Building good financial habits: budgeting

Making drastic changes in your life is hard. This is very easily evidenced by how terribly most people manage to fill their New Year’s resolutions. Most promises are just too far optimistic and require changes that aren’t sustainable. One of the key pieces of advice in the land of personal finance is emphasizing the need for having a budget. However, it’s not just all that simple to start keeping a budget and even worse, following a budget! What will get you there in the long run is building sustainable habits step by step so that you don’t feel as if you’re being deprived of anything.

1. Keeping track of where your money goes

There are multiple ways of doing this. There are whole programs for it (Quicken and YNAB come to mind). There are also apps that you can use such as Mint, or you can just make a spreadsheet using Excel or Google Docs. Alternatively you can just also write everything down into a notebook manually to keep track of it. The problem with all these is the amount of time/dedication required to keep track of things. Forget just a few things and you’ll be quite hopelessly lost. It is important to know where your money is going, so there are a few habits to build that help you keep track of it without going insane with bookkeeping.

– Pay for everything by card. A lot of banks run an analysis on your expenses, which means you can get an overview without spending time on the tracking yourself. Some people also use an envelope system (set cash aside for certain categories).

– Set an amount of money as a daily/weekly budget. If you know that your weak spot is spending money on food then just plan to use x amount per week. If you find yourself running short then you’ll know that you’re having issues.

– Automate as much as possible. Rent, cable, internet, phone bill, insurance etc. Most of these can be set as automatic payments meaning that you know when they’re planned (1x month, 1x year) and know how much money they take.

– Plan for bigger purchases in advance so you won’t be surprised by them in a way that destroys your budget. (For example save x amount per month for replacing any appliances that may break.)

– Keep track of any expenses that might bring about fines, extra payments or other extra expenses. (Take your car into maintenance before something really breaks and you start bleeding money.)

2. Staying within your budget’s limits

– Pay yourself first. Transfer money into investments the day you get your pay. If the money isn’t just sitting in your account then you won’t be able to spend it!

– For bigger purchases force yourself into a time-out. There are a lot of suggestions about this – one example being taking an extra day to think for every 100€ that something costs.

– Do research before buying things! Often things are cheaper online, or in some obscure shop you wouldn’t think to check. Waiting for summer/winter/other sales might also save you a lot of money. (Clothes are a great example here.)

– Limit your discretionary spending. It’s completely fine to buy things you enjoy – coffee, candy, etc. However, unless you limit yourself even a bit then you’ll likely end up spending way more than you realize.

Building habits

My financial habits are a general mix of these suggestions. I transfer a part of my planned investments the day I get paid (it’s taken me a while to get to the point where I can do this every month though). I mostly pay for everything by card and let my bank run the expense analysis for that, but I do have a spreadsheet for my home expenses.

I tend to spend a bit of time to find good deals on things, I quite often end up ordering things online since things in Estonia are unreasonably expensive at times. One of my big weaknesses is spending money on food, so I’ll write about that later. I’ve gotten better with impulse purchases, but I sometimes splurge on books but I’ve gotten a bit better at choosing ones I really want to have for a long time. In the end, small steps lead to great habits and after a while you don’t really need to think about them.

What’s your greatest habit that helps your budget?

Barrier of entry to investing

Investing is without a doubt quite an awe inspiringly huge field and it’s understandable why a lot of people never really get into it. However, if you break the problems that stop people from investing into smaller pieces then the barrier of entry can hopefully be overcome more easily.

1. “I don’t have enough money to invest.”

This is of course perfectly understandable – people need to buy food, pay rent, pay for kindergarten fees etc. The first problem here is the fact that most people never really define how much money they need to invest. There are of course really demanding fields like real estate and bonds that need thousands of euros to start. There are also fields with a much lower minimum amount – social lending for one (you can start with 10€), investing into funds (I don’t particularly endorse this, but some banks let you start with 20-30€ per month), investing into stock (1000€ is already a reasonable amount of money to purchase your first stock). You could also start a company – technically you just need to pay the ~185€ for the registration fees!

The second problem is that people rarely look critically at how to find this extra money for investing. Of course, there are ways for extra income, side gigs, finding work from GoWorkABit, doing overtime or side projects etc. Another, and even easier way usually is to just save more money – being able to set aside an extra 5% per year, means anything from 300-1000€ per year depending on your salary! That’s enough for 30-100 loan pieces on Bondora or about 70 stocks of TVEAT dividend stock!

2. “It is all so complicated.” (aka the “I don’t know math” argument)

I’m surprised by how many people get really caught up in this argument. Really, not a single person who has ever started investing has never ever known everything there is to know about investing. An even bigger surprise – a lot of people who are into investing do not have economics degrees or a great understanding of mathematics. What they do have is a willingness to learn and a positive attitude.

If you find your lack of knowledge a serious problem that is truly stopping you then if you’re reading this, you have a great resource available – the internet. Even starting off Wikipedia on topics such as investing, interest, stocks, risk management, diversification etc will get you a great basic understanding. If you’re already looking for more details then open up Investopedia. If you’re more into learning from other people’s experiences then just open up the Bogleheads forum and read through the top posts! In the year 2014 lack of information isn’t a valid excuse in ANY situation.

3. “It’s too risky, I’ll just lose it all.”

This at least has some reason to it. You don’t want to get started carelessly and just lose all your money in a few bad deals. This, however shouldn’t paralyze you with fear and stop you from ever getting started with investing. This is why you read about risk management and diversification. This is why you do research and use logical thinking.

There isn’t a single thing in life that is risk free. People seem to think that them having a job is risk free – that they’re very unlikely to lose it. The recent crisis really showed how untrue that was. While your boss might leave you and your job might be made redundant, your investments won’t disappear on you in tough times as long as you take reasonable care of them.

Getting over the barrier of entry

1. Make a plan for how much money you’re planning to invest (what is your final goal?)

2. Look over your finances to see if you can generate extra income OR save more (set monthly goals)

3. Choose a few fields of interest and just READ about them (either books, blogs, forums are OK, just remain critical)

4. It’s fine to start slow and with smaller amounts of money to get a feel for it (just make sure fees don’t eat your money)

5. Find friends online or offline who share similar interests (even better, get a mentor!)

6. Be able to tell if the barrier really exists or if it’s only in your head!