058: Building a Budget that Benefits You
Nov 18, 2021
It’s the holidays–and that means we’re gearing up for Black Friday deals, Christmas gifts, and more.
Giving (and receiving) gifts can be a whole lot of fun–but it’s also one of the easiest times of the year to overspend, rack up credit card debt, and make financial decisions that feel better in the moment than they do in the long run.
With that in mind, today’s episode is all about how to set an effective budget. We’re talking about why budgeting gets so contentious, how to eliminate conflict through budgeting, and tools you can use to know where your money’s really going–and start saving lots of it.
Here are just a handful of the things that we'll discuss:
- Why it’s more important than ever before to have a solid budget and revisit it regularly.
- The value of budgeting early in life.
- How to create your first real, accurate budget, hold to it, and repeat this process every month.
- How a budget creates financial freedom, makes it easier to identify and solve problems, and address money issues when they arise.
- “We’ve really got to start putting money away. We’ve got some credit card debt, we’ve got car payments, we’ve got Christmas coming up. We’ve got to make sure that we can afford these things as the price of oil is going up, gasoline, taxes, all these things. So, having a budget now is very important.” – Ed Siddell
- “When we’ve made those long planning decisions, it’s been the best investment for us.” – LeAnne Siddell
LeAnne Siddell: It’s The Retirement Trainer with Ed Siddell, a podcast about finding ways to help you become financially fit for your future, no matter what financial shape you’re in now. It’s that time of year again when everyone’s making their list and checking it twice, preparing for Black Friday, and hopefully, coming up with their budget for Christmas. What if you don’t have a Christmas budget? How do you make sure that your biggest beneficiary is not the credit card companies? This is LeAnne Siddell, and here to help us with all our questions and give us some guidance to stay in the best financial shape possible, The Retirement Trainer, Ed Siddell.
LeAnne Siddell: Hi, Ed.
Ed Siddell: Ola, how’re you doing?
LeAnne Siddell: Oh, I’m telling you…
Ed Siddell: This is one of your favorite topics. See, this is where we sit around the breakfast table and just reminisce.
LeAnne Siddell: Well, I just want to be fair.
Ed Siddell: I’m sure every person out here just loves talking about budgets because it’s thrilling, it’s exciting.
LeAnne Siddell: Well, I want to be sure that everyone understands that this was my idea because the reason that I think this is so important is because I can tell you, over the 20 years, 20-plus years we’ve been together married, probably one of the greatest arguments, and I’m sure this is not unlike most married couples, but we fight over things like how we spend our money and where we spend our money.
Ed Siddell: That’s I think we’re unique in that way.
LeAnne Siddell: Yeah. Well, anyway…
Ed Siddell: But I mean, it stinks, having to talk about that and be that disciplined, and in the words of Jocko Willink, right? I mean, extreme ownership and discipline equals freedom. And it really does when you boil it down to that, if you have a budget, especially this time of the year, especially this year, inflation, I mean, there are taxes, and I mean, things are just out of control, supply. So, now, we’re paying way more than what we ever would have before. And so, it’s so important to have that budget.
LeAnne Siddell: Well, and over the years, I think you and I having the conversation about some of those things that you can’t necessarily put a price on, and those experiences that you want to have with your family, but in the back of your mind, you’re always saying, “What does this look like, 10, 20, 30 years down the road?” And obviously, having had the opportunity to work with a lot of clients and put a lot of plans together, there has been that moment in my life where I’ve sat back and said, “Ah, now I understand this evil item that is called a budget,” and the reason why I have had trouble with it has been just because of the fact that a lot of things come up along the way, and they change how, where, what you’re spending your money on. And it’s important to revisit that on a regular basis.
Ed Siddell: Every month. It’s so important. But going back to safety, income, and growth, I mean, the reason for that methodology is if you have everything in place when things turn upside down, go bad, go crazy, whatever, as they often do because that’s life, right? Life happens. You’re going to be more prepared. It’s never going to be perfect, but you have to kind of roll and adapt with it. And everyone here knows I’m all about the process, right? Every day, and it does, and having that process provides the outcome or a more disciplined outcome of really what you’re trying to get to in. And I want to give everybody something a useful tool, something that they can actually take with them and use and implement themselves from the budget and paying off debt and…
LeAnne Siddell: But even some advice early on, I mean, we tend to focus what we do here on those coming close to retirement. But what I think is probably one of the most eye-opening things is having a budget young, having…
Ed Siddell: Makes all the difference.
LeAnne Siddell: Makes all the difference because then indeed, you can start to see where maybe you need to get tighter in your budget or where you can afford to spend a little bit more money. But inevitably, like those questions that come down the pike to simple things like you’re starting your marriage and you’re buying your first home. I don’t think that anybody understands the amount of money outside of the mortgage, outside of taxes and insurance, but the things that hit you unexpectedly.
Ed Siddell: How about the family, we’ve been working with them for years, and they just bought an old farmhouse, and it passed the inspection with flying colors. And now, they’re going through it all. The HVAC’s got to be redone and the plumbing, and now, the list keeps coming, and even with a new house. You’ve got furniture and drapes and just other, there’s always something else. And so, that’s why having that budget is so important just in life. And then, part of that process is having the budget for Christmas and birthdays and anniversaries and vacations, and having that all rolled up into one. And it doesn’t have to. And actually, we were talking about this today in our Monday morning meeting, where, hey, we can get really down into the weeds, but the reality is most people are going to do that. People want to keep it simple.
LeAnne Siddell: You’re referring to being super specific about how we’re…
Ed Siddell: Like how I am, right? I mean, getting down into, okay, inflation for this, and there’s a different rate inflation for that. For our purposes, that’s really important because everything’s about the math. But for the couples just starting out to those getting ready to retire, keeping it simple, KIS method, right? Keeping it as simple as possible so that people follow it is going to be key, and when you look at, again, there’s a process for everything, and there’s a couple steps and just going through this process, just starting off on a budget, paying off debt, saving, and building cash reserves. And so, let’s just kind of go through those step by step, what those are, and what advice we can give people and help them and offer some of the budget forms and things like that so people can actually use those tools in their everyday life.
LeAnne Siddell: Yeah, because like I said, I don’t even think a lot of people even know how to balance a checkbook or make that a priority in their lives anymore. And a lot of us have gotten away from that. The reason we’ve gotten away from it is due to just simple time constraints, but the value of doing those things, of realizing where your money’s going, the amount of, I mean, you’ve got all kinds of tools that are out there, like I just saw an app where it keeps track of your subscriptions because people sign up for things, and they don’t even realize it.
Ed Siddell: But you also have to be careful with those because a lot of those are open source, and so, your information’s out there. So, again, you’re exactly right, though, kind of, know what you’re doing. So, let’s talk about the first step, which is, I mean, build a budget. And this is so hard because you have the saver and the spender, and it’s not as rigid as that because it depends on the situation, right?
LeAnne Siddell: You knew I was just ruining my ass, it’s not that. Your priorities and…
Ed Siddell: That’s exactly it. And so, the key for this is…
LeAnne Siddell: Compromise.
Ed Siddell: Well, and communication, right?
LeAnne Siddell: Actually, yeah.
Ed Siddell: I mean, it really is. And starting down in the very beginning, so when we work with families, how often does this happen, where they send in their budget, we start building the rough draft of the retirement fitness plan, they come in, we review it. I’m like, okay, you’re making X and you’re spending Y. And so, at the end of the month, you have about $4,000 left over. And everyone looks at me and says, “No, we have nothing left over.” Like okay, so you got to understand what you give me is what goes in the plan. And most people don’t even know what they’re spending.
So, one of the things that I would recommend doing is getting one of those tiny little spiral notebooks, one of those little memo pads that you stick in your back pocket or your purse and for 30 days, write down absolutely everything that you spend from a stick of gum to a cup of coffee. And it is monotonous and it’s horrible and everything else, but I’m telling you, typically, we find, or people, the families that we’re working with, they find an extra $350 to thousands of dollars a month extra.
LeAnne Siddell: And sometimes it doesn’t need to be as much work as getting a spiral notebook and writing it down because we use the same vehicle usually to pay most for, even if we use a credit card and because we’re doing points, we put it all generally in a place it’s going through and reading through everything that you spend.
Ed Siddell: But it’s the conscious part of it. It’s just like paying cash for everything, right? So, I mean, it’s the physical act of writing it down, just like the physical act of paying cash for things.
LeAnne Siddell: Right.
Ed Siddell: Because it becomes painful.
LeAnne Siddell: Yeah.
Ed Siddell: Now, all of a sudden, you’re like, oh, it is. It’s like, oh my gosh, this is my fifth cup of Starbucks this week already, and I’m at– I don’t even know how much Starbucks is. What is it? Four bucks? I don’t know. It’s a lot.
LeAnne Siddell: It’s a lot. You can’t even go there, so.
Ed Siddell: But I mean, that’s the whole thing. And once you kind of get that budget together, do a rough budget, and then go back and look and write down everything for 30 days because if you write down everything in your budget and you say, “Okay, we’re spending $4,000, $5,000, $10,000 a month, whatever it is, and we’re bringing in more than what we’re spending, but we don’t have any money left at the end of the month.” Then that’s when you go through the exercise because that is so very important. And then what that also does is it stimulates the conversation as to, “Okay, you know what? You’re spending way, way, way too much on coffee.” “Oh yeah. Well, you’re spending way, way, way too much on lunch.” And it’s going back and forth as a team and saying, “Okay, you know what? You’re right. I am spending way too much.” And this is what we need to do because we’ve really got to start putting money away. We’ve got some credit card debt, we’ve got car payments, we’ve got Christmas coming up. We’ve got to make sure that we can afford these things as the price of heating oil is going up, gasoline, taxes, all these things. So, having a budget now is so very important. So, that’s really kind of step one.
Now, step two is, in our safety, income, and growth, you’ve got to have money that’s safe, right? Just set aside for emergencies, Suze Orman, Dave Ramsey, and I forget there’s a couple other people who say, a thousand dollars. And I think you need to really, especially nowadays, have at least $2,000, right? And here’s why. I mean, our kids went and filled up gas in our cars, and it costs them $60, and they about had a heart attack. So, everything is so much more now, you want to make sure that you have enough money set aside for emergencies.
LeAnne Siddell: But this is not your cash reserves.
Ed Siddell: No.
LeAnne Siddell: This is now your 6 to 12 months.
Ed Siddell: This is just starting off. If you don’t have anything saved up, alright, this is the very beginning. Let’s just say we’re starting from scratch. You don’t have any money in the bank. You’ve got credit card debt, you’ve got car payments. Where do we start? So, this is kind of like ground zero. And the reason you want that $2,000 is because you really want to make sure that if something happens, you’re not putting more money on your credit cards. You build up that cash reserve so that that way, you go right into step three, which is paying off your debt. In our debt calculator, the way that it works is, well, I mean simply, there are only four ways to pay off debt, it doesn’t really matter.
Okay, the first one is the snowball, which is really, you’re paying off the smallest balance first. And then as soon as that’s paid off, you take whatever that monthly payment was and you put it on onto the next debt. And then once that second debt is paid off, you take the payment from the first and the second and you roll it into the third.
LeAnne Siddell: And these are basically taking baby steps because…
Ed Siddell: That’s exactly it.
LeAnne Siddell: It is painful to take a debt when you’re looking at it and say, “Oh my gosh, how am I going to get this paid off?”
Ed Siddell: How are we going to do this?
LeAnne Siddell: Yeah. So, it’s the baby step of taking it. Most people are going to look at something and say, “Oh, you got to take the highest interest rate and you’ve got to pay it off first.” But again, it’s the…
Ed Siddell: It’s got to be what’s easy, right?
LeAnne Siddell: You’ve got to be able to complete a task. And if you can’t get to the point where you can complete it, then it’s not going to ever benefit you in any way.
Ed Siddell: Yeah. I mean, and that’s the key, which is, and so the second way is the highest interest first. Now, the snowballs that probably, people have the most success with that one because it’s the easiest. The highest interest first, nine times out of 10 is more economical, and you’ll pay things off quicker. But again, the snowball is the easiest. The third way is doing a custom payoff, which is a combination of the highest interest first and a snowball, depending on the situation, because you’ve got people planning for weddings and business, credit card, I mean, there’s a whole lot of different situations. And then the last is, you just pay as agreed, and especially when it comes to credit cards, if you’re paying those minimum monthly payments, we’re seeing credit card interest of 25%, 29% again. And I mean, you’re looking at $5,000 balance at those rates, paying the minimum payment, it’s going to take 35, 40 years to pay those off, so.
LeAnne Siddell: But I think where you’re getting to right now is setting up a plan, no matter what, this is all about a plan.
Ed Siddell: It is.
LeAnne Siddell: But it is setting in motion something that you can repeat over and over and over again, so.
Ed Siddell: It’s the process.
LeAnne Siddell: Yeah.
Ed Siddell: It is a process. And that’s why if you start off with a budget and you know how much extra you have by cutting out that extra fat, what that’s going to enable you to do is to then turn around and start paying off debt and building up your emergency fund and kind of getting back on your feet. Or if you’re already there, that’s going to be your budget, right? This is our budget for Christmas. And if we keep doing this and then we can set aside our budget for vacations. So, you’re going to have the cash ahead of time. So, as you’re doing these life experiences, vacations, concerts, whatever it is, you’re going to enjoy yourself with that much more knowing that at the end, it’s the end, you don’t have to start paying then because it’s already paid for ahead of time.
LeAnne Siddell: Yeah. And boy, oh boy, when you get to that point where you actually are looking at, I have the money that is now saved for something that you end up saving more money because you can pay for those vacations ahead of time instead of last minute. And speaking from experience, I think we’ve all been there, but I can definitely say go back through our marriage and when we’ve made those long planning decisions, it’s been the most economical trip for us or it’s been the best investment for us.
Ed Siddell: When we were the most disciplined, it was the most free that we were, and enjoying it. I mean, it really was, and it really does. It’s all about having that process so that that way we can enjoy the outcome. I mean, step four is building your 6 to 12 months cash reserves, again, as part of our safety, income, and growth. This is so key because look, we saw it after the tech bubble, the housing bubble, COVID, people were losing jobs and everything else, and if you have debt and you don’t have your cash reserves built up, you’re in trouble. And so, the discipline up front is very, very painful, okay. But the freedom that it gives you when things start to go awry, it can give you the ability to make the choice of, yeah, I don’t want that job so I’m not going to take it because I don’t have to. I’m going to wait until I have something that comes along as compared to, oh my gosh, I just got to get something. I got to put food on the table. And that’s a reality.
And so, having that 6 to 12 months cash reserves, and when I say that, it’s in an asset class that’s liquid, accessible, it’s not about rate of return, and it’s so counterintuitive because everyone says, “Well, how much money can I make?” That’s really not what it’s about. You don’t want to have it in the market because if the market goes down and you need it, you’re going to be liquidating at a loss, and it really defeats the purpose. It has nothing to do with the rate of return. It has everything to do with liquidity and accessibility. The only asset class for that is cash, not a money market because they can go down, not a CD because if you cash it out early, you’re going to have a penalty, not a fixed annuity, which is the insurance version of a CD, and it’s the same result as a CD. You just want to have a liquid in cash, just so if you have an emergency, it’s there and it’s readily accessible.
And taking it one step further, I use my mom and dad as an example, growing up in Florida and they got side-skirted a couple of times with hurricanes and having the power outages and everything else. And I’ll never forget in one particular time where the power was out, it came back on, but no one’s bank cards were working. And so, you could get gas, you could get groceries, but if you didn’t have cash, you couldn’t get it. And I remember my mom and dad because they had cash in their safe on the hand, just for emergencies, not a lot, but just for emergencies. And they were buying groceries and filling up cars for people with gasoline. So, those are the things that when you get to the point where you don’t have the credit card debt, you don’t have the car payments, you’ve got a budget in place, these are the things that you can do, which is help others when they’re in need, which is pretty awesome.
LeAnne Siddell: Well, and I think the one thing that we’ve already laid it out pretty well, but going ahead and repeating is doing these things establishes a habit.
Ed Siddell: It is.
LeAnne Siddell: And a good habit. When you’re recognizing what you spend every month and you’re going, obviously, it becomes a lot more, you’re a lot more aware. When inflation comes into play, and you’re at the grocery store and you’re like, that same grocery bill costs me such and such a month ago and now, it costs me. So, that is eye-opening…
Ed Siddell: How about our water bill?
LeAnne Siddell: Well, yes, and…
Ed Siddell: And that’s a whole thing because we knew what it was and when we called, we knew there was a problem, especially when it tripled.
LeAnne Siddell: Yeah. So, it is something that paying attention to that and not letting– I know a lot of people that just do online bill pay, and they set it up monthly, and it just goes out. They don’t even in large part, look or open up that bill. And I’m just going to say sometimes, that really becomes extraordinarily painful when you go back and you’re like, oh my gosh, we ran out of money twice as fast this month that we did last month because again, being proactive, looking at that, seeing how you’re spending your money.
Ed Siddell: Especially in an inflationary period, right? When you go from spending whatever, $30, $40 to fill up your tank, and now, it’s $75.
LeAnne Siddell: Yeah. All these things bring full circle, but it’s important, I guess, when we start looking at, I mean, you and I have had many, many conversations, and I’ll say that in the nicest way, but specifically, as it relates to Christmas, both of us come from, I know what I want to get, and you know what it costs. And those two things don’t always meet very nicely.
Ed Siddell: A little bit of oil and water, but that’s the key, is communicating it, making sure that it’s part of the budget. And part of that budget is saving, right? I mean, growing up, coming from a very blue-collar family, it was drilled, ingrained into my head, pay yourself first. And it’s so easy with student loan debt and everything else, I mean, it’s really easy to get upside down. But if you go through these steps, you establish a budget, you pay off your debt, you start your emergency fund, build up your 6 or 12 months’ cash reserves, and then you start saving money, that’s key.
I tell everyone, if you can pay yourself first 10% and each and every year, whether it’s– and I always do it in a Roth, start with a Roth. And the reason you want to do a Roth, we’re in a rising tax environment, right? No matter what anyone says, David Walker, who was the Comptroller General for the US, kind of like the CPA for America, under Clinton and George Bush, II. So, he’s kind of agnostic, just a numbers guy. And he said in 2008, any additional debt is really just deferred taxes. I mean, that’s really what it was. And back then, the national debt was, I think, $8 trillion. Well, we’ve spent more than that in the last 12 months. Okay, so $8 trillion over the 200-plus years of the country, and we did $8 trillion in one year. So, we’re in a rising tax environment.
LeAnne Siddell: And what you’re basically saying is the US government needs a budget?
Ed Siddell: Not one of these and not keep raising the debt ceiling. But putting money in a Roth, so the difference between pretax and a Roth is, if you make $30,000 a year, $50,000 a year, $100,000 a year, whatever it is, and let’s just say that you’re making $50,000 a year, you’re putting 10% away into a pretax, so that means $5,000 goes in. Then on your W-2, you didn’t make $50,000, you only made $45,000. So, it comes right off the top, it’s a haircut. But that growth is growing tax-deferred along with the original contribution, when it comes out, it’s 100% taxable after the age of 59 and a half.
With a Roth is you’re locking in your taxes now. So, in that same example of $50,000, you put in 10%, that’s $5,000 where your W-2 is still going to show $50,000. The difference is that growth on that plus the original contribution when it comes out, it’s tax-free. And that’s key because that has a huge impact on your budget when you retire because it impacts the taxability of your Social Security. The means based testing on Medicare B, C, and D can’t call it a tax, it’s a premium adjustment charge, right? So, the more you save the wrong way, the more it’s going to cost you, which is going to affect your budget when you retire. But I tell people because with all the 401(k) plans that we work with for all the companies that we deal with, it’s a meeting with the individual participants who said, just increase at 1% each and every year. Just 1% a year, that’s all you need to do. And it’s that compounding effect. Year after year after year, plus, if there is a match, even if there isn’t, that could have a six-figure difference in your pocket at retirement.
So, putting money into a Roth because when it comes back out, it’s tax-free. Your Social Security, it’ll be less on your taxes and it could lessen the amount on the means based testing on your Medicare B, C, and D, which means you have more cash flow and you have more money to spend. So, like you said, these are all baby steps and little by little, you start off with one, then go to the next, then go to the next. But anybody who wants this, we’re going to be happy to, if you give us a call here at 614-526-4118, we’ll give you the budget form. We’ll email it to you. It’s a PDF that’s fillable, right?
LeAnne Siddell: Yep. And there’s also the debt workout plan, which is basically a way to get out of your debt. And it works that debt down to zero, and you can move on from there. So, those are a couple of tools.
Ed Siddell: Yeah, it’s a calculator, so it’ll actually go through and calculate which is going to be the most efficient for you.
LeAnne Siddell: Yeah, but when you can see that finish line, which that’s what this debt workout plan does, it shows you what that finish line is. It is something that when you can…
Ed Siddell: You compute the approximate month and year, I mean, it’s pretty…
LeAnne Siddell: I know when I’m running, when you see that finish line, it just makes it so that you can make it to the end.
Ed Siddell: And every time you pay off one debt, you get to the next one. I mean, it’s the elephant rule, anyone can eat an elephant just one bite at a time. I mean, it’s the same principle, just little by little by little.
LeAnne Siddell: Alright, Ed. So, if they want to get a hold of us, they can reach us at www.egsifinancial.com. You can go on there. You can schedule an appointment to take some time to talk to Ed about the things that we’ve discussed today, the budget worksheet, the debt workout plan. You can reach us at 614-526-4118. Everyone needs help when it comes to finalizing some details and getting our plan in place. And this is just the beginning of those steps.
Ed Siddell: And we’ll do it no charge. Just give us a call. We’re here to help.
LeAnne Siddell: Thanks, Ed.
Ed Siddell: Thanks.