Saving is the single most important step to building wealth. Knowing how to make a budget is the most important step to saving.
That said, budgets can be annoying, time-consuming, and hard to maintain. If you don’t use your budget, it defeats the whole purpose. It’s great to write it down on paper and tell yourself you will not spend some random dollar amount on lattes and avocado toast; but if it means you are so miserable you can’t stick to it, it defeats the purpose. If your budget keeps you in the house eating instant ramen five nights a week, you’ll start to hate the budget and abandon it.
Generating wealth is important to me. And getting the budget right is an important part of the journey. So, I came up with a few rules to keep yourself on a simple budget, but still enjoy life a little (aka “ball”).
My budget is a liberating force in my life. It allows me to buy whatever the f*** I want without feeling bad about it.
Yes … whatever I want (and can pay for).
When you know you’ve paid your bills and put money away for investing, you don’t have to feel bad about spending pre-allocated money. It’s amazing! I’m not concerned about hurting my long-term wealth dreams, or delaying buying a house, or coming up short on my student loans … yet I can spend on things I want. I can do whatever I want because of a basic ass budget. I love my budget soooo much now.
And that freedom to spend money on the things I want makes me feel good. Like deep down good. Like I-just-saved-a-kitten-from-being-run-over good.
These are the top tips I use to make sure I can enjoy life guilt-free and still work on my long-term wealth goals.
Create a guilt-free spending account
The first step is labeling money for guilt-free spending on whatever you want. Traveling, shoes, eating out, or whatever your vice is. You want to have a bank account where you will never ever, ever, feel bad about spending all the money in it.
Creating this account is important for many reasons, but the biggest are:
1) You remove the guilt from spending money.
Splurging on something always carries this “Should I be spending money on this?” feeling in the back of my head (and hopefully yours, too). Since this money has no other purpose, you can feel great spending it.
2) You limit yourself from doing “the most”. (read: blowing rent money at the club)
It’s not easy to keep track of all your purchases in the moment. How much did you spend last week on clothes? How much was dinner last night? These questions are annoying and hard to keep track of in the moment. If you reduce it to “Is there money left in the account?”, a simple check on your phone will give you the answer.
So, how do you do this?
- Create a checking account with a debit card.
- Setup a re-occurring weekly deposit into the account.
- Don’t overdraft the account.
- Make ALL your non-essential purchases here.
Finding the right dollar amount will be hard. It took my family a few months. We gradually increased and decreased it until we were comfortable and had enough money going towards wealth goals.
Use Mint.com, or a similar service like Personal Capital to track your spending. Understand what you are spending money on from day to day. Make sure to categorize all of your expenses for a few weeks. By then you should be able to determine an average dollar amount for your weekly expenses.
This number will be the starting figure for the weekly deposit into your spending account. Now cut it by 10% as the first step to reducing your spending. You can put in a small buffer for overages when starting out (everyone goes over-budget starting out). When this feels comfortable, try cutting another 5%-15%. Keep doing this until you are happy but able to invest more towards your wealth goals.
Trying to figure out how to cut your spending by 10%?
Pick your Poison
I love the tagline of the podcast Afford Anything:
“You can afford anything … but not everything!”
The truth is, you really can afford almost anything if you want it bad enough. Even earning very little, you could buy a Lamborghini. You might need to live in the Lamborghini, bathe at a gas station, and eat at a homeless shelter… but, you could make the lease payments work.
The question is, what do you love so much that you are willing to sacrifice for it?
When it comes to balling on a budget, you must realize you can’t ball on everything. Instead of Gucci from head to toe, maybe it’s just Gucci shoes and some Levi’s jeans and a t-shirt. If you direct your spending, you can focus on getting the things you want the most and lowering the overall cost.
For me, I just won’t compromise on travel. It’s my right to go around the world and do it big. As you’ll see, I’ve learned to save money… because I’m not staying in a hostel and need at least two nights in a five-star hotel and plenty of activities on my vacation.
Now that I know my vice and what’s important, I spend less on clothes, rent, and eating out. I make sure my overall spending is in line with my goals and stop wasting money on things I enjoy less.
Make your Vices more Affordable
When it comes to the things I don’t need but still spend money on, I’m a little fancy.
Travel, Technology, and cars are my top vices, and they’re not cheap vices to have. One international trip would set me back $4k-$8k depending on where I went, and a nice car is easily ten times that. My gadget game is serious, including a robotic vacuum cleaner.
When I committed myself to becoming wealthy, I had to make some changes. I committed to spending some time to understand how I could save in the areas I spend most of my money, so I wouldn’t have to compromise on quality or quantity.
Travel was the easiest. I went and learned about travel rewards cards and travel hacking. Soon, I was flying to Brazil, Bali, and France for free, and spending significantly less on hotels by using Airbnb or points for my hotel stays. I would also rent my home on Airbnb for easy money.
I learned that buying a late model used car in LA, five hours away from my home in San Francisco, would save me $20k when purchasing my Audi. Much better than going to the dealership and rolling off the lot with something new.
Saving on electronics was more difficult, but I kill every Black Friday and Cyber Monday by getting outstanding deals, and I started re-selling old stuff on eBay.
No matter what your vice is, there is a way to save 10%-50% on it and still enjoy things that are important to you. Try Reddit as a start. Or Google “How to save money on ______,” where _____ is 5,000 thread count sheets or Gucci wallets, whatever your vice is.
Maximize Rewards Cards to Save on Everyday
I hate credit … but I love credit cards.
My wallet has more plastic and metal than leather at this point.
Each card serves a purpose and I pay them off every month to avoid interest. I save 5% off everything at Target with their Red Card and on Amazon.com with their Prime rewards card. 3% on all food and travel thanks to Chase Sapphire Reserve. 2% on literally everything else from Citi.
THIS ADDS UP!
**Important note** If you don’t pay it off monthly and end up paying interest, you ARE LOSING MONEY! Don’t spend more than you can afford to pay off now, period!
The real bonus here though is the sign-up bonuses. Those sweet, sweet, sign-up bonuses.
The one-time signup bonus is the real reason I have so many cards (and cancel so many every year). They can range from 100,000 miles to $500 in cash back savings. Million Mile Secrets is my favorite blog for learning about the ins & outs of travel hacking.
It all sounds too easy (and is). A credit card will make you an offer, such as 50,000 United Mile or 70,000 Chase points. They also add their restrictions, such as spending $3,000 in 3 months and only one bonus every two years. You sign up for the card (you will need good credit), you spend the amount (you can pay your rent through a service like RadPad if needed), you get the rewards.
**important note** Just reminding you again to pay off the balance every month. None of this works if you carry a balance.
Before you ask, my credit score has gone up since doing this. Yes, I do have a lot of inquiries, but it doesn’t impact your score that much. What does impact it is your utilization, the amount you owe vs. your maximum credit limit. Now, I have 10’s of thousands of credit I will never use, so my utilization rate dropped so low my score went up 30 points. Use a service like Credit Karma or Credit Sesame to check your credit before and while adding new cards. You’ll be happy with the results.
Reward Yourself, Within Reason
When I committed myself to wealth creation, I had to take a hard look at how I spent my money. I knew I was spending more than I wanted to and it was hurting my ability to build up enough funds to make serious investments and get rid of debt.
I spent a lot of money eating out. Way more than I would have guessed. But I loved eating out. I didn’t go to costly restaurants, but I like professionally cooked food. Ever since I was a kid, I never got the obsession with a “home-cooked meal.” F*** that, give me some store-bought Chinese food any day.
I had to make a choice about how much of this indulgence made sense. So, I committed to spending a little less every time by ordering fewer cocktails and going to cheaper places. I strove to cut my spending here by 20%, but dropped other expenses by 30%-60%, because they were less important (remember picking your poison?).
Now I make sure I still do all the things I love, but I moderate them. I might stay at a cheaper Airbnb on a trip instead of spending so much on hotels. I’ll get black coffee and add milk myself instead of a latte. I find this lets me live the lifestyle I love, but still be able to invest in my long-term wealth.
Go forward and enjoy life. Just make sure you aren’t sacrificing long-term enjoyment for some short-term battles.
Damien is a Personal Finance Nerd and former Facebook Product Manager who started Wealth Noir to help others find wealth. He actively invests in stocks, robo advisors, and cryptocurrency … but loves real estate investing. He holds an MBA from MIT and a Comp Sci & Econ degrees from Unv. of MD. He’s a proud dad, which is his biggest accomplishment.