How to Create a Budget that Works (from Financial Freedom)

Image of cover of the book Financial Freedomir?t=54087 20&language=en US&l=li2&o=1&a=B07DH8XKGPLet's face it, not many of us like budgeting. Budgets can be tedious. We often find them to be disheartening and difficult to follow. What if I told you there's a way to create a budget that works. I'm talking about a budget that isn't tedious, isn't disheartening, and not difficult to follow.

Does that sound too good to be true? After reading this post, I'll let you decide. You can tell me exactly what you think about it.

Grant Sabatier, the proprietor of the blog Millennial Money, has a new book that's just released. The title of the book is Financial Freedom, A Proven Path to All of the Money You'll Ever Need. That's a bold title. It sounds like one of those “too good to be true” kind of things. It's far from it. I found it to be a practical, how to book that grew out of Grant's own experience created wealth.

Grant's personal story is unique. Here's a summary from his blog:

“JUST AFTER COLLEGE I WAS UNEMPLOYED, LIVING AT HOME WITH MY PARENTS, AND HAD ONLY $2.26 LEFT IN MY BANK ACCOUNT. 5 YEARS LATER I HAD A NET WORTH OF OVER $1 MILLION.”

It's in the bold text here just as it is on his website. And why not? It's an incredible story. You can read a short version of the story on Grant's About Page. Better yet, get the book and learn how he did it and how you can use some of the same techniques to improve your financial condition.

Chapter review

In today's post, I'm going to review Chapter 7 of Financial Freedom. The title of the chapter is The Only Budget You'll Ever Need. To me, the title of how to create a budget that works is a better fit. If that turns into the only budget you'll ever need, then it's a win-win.

You can find a chapter by chapter review of all 14 chapters written by 14 different personal finance bloggers here.  It's a great way to get a fairly detailed overview of the book before purchasing. It's a book in which everyone will find something useful.

Let's get started with my review on budgeting.

You may also want to check out reviews of these chapters:
Chapter 6 – Is It Worth It? 11 Ways to Think About Money Before You Buy Anything
Chapter 8 – Hack Your 9-to-5: Use Your Full-Time Job as a Launching Pad to Freedom

Create a Budget that Works

Grant opens the chapter with a bold statement – “I hate budgets.” That's not exactly what you'd expect from a chapter about budgeting. Why, you ask, would someone writing a book on financial freedom say he hates budgets? Simple. As I said in the beginning, budgets can be tedious, disheartening, and difficult to follow.

Grant adds another reason. He says, and I agree, budgets “reinforce the idea of scarcity.” Many budget apps and spreadsheets have us track every penny we spend. Doing so can bring feelings of guilt or even shame when we spend over our budgeted amounts. When we're operating out of guilt, it doesn't feel right. We may become resentful of our budgets. How likely is it we'll stick with something we resent?

Of course, the answer is not very likely.

Focusing so much on the little expenses distracts us from the big three things that can kill our budgets. Grant's list of the big three includes housing, transportation, and food. He contends if we focus on cutting down these big three expenses, we can add 25% or more to our savings and investments. Doing so can increase our chances of getting to our retirement goal much quicker.

That makes a lot of sense. Many bloggers talk about the Latte' Factor, They add up the cost of our fancy coffee drinks, total up the daily costs than convert that to an annual cost to show how much we're wasting. Using a price of $4.50 for a latte' 6 days a week adds up to over $1,400 a year which, over twenty years, is over $28,000. That's not a small number.

Comparing that to what we spend on the big three reduces this number to something much less meaningful.

Average household expenses

Looking at the chart below from the Bureau of Labor Statistics, you can see the point Grant makes very clear.

Image of Bureau of Labor Statistics chart on average American household spending

Housing, transportation, and food make up 61.31% of the average American's household expenses. That's almost two-thirds of the total. That validates Grant's point. If we can reduce this 61%, we can save far more than what we would eliminating our daily coffee fix.

The smaller expenses, which we read so much about in the personal finance blogosphere, are minimal by comparison. At 5.08% and 3.15%, entertainment, apparel, and other services are just over 8%. It seems only logical to focus on the two-thirds and less on the 8%. If we create a budget that manages these three expenses better, it indeed can be the only budget we'll ever need. Maybe we can save enough to continue to enjoy our favorite coffee.

Get your copy of Financial Freedom

The big three by the numbers

Housing

At 33% of the total, housing is by far the most significant single expense. Chasing the American Dream of home ownership can be costly. It can be a budget killer. Conventional wisdom says that housing should between 30% and 40% of our monthly budgets. Following conventional wisdom can be costly.

Grant shares his story of moving from a $1,500 a month apartment to a $700 a month apartment.

Managing finances is about making choices. We can stay in the beautiful house, or we can downsize or move to save money. Grant chose the latter. He saved over $25,000 between 2011 and 2012 with the move. One way was in choosing to live on a busier street, and a smaller apartment to save money. Investing those savings, they are now worth over $100,000. That represents 10% of the number he needs to be financially independent.

A caution

Grant uses an annual return number of 7% throughout the book to look at what money is worth over longer-term periods. Many financial bloggers use this kind of calculation. It's useful to see how compounding can grow money. It's not very useful in calculating real numbers. Market volatility and timing of returns can have an outsized impact on success rates and overall return. It is a reasonable

Sequence risk can and has changed retirement and financial independence timing. Bad returns right before retiring, quitting a job, etc. can throw a curve-ball into our plans. When I plan for clients, I prefer to use a much more conservative number.

The real message is in the value of cutting down the most significant expense in our budgets. That's a very valid point, and we should strongly consider reducing it as much as possible. There are extreme examples in the chapter of people having roommates who rent space, even to the point of living rent-free. I'm sure that some families with children rent rooms. I'm guessing it's relatively uncommon. Nonetheless, there are many examples of ways to cut down housing costs. Some will make sense to you. Others won't. That's true of most personal financial advice.

Transportation

At just under 16% of our monthly budgets, transportation is the second area where reducing costs can have a significant impact. Grant breaks down the transportation budget into three primary areas – commuting to work, commuting for day-to-day errands (running to the store, taking the kids, etc.), and traveling for vacation. It seems dubious, but statistics show that Americans average daily commute to work is 53 minutes. Where we live outside of Washington, DC, the number is much higher.

For some, there is no way to cut down their commute. With some creativity, you may be able to do it. Start with the car you own.

Buying used rather than new can save a ton. New cars depreciate substantially the minute you drive them off the lot. Letting someone else depreciate your vehicle before buying it can save a lot of money. Grant cites a statistic saying the average car payment is $517 with an average loan term of six years. Paying cash for the car and investing the $517 can add up to a substantial sum over time. As he does throughout the book, Grant uses the monthly investment and a twenty to thirty-year time horizon to show how the money grows.

Get your copy of Financial Freedom

Operating costs

He goes on to show how much owning a car costs to operate every year. The cost of gas, insurance, taxes, maintenance, and parking fees total $8,469 a year.

If there is public transportation available in your area, using that instead of driving can save thousands of dollars a year. If that's not an option, consider carpooling. Many commuters in our area carpool. Even if you own a car, using public transportation and carpooling will reduce the costs of ownership and annual operating costs. In the DMV, the majority work for the government or agencies that support the government. Many of them offer flexible spending accounts for public transportation expenses. Some provide a monthly stipend to help defray the costs.

Check into your options wherever you live. Be creative. It's the second highest expense and should be managed properly.

Travel hacking

I won't go into much detail here, but in the book, Grant goes into considerable detail into how to “travel hack.” If you're not familiar with the term, travel hacking means finding ways to save money (hack) with travel tricks. Below is Grant's list of seven methods.

  1. Make yourself invisible to the airlines when searching for flights. They will often raise the prices if you go back and search again for the same flight. Turn off cookies or use an incognito browsing window.
  2. Travel when no one else wants to travel
  3. Buy one-way tickets each way
  4. Buy tickets individually if you're a family. Airlines often have only one or two tickets at the lower price. Trying to buy four at a time eliminates your possibly getting the cheaper tickets
  5. Fly from the biggest airports you can. They often have more choices for cheap flights.
  6. Set up a fare monitoring service to notify you when flights you're tracking become cheaper
  7. Sing up for travel email newsletters from services like Expedia and Travelocity

There are more details under each item. Be sure to get the book to learn more.

Related:
How to Use Reddit Churning for Travel Hacking

Food

Third, on the list of the big three budget items is food at just under 13%. There are many ways to save money on food. Food is an area that, though difficult, can give us some meaningful savings. Even though it's just under a third of what we spend on housing, using some simple techniques can cut our monthly costs down considerably.

One way is to buy in bulk. Stores like Costco, Wal Mart, and Sam's Club offer lower prices on many items. A tip to price compare is to use the per unit cost of an item. The per-unit cost (per ounce for example) determines the overall value for the price. The per unit cost can be found on the label. An item selling for more money at one store may be cheaper on a per unit basis. That means you're getting more for your money. It's these little things that, when we pay attention to them, can add up to substantial savings.

Meal planning

Meal planning and food prep go hand in hand as well. My wife and I have found savings we never knew we had once we started meal planning and preparing meals in advance. Planning your meals for the week and cooking them in advance does several things.

  • Makes you think about what you're eating. That has benefits for your diet, your budget, and your time. She and I both work. Having meals prepared in advance allows us to not worry about what we're going to eat when we get home from work.
  • You will be a more efficient shopper. When you plan your meals, you can better manage your grocery. You'll have the ingredients listed and the quantities you need for each. When you go to the store, you will be much less likely to engage in impulse buying, which can kill your food budget. It also reduces or eliminates those trips to the story where you forgot something.
  • You will save money.  When you have a list of specific things to buy to prepare your planned meals, you can shop for those things at different stores to find the best-priced items. Our weekend trips often include three stops – Wal Mart, Trader Joes, and Wholefoods. I realize Wholefoods is blasphemy to many personal finance bloggers. Our trips are limited to specific items, mostly meat. I trust their meat quality more than other places.

When we prepare our list and shop, we use an app called AnyList. It's one of the most ingenious apps out there. We create a separate list for each store and add items on the list for each. We share the list. When we shop, we simply click the item we get, and it gets crossed off both lists. It's incredibly efficient and saves us a lot of time in the stores. Check it out the app. You'll love it.

(I get no affiliate compensation for AnyList recommendation. We just love the app).

Dining out

The last thing Grant talks about in managing the food budget. Eating dinner out can be a food budget killer for sure. Planning meals can eliminate the habit of eating out. At the very least, it will reduce it to the point where it doesn't ruin your budget.

There are ways to save on the nights you choose to go out to eat. One is to join the restaurant's frequent diner's club (if they have one). Another is to sign up for newsletters to get special promotional offers. Alcoholic beverages are dinner out price killers. They are the highest profit item on the restaurant's menu. Ordering water instead of sodas or alcoholic beverages will cut your bill down substantially.

Final thoughts

If you're looking for a “how to” book that can help you move closer to your financial goals, consider Financial Freedom, A Proven Path to All of the Money You'll Ever Need. The best books on personal finance come from the author's own experience. The experience can be the author's or from the experience of others who have achieved financial success; however one defines it.

Adopting the budgeting ideas from a guy who hates budgets seems like a great place to start. Reduce the expense of the big three. Everything else will be more manageable.

The Millionaire Next Door introduces sound principles upon which to build wealth. Things like spending less than you make, saving and investing, and reducing unnecessary debt are traits that most millionaires have in common. Grant's lifestyle represents these same traits. The principles are sound. They work for other millionaires. Grant used them to become financially independent. You can use them too. His book is full of specific examples from his own life and from the lives of other successful people on things they did to become or get closer to being financially independent.

The question is, do you have the desire and discipline to implement them in your own life? If you do, you can change your life forever.

Now it's your turn. Do you focus on the big three expenses in your budget? Or do you track every dollar spent? How have you been successful in your budgeting? Please let us know in the comments below. 

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