you are retired, your main sources of income … What do you see? I know you work with a lot of retirees.
What do you see there?
What we see, it’s that shift of mindset.
You’re used to having that paycheck come in and your paycheck is kind of what’s filling that bar up to meet the expenses and now you don’t have that paycheck coming in. Now to meet your expenses you’re having to withdraw from your portfolios or maybe you’re starting to take social security. I think it’s really, you got to almost start from scratch of your budgeting again and working out that cash flow and what is that going to look like to meet your expenses? Yeah.
Yeah, let’s face it, it is going to change. Your spending is going to change when you retire. It just is what it is, as it changes through your life, right? You mentioned withdrawing from your portfolios, social security as an income source, we’re starting to see other income sources, too, like consulting during retirement.
We see rental income if you have some investment properties. We do see pensions every now and then but those are becoming more rare.
Well you’re required [crosstalk 00:24:43].
Or even business distributions.
Yeah and your required minimum distributions.
Once you’re 72 and you have to start pulling from your portfolio, maybe you’re required to pull more from your portfolio than you’re actually spending.
That’s a good point.
That’s another shift of mindset of your savings, too, because you’re kind of re-saving what you’ve saved.
Right, right. Yeah, I think … And that’s, again, a great reason to know what you’re spending because if you are able to save some of your required minimum distribution, that’s going to be good for your financial plan overall because it just makes your assets last longer. I know we’ve worked with some clients where they say, “Jeez, I’m getting this check from my retirement account and I’m not spending. I don’t need all this money,” right?
“So what do I do with it?” Well that’s where you can work with your financial planner.
And sort of figure out a plan for that money. Sort of give that money a job again.
Just because you’re retired doesn’t mean you don’t have goals anymore.
Your goals are just going to change.
So would you recommend then almost creating a paycheck for yourself when you’re in this retirement phase? Now that you no longer got one coming in from your employer, or maybe you do and it’s just smaller since it’s part time work, do you recommend that? That somebody maybe kind of create one for themselves? I know my parents do that. Every month they go to the bank and they kind of pay themselves. They take what they have to take from their required minimum distributions and from their accounts and they put it into a family checking account.
Yeah, I think that’s a really healthy way to do it, especially starting off with retirement because it is a little bit unnatural for us, right? We’re conditioned to get that paycheck every month if you’re working for a company or even if you’re self-employed, right? You have a potentially steady source of income coming in from your clients but creating that paycheck from your portfolio is definitely a healthy thing to do and that’s something that your adviser can work with you on and I think the foundation, again, of that is just talking over your goals with your adviser so that they can create a plan for you and understand, “Okay this is how much we’re assuming you’re going to need to meet your lifestyle needs in retirement from your portfolio.” They can help you construct that distribution plan for you. I know you work with a lot of clients on that.
Mm-hmm (affirmative). Yep, absolutely. So speak to your financial planner, yeah.
Andrew, what would you say the biggest takeaways here have been? In the two distinct phases of life, what do you think?
Well I think, like we said at the beginning, a lot like a diet you have to find a budgeting method that works for you when you’re in your working career.
I think making your money more efficient is the key here and when we say that, it’s allowing you to save for your goals and reach your goals faster. I think whether that’s retiring at 60 or buying a home or a second home, sending your kids to college, these are just some of the common goals that pop up with folks in their working career but it’s just ways to reach those goals faster. I think that’s one takeaway from me during the working career. When we’re talking about getting down the mountain, I think it’s, again, I think it’s working with your adviser, talking to them because this is a big financial transition for a lot of folks.
You shouldn’t have to go through it alone. I think it’s working with your adviser to understand what your lifestyle needs are and how your portfolio can support it.
How about you?
I totally agree. I think my biggest takeaway is that I feel that everybody needs some sort of budget.
Regardless of the amount of income that you’re making, I think having distinct lane lines that you’re trying to stay in just can help. I mean, it just is going to help you down your path. I think establishing goals, whatever those might be, so that you’re having something to work to. It also puts parameters around how much you need to be saving or how much you can be spending.
I think that’s one of my biggest takeaways, yeah.
Getting your arms around it.
Yeah, absolutely. I’ve got another takeaway, too. I think no matter what method you choose for budgeting, I think you have to track your spending.
One way or the other I think it’s a really healthy exercise to do and it’s not there to shame you or to say … But it might be there to surprise you.
I think when I did it I was certainly surprised and saying, “Wow.” Looking back over the last few months you might be a little shocked to see how much you spend. Even that, I read a study where even just by tracking your spending the average person reduces their spending by 15% just from doing that.
Oh, I believe it. It’s like many dieting methods are the same way. Just having to be aware. Weight Watchers, having to know, “Okay each one of these foods is worth so many points.”
Just it constantly being on your radar and on the front burner, it puts it in front of you and it kind of forces you to be aware and not just brush it under the rug.
Absolutely. Well, Diana, thanks for joining us today. This was a great conversation.
Oh, thanks for having me.
This is Andrew Busa and Diana Linn, from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. Those subscriptions really help us create relevant content for you so feel free to do that. You can check us out a www.adviserinvestments.com/podcast. Your feedback is always welcome. If you have any questions or topics that you’d like us to explore, please email us at firstname.lastname@example.org.
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The best diet is the one you stick to. It’s the same with budgeting and cash flow planning.
The best diet is the one you stick to. It’s the same with budgeting and cash flow planning.
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