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My name is Sir Budget! So, I definitely love budgeting, huh?
You may also think, I am addicted to saving on everything.
I am the guru when it comes to spending less and cutting your expenses down to the bare minimum.
Here is the bombshell! I am totally not!
Sorry to disappoint you but in my opinion neither classical budgeting nor saving is fun or fulfilling. There are at least 4 things when it comes to money and finances that are much more appealing to me:
- Investing (in stocks, real estate, funds, etc.)
- Increase your income (with site hustles, freelancing, getting a raise and many other ways)
- Building a business (do what you love, work for yourself and become your own boss)
- Spending money (obviously)
So why I still do budgeting and call myself Sir Budget? This page will tell you why.
Reasons for budgeting
Let’s start with some motivation for the topic before we dive into my system and the advantages over other budgeting methods. So here are just a few reasons to create a budget:
- As a gentleman, you have to know where your money goes. You want to be in charge of your finances. Believe me, it’s not desirable to go broke accidentally. It’s also not worthwhile to spend all your money during the month and in the last week, before the paycheck, only buy the cheapest bread (that is close to its expiration date) just to prevent your body from starving.
- If you want to have some money to invest, you need to limit your expenses. The better you budget, the more you can invest.
- To build a business you will often need some cash aside to start. It’s also good to know how to take care of your personal finances before you have to look at your own companies money as well.
- We all have short-, mid- and long-term goals. Often they require a decent amount of money (think of your wedding or a new car). Budgeting allows you to detect these coming expenses early enough and react on them by setting aside a small monthly payment to a savings account.
- Have you ever felt guilty for spending some of your money? Do you know the fear when looking into your bank account after a while? Have you paid bills over and over again just because you were too lazy to cancel a subscription or membership? You shouldn’t feel this way. Budgeting can help you.
These are just a few of the reasons why you really should track your expenses and manage your fortune.
What most other bloggers are doing
There are endless money lifestyles out there.
Minimalism and extreme early retirement are the hot topics in the personal finance blogging sphere right now. If you want to retire early – between 30 and 45 – you have to cut heavily on your expenses and continue to live this minimalistic life for the rest of your time. With the money that is left over you have to choose your investments wisely (which is actually easier than it sounds). As soon as you hit $1,000,000 you can stop working and continue living from 4% of that investment annually ($40,000). If this still sounds appealing to you, check the blog of Mr. and Mrs. 1500 or Mr. Money Mustache, which are the go-to-resources for this way of life.
There are many people and key influencers who disagree with this approach. Robert Kiyosaki, the well-known author of Rich Dad Poor Dad, recently called Mr. and Mrs. 1500 losers in an article because of their approach. I neither like to judge others nor do I think that there is only one way to financial success. Anyway, I also don’t think that this approach is the path I want to choose. I want to be able to change directions like a motorboat and not like cargo boat.
Another reason, I disagree on early retirement is, that I like my job. Work in general. Sure, you can continue working on things that you love, but why not change it even before retiring?
In my opinion, early retirement and minimalism are a great way for some people. However, for many, this is just an idealistic approach that they will not stick to and quit as soon as the first hurdles are arriving.
Requirements for my financial system
I have to make a confession. I like luxuries. I love my MacBook, my Apple Watch and other premium things. So sorry, I’m not a penny-pincher and can’t help you if you look for someone like this.
Another confession, I enjoy making money and increasing my income. However, I dislike saving and spending less. Budgeting is a necessity and helps me to make more money on investing. But making more money is simply more fun than saving some extra bucks by using coupons.
These characteristics form the requirements for my financial system:
- The system should take into account that I like to buy nice stuff.
- It has to be easy to setup and manage.
- I want to have the freedom to change directions from time to time.
- It should be easy to stick to. No system that forces me to make 100% best decisions or suffer otherwise.
- I should be able to improve my finances by fine-tuning the system (easy to learn, hard to master).
So how to build such a financial system? Here we go.
How to build a financial system
The title of this page is ‘Budgeting: Build a financial system’. Anyway, even better would be ‘Budgeting: Build a financial system that works’ or ‘Budgeting: Build a reasonable financial system that takes into account that you are a human being and is not funny but you will have a joy using it’. Well, I’ve decided that this title is a little bit too long.
First of all, I want to point out, that I’m not an expert. I’m still learning and my system will probably evolve over time. I will update this page accordingly and link to relevant posts later on.
Another important note I want to add: This system is built upon the one of Ramit Sethi in his book I Will Teach You To Be Rich. I can highly recommend this book. My system will evolve over time and is already a little different from his. But for now, I don’t want to take the credits for building it.
Let’s start with a glance at the whole before diving in a little bit deeper.
- Cut your expenses in a reasonable fashion
- Calculate your fixed monthly expenses
- Put aside money for an emergency
- Calculate how much money you will need for short- and mid-term goals
- Buy assets that will generate money for your long-term goals
- Buy/do whatever you want
Step 1: Cut your expenses in a reasonable fashion
Before you call me a liar and be mad because I said I’m not a penny-pincher, this is not about saving on all the great thing in your life. It’s about reducing your spending on all the clutter to make room, time and money for new and great stuff and wealth. The buzzword here is conscious spending. You know where your money goes to and only allow it to flow into stuff that you like.
It’s important to recognize where your money is going to right now. Then you have to consider what is important to you and what can be easily cut. I want to give you an example of myself. I paid 6 months for a gym membership without going to the gym. I like to workout at home. It just needed some initial activation and soon I saved 20€ per month.
Another one: I don’t like to drink coffee (real gentlemen drink tea anyway). So do I spend a lot of money (and time) in cafés? No.
I love to read personal finance books. Is it okay to spend $70 on a single book about investing? Yeah, for sure.
This step has to be done only once and then repeated from time to time (6-12 months).
Step 2: Calculate your fixed monthly expenses
This is the most tedious part of the whole thing. However, there will be calculators on this blog that will help you to find out how much this really is. You don’t have to create the perfect listing of all expenses here. Over several months you will reiterate the process and add things accordingly.
Fixed is a little bit misleading as it doesn’t mean the amount of money must be the same every single month. You will track instead everything you can give an average or above average amount of money and is a recurring payment you have to do in an interval. For annually or quarterly payments you will break this done by the number of months.
- Rent (monthly) -> really a fixed amount
- Food (monthly) -> you will use an average or above average amount here
- Dropbox subscription (annually, so divided by 12)
- Gas for your car (monthly) -> this will be tricky
The longer you’ll use the system the more accurate the values become. This can be easily updated in less than 1-2 hours each month.
Step 3: Put aside money for an emergency
This is different from most suggestions as others will recommend you to save for the expenses of 6 months. This is actually a pretty good value to use.
However, we will build this up slowly by taking an amount that is equal to 10% of your fixed monthly expenses aside. If you need them (this will happen often in the beginning) because you have an emergency OR because you have forgotten one of the costs in your monthly expenses calculation, then use it. Otherwise, put them into a savings account to build the 6 months of expenses for an emergency.
Don’t skip this! You will need this money, and the more you have the better it is.
Attention! Also, don’t use it in cases where there is no actual emergency.
Step 4: Calculate how much money you will need for short- and mid-term goals
This is pretty simple but very important. You probably need a new car in two years and it will cost you roughly $10,000? Bad news, you will probably have to put a lot of money aside. However, next time you know it and you will do a lot better.
Again, this is something that will improve over time and in a short period, you will be pretty good at it. I will show you how the calculation works and give you some neat tools for this in a later blog post. I will link to it for sure.
What actually is short- and mid-term?
By my definition, everything < 1 year is short-term. More than a year and less than 10 is mid-term. Everything above is long-term.
Step 5: Buy assets that will generate money for your long-term goals
Here we go, this is where the fun begins. Maybe you don’t like it now, but I will do everything that you’ll start loving it like I do. There are many things to build assets and let the money work for you.
If this ‘let money work for you’ sound unfamiliar and strange, don’t bother, you will see shortly how great this really is. It can be like an addiction.
However, I know, not everyone is like I am. So, I will show you an easy and mostly passive way of doing it.
Examples of assets you can buy:
- Real estate
- Index funds
- Individual stocks
If you think, you don’t know how to make money with those, I will dive deeply into most of them and provide resources for you for the remaining.
Let’s see the $$$ rolling!
Step 6: Buy/do whatever you want
This is no joke. Everything that is left can be used for whatever you want. You want to buy a second or third car just for fun? Do it. As long as you just spend the amount of money that is left.
Imagine you have $500 left and spend all of it on clothes. And you are totally fine. You’re doing pretty good actually.
Or if you spend $600 (that are left after Steps 2-5) on drinking and going out. Is this also okay? Well, you should probably consult a doctor and not me. However, from a financial perspective, you are covering all your costs (Step 2-3), you will reach all your short- and mid-term goals (Step 4) and build wealth for the coming years (Step 5). So you’re doing (financially) great!
The best thing in this system is, the more you get into, the more it becomes appealing to you and you will find yourself saving more on stuff that is not emotionally important to you and use this to increase your long-term assets or just have some extra $$$ each month to spend.
You will also see, that this framework provides you with a lot of flexibility and gives you the opportunity to make your own decision. E.g. you can save some more and add a new mid-term goal or save more for the long haul.
Where to start your journey
This was just a very basic look at the whole system. We have to talk about all the required steps in more detail and I will link to them accordingly. For now, it’s just a good start to sign up for my newsletter and to start reading some posts in the budgeting category. You’ll find it in the navigation bar.
One last thing, as I’m from Germany I cannot provide high-quality content on some topics such as real estate in the USA or how to max your 401(k). I will try to cover this with guest posts. This will take some time to grow my blog a little. However, the content will always be of great value and I will fill the relevant parts ASAP.
Thanks and have fun with budgeting on Budget Like a Sir!