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Are you scared of the ‘b’ word?

In my 15 years of working as a financial adviser, one of the most inevitable, but avoided, conversations I have with clients and potential clients is around the dreaded ‘b’ word – budgets. When I bring the idea of budgets up in meetings, I tend to observe pretty common reactions amongst most people. And let me tell you, it definitely doesn’t cause too much excitement or elation. Budgeting is often one of the reasons that people put off seeking financial advice – the idea of restricting money is off-putting and people really don’t like being forced to count their pennies.

It’s not all doom and gloom

Whilst budgeting does require some control, would you believe me if I told you that it was the key to actually setting you free from spending worries? All it takes is looking at things through a different lens. I know what you’re thinking but bear with me here.

In my experience, where most people get the whole budgeting thing wrong is in the initial setup and then the execution – on the outset it’s all positive, but then they sit down, look at the expenses categories on a budget template e.g. utilities, rent or mortgages, cars, travel and attempt to reduce each area as much as possible in order to achieve the most amount of savings. And trust me, this is where it all goes wrong.

Budgets can be like diets, doomed to fail from the start

Here’s another way of looking at it – imagine someone that decides to go on a diet. They cut their calories right down to the bare minimum, to the point where they’re starving. Very quickly, the diet will be thrown out the window as they end up eating everything in sight to end their starvation – probably eating more than they would have in the first place if they had not been so aggressive with their calorie cut.

I see the exact same thing happen with budgets – people tend to do one of two things:

  1. They don’t set their budget based on reality and as soon as they see they can’t commit to it, they decide it’s too hard and just give up trying. Or,
  2. They set all their expenses categories as low as possible, and just end up unhappy overall as they have nothing to enjoy for their efforts.

It’s all in the accuracy

So how do we make a budget work, so we can achieve the freedom we desire? Well, I believe there are two key elements to getting this right. Firstly, make sure your budget is accurate as possible – it may be a little time consuming but rather than just guessing a ballpark amount for each expense category, go back and actually check bank statements to figure out the real amounts spent on each area.

Turn up the spending

Wait, what? The second element is my best budgeting hack (you’re welcome!). This involves taking the time to sit down and decide on what are the things in your life that you really love. It’s those things in life that really give you the most joy. Are you a travel junkie? Someone that appreciates culinary delights? Perhaps, you love investing and collecting art or pampering yourself every month at your local day spa. Once you have identified these, figure out how much you tend to spend on these activities. Now do something completely counterintuitive to setting a budget – increase the amount you allocate to this activity. You heard me correctly, increase. Sounds fun, right? There is a catch of course. In order to achieve this new level of fun or enjoyment, it requires you to then look over all the other expenses categories on your budget list and decide on some that you care very little about. For this to work, you need to ruthlessly cut down expenditure in these areas.

You can still have a slice of the budget cake

So, how does this work? The key is that there needs to be an overall reduction in expenses – this allows us to create the right surplus amount required to get ahead financially. The difference is you won’t be left feeling miserable as you will have the things you love most to look forward to as a reward for your financial fitness. This is how my wife, Rebecca, and I manage our finances and I can guarantee you it works. For us, our passion is travelling the world and this occupies a large chunk of our budget.

I’d love to hear what yours are. If you would like something to follow to get you started, you can download our budget template here. And, if you would like some help in figuring out what things mean the most to you, I’d love to chat with you so feel free to get in touch.

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