The Tips to Budgeting

Budgeting is a task everyone has to go through (well, mostly everyone!). I have been approached and asked by friends about how I managed to save roughly ~94% of my income on average consistently. Note that the income I refer to here is after-tax and includes contributions made to a Roth 401k retirement account and Health Savings account (HSA). This should be factored in when performing the savings rate calculation as it could have a huge impact on the value depending on the contribution amounts. My income streams include the regular paycheck from a full-time job, the yearly performance bonus typically paid out in March (hence a higher savings rate in March is expected), investment income sources, and other income. There are some key things to look out for when budgeting and I will touch on them in this blog post. Below is a snapshot of my personal savings rate. What gets me excited is the last 4 months have all been over 90% and September will also be way over 90%. This indicates that something is going right in my budgeting as I have made a couple of changes to some big items on the budget. Note that this savings rate also includes the monthly expenses spent on my rental property. It might seem that to achieve such a high savings rate requires cutting back on discretionary spending but I would argue that this has actually been the opposite case in my situation. Not only did I spend multiple nights at a resort in Scottsdale – Arizona this year, checked out different museums and art centers, enjoyed great food and drinks at fun bars, and attended various music concerts; I have also traveled to four different states on ten different occasions just this year alone.

Now let us switch gears, and take a look at the average savings rate in the United States over the past 50 years. In 2019, the personal savings rate is between 7-8% of income. Now this is not necessarily bad, in fact, it is extremely positive because it shows that people are actually saving! Below I will list out some easy steps to practical budgeting.
  1. Start with the big ticket items
    This is the biggest lever that can sway your budget one way or the other. Typically housing is the largest monthly expense for most folks. For those who rent, I would recommend optimizing the rental expense taking into consideration distance from work and the quality of the rental. The key to trimming the largest expense is to be creative and think outside the box.
  2. Pay off debt
    This is an obvious one that should be tackled. Loans, especially those with a high interest rate hinders savings. Also, there is an inherent risk people take on when they take on a loan. If tough times arrive and income is surprisingly slashed then that would lead to a zero savings rate since that debt would not go away. Now, there are loans that can be restructured but typically student loans cannot be discharged in bankruptcy.
  3. Stop keeping up with the Joneses
    This is where a lot of people fall short. There is a positive correlation between income and spending. This is more psychological and it takes a mindset which is immune to the societal pressures to prevent this from occurring. We really do not need everything out there. Finding internal happiness, joy, and a purpose in life eliminates the need for external sources of happiness.
  4. Try an online budgeting tool
    To round it all up, there are budgeting tools that helps track how one is measuring up to a set pre-defined budget and keeps track of it over time. This is extremely powerful as it provides a lot of insights real-time.

Personal Capital is a FREE and easy-to-use platform driven by data analytics that helps track these accounts as well as forecast retirement cash flows. This platform is similar to Mint (which I have used in the past). However, based on my experience, Personal Capital is a lot easier to understand and has a much cleaner look.

The main benefits of Personal Capital based on my experience with the platform are as follows:
  1. Tracks a lot of existing accounts with updates done very frequently.
  2. Excellent analytics dashboards which displays your net worth, cash-flows, income, and expenses giving the user the ability to forecast future expenses.
  3. Algorithms that compute your investment portfolio performance and allocation across all your accounts as well as the fees you pay on each account (giving you the insight needed to optimize that account).
To round up this blog post, I thought I would share a quote from Steve Jobs!…


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