People have asked me in the past about how I am able to afford certain items or experiences in my life and there are a multiple aspects so I will cover them in a series of posts!

Why I Would Be Broke!

The first aspect of gaining more free time in your life is learning how to budget. Budget you might ask? There are millions of articles on budgeting but I think they are all worthless. Budgeting supposedly helps you develop a habit for being able to allocate the money to different priorities in your life. To gain free time in the near future, part of everyone’s budget is saving for retirement or a rainy day. But most guides show you how to budget with savings/retirements as part of your total pie which is develops a bad habit in my opinion. If you’re a normal person like me, when you see extra money somewhere you just say oh maybe I’ll dip into this area for a bit this month and it won’t hurt. If I budgeted the way most articles say online I would be dead broke from buying ice cream all the time. My simple method for budgeting develops a habit that effortlessly lets you get those savings.

Budget content picture Budgeting should be as easy as stacking pennies!

Action Steps

Step 1: My first part of budgeting is not budgeting anything for savings. You can easily figure out if you need to save 200$ or 1000$ a month for whatever your retirement goal is but the temptation is so easy to divert this money for something else like ice cream. Whatever the amount is I have it automatically taken from my check into a 401K or IRA. No matter what your retirement option is you can setup this money to be deducted on the same day! If your paychecks come in bi-weekly, then two transfers in your bank account should be set up (i.e. if you need to save 500$ a month, then set up two transfers for 250$ when each paycheck comes in. Most employers offer 401k accounts as a benefit of employment therefore you can easily talk with someone in HR to have this deduction automatically setup.

Action item now: Setup your savings right now to be deducted on the same day that your paycheck gets deposited in your bank account.

Step 2: Take a look at total income that you get per month AFTER taxes! The keyword is AFTER! Don’t try to factor in anything that you might get back at the end of your tax return or that you might deduct extra for (if you need to understand how deductions work, check it out here). Then prioritize one thing that you want to do most (nice dinner, new nature experience, downpayment for house etc)! For me it was always traveling somewhere into the world therefore I needed to save up money for the trip including flights and hostels! One you have determine your top priority put down anywhere between 10-30% of your after tax income towards this goal. The reason there is such a big difference in the percentage is that you can prove to yourself how aggressive you could be in getting what you want. By saving 30% of your income towards what you really enjoy in life means cutting out other items daily to get there.

Action Item: Write down on a post it note what the next thing you would love to spend your money one that you think is worth it. Setup a separate savings account for the money to be deposited toward your goal.

Step 3: After you have allocated the money in step 2 for your desires, create your budget with the total dollar amount remaining for your day to day life. There are many rules of thumb online but my general breakdown is rent/mortgage at 25-30%, bills at 10%, food at 20%, car payment 20%, subscriptions (Netflix, etc.) 10%, and rainy day fund 10%. During my time, I rented out a room to essentially decrease my mortgage to 5% of my total budget. Keep in mind that all of these portions are budgeted after Step 1 and 2 therefore all  of your energy should be focused into optimizing step 3. This could mean a whole bunch of things including moving to smaller place, eating out less, etc. There are a bunch of articles online about how to cut expenses in a person’s daily life. The biggest benefit for me was learning how to eat out less despite being such a foodie.

budget cut expenses

Focus on cutting expenses!

Action Item: Download Mint (or any other expense tracking software) or use a sheet of paper and write out the percentages for each expense category. Determine the total dollar amount for each category based on the percentages and see if this is doable, rebalance the portions depending on how much you are willing to sacrifice from one category to another.

And that’s it! That’s my simple budgeting method! How does this method work? It’s called set it and forget it, the principle is so strong but so hard to follow through. Step 1 causes your brain to never even think about your total spending money. Essentially it’s a developmental practice for the habit of set it and forget it. When I first started using this tactic for 4 months, I always told my mom that I made much less that what my salary says I made. Even though my mom said after tax that my numbers were too low I was adamant that I was sure of my total spending money before realizing that I never even told her that I deposit a percentage of the money in a retirement account. That’s how you develop the habit of set it and forget it. Step 2 indulges in your guilty pleasure, by having this account and watching the savings grow towards your short term goal focuses your attention away from the amount of money you are saving in Step 1. Step 3 should grab all your attention as you are focused on your day to day optimization to make sure you can live within the budget. By the end of a few months you should already be in the habit of spending that known amount after deducting from step 1 and 2. By this point your habit should be so well developed that you will easily live within your means without even thinking about it.

Set it and forget it!