Key Summary: Everything You Know About Budgeting is Backwards
Budgeting...blah blah blah...I know, especially when you're young and the world of possibility seems endless and timeless, the idea of constraining yourself with a budget feels like jamming a 2x4 up your butt sideways. I suggest scrapping the idea of a traditional budget and focus on paying yourself first.
You already KNOW that you should spend less and save more.
You FEEL it when after every paycheck, you are left wondering where all your money went.
You SMELL it when you walk past the restaurant with delicious grilled food you can’t afford.
You SEE it on social media when all your friends are posting IG pics of them laying on a beach.
You READ about it when 70% of people don’t have enough money to get by if a $1000 emergency happens.
You know that having a budget to track your savings is a proper adult thing to do, but DAMNNNNNN is it boring and tedious. And you sure as hell don’t want to do it.
1) For the majority of people, Traditional Budgeting is a failure.
The big mistake is starting with a “Traditional” budget. You sit long and hard with receipts in a box and a screen of your credit card bills, while you categorize and tally up how much you spent on food, drinking on the weekends, dining out with friends, movie dates, birth control, and rent. Then you make adjustments, "ohhh, I bought that shirt last month for my happy hour date. That doesn't count." So, you reduce your expected expense for that. Then you remember you had to change your Honda's brakes three months ago, so you remove that from the total expense. You put in a miscellaneous category for random spending you don't even know about yet.
Then come the reductions. You start to reduce everything you think is unnecessary, frivolous, or excessive. You cut out your daily lattes. You cut down your "going out" allowance by 30%. You vow to take public transit or walk more to save 10% from your gas and transportation budget.
You take your income + tips/bonus to that number on the top, then you subtract your new and improved financially responsible expenses you just calculated. What ever is left, you promise to put into your savings/401K/IRA/Emergency Stash/Cookie Jar on the shelf.
Tah Dah!!!! You have six months of cash expenses and credit card line items categorized and added together for your "Master Plan" budget that is going to turn everything around for you financially.
Tear that crap up, because you know as well as I do that the likelihood of you following that budget is about as likely as finding Mr/Ms. Right on Tinder tonight. It could happen, but most likely you end up doing something impulsive, risky, regrettable, and probably way more fun.
2) To Generate Savings Fastest, Build A “Backwards Budget”
We all want to save money, but none of us think we are saving enough, so we end up not saving at all. Want proof that we can’t budget worth a crap. Personal savings rates in the US was a laughable 2.4%, the lowest since 1960.
Half of Americans would need to borrow money or sell something quickly to cover a $400 emergency.
The problem with traditional budgets is that we never seem to have enough at the end of the month to put toward our savings. We have the best intentions. We say we will up our retirement contributions (next pay period, you promise!) or saving for our summer vacation, but somehow another month passes, and we still haven’t done it. If our master budget is not quite working out this month, we promise, to correct our spending habits next month. If we skip out on building up our emergency fund this month, we SWEAR we will double our contribution next month to make up for it.
The problem is real life gets in the way of our best intentions. We planned our budget. We desperately want to make the budget work. It is just that by the time you’ve paid for everything else—rent, groceries, utilities and maybe even a few dinners out—you often don’t have enough left to add to savings ... at least not until your next paycheck. And so the cycle goes.
The best way to beat these crappy odds is to do a “Backwards Budget.” At Nomadic FIRE, we are sooooo passionate about using this concept that we are devoting a whole series to show you step by step how to automate your savings and set up a system to guide you to financial success. We are still polishing the final product, and this guidebook isn’t ready, not because a Backwards Budget is difficult or complex. In fact, it’s simplicity is what makes Backwards Budgets so powerful. We are taking the time to prepare this guide because it is such an important system for Financial Independence.
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A key concept to Backwards Budgets is “Pay Yourself First.”
There was a comedian that once joked that nobody appreciates dads. If on a special occasion a person gets randomly put on TV, everyone always screams “Hi Mom!” Even in two-parent working households, dads seem to get a lack of appreciation.
I'm talking about fathers that handle their business. People expect dads to take care of things. Nobody ever says, ''Hey, dad, thanks for taking care of the house payment.'' ''Hey, dad, heating the house sure feels nice.'' Think about everything that real fathers do: pay the bills, buy the food, put a roof over your head, take care of bullies, make your world a better, safer place.
And what reward does Daddy get for all the work? The big piece of chicken. That's right. When the family sits down for dinner, does not matter if dad spent all day BBQing it, mom slaved away preparing it, or even if it’s from a take-out restaurant, dad gets the first piece of meat. Even if there are guests, even if the kids just finished football practice and are starving, dad gets first dibs on the meat. No matter the circumstances, when the plate of meat comes out, and everyone is grabbing for their share, dad get the first piece of chicken.
That’s what I am telling you to do. Male or female, you are the most important person in your financial life. You handle all the stress. You take care of your bills. You are working those long hours. YOU need to get the first piece of meat.
3)The most important investment you make is in yourself
“Getting the first piece of chicken” or “Paying yourself first” means saving before you do anything else, before you pay rent, before you buy food, before you send a check to pay for your student loans, you will set aside a portion of your salary IMMEDIATELY after you get paid. You need to become the priority. Most people wait and only save what’s left over. That’s Tops Down—that's paying yourself last. That’s you getting the last piece of chicken.
No one will ever care about your money (and your future) as much as you.
Why the First Piece? Because there never seems to be enough meat
I remember when I first started as an adult living on my own. My first paycheck would come in, and I would immediately start spending it: I had to pay my rent, my car loan, I had to pay credit card, I needed money to eat. Then I started to think of all the fun stuff I wanted: a new phone, some new shoes, a night out with friends. At the end of the day, there was no leftover money that could then go to a retirement account or for long term savings. Does this story sound familiar?
The most common excuse for not saving enough money for retirement or having an emergency fund is because you are already broke. How do you save more money, when you don’t have any money to save?
That’s why you getting that first piece of chicken is an important approach. YOU are the most important catalyst for your financial future. You need to treat your financial future like a bill. Pay into those retirement and savings accounts FIRST. Treat it like a bill. Approach it the same way you treat your rent or your cell phone bill.
The goal of paying yourself first is to make sure you have a laser focus on your financial priorities. Your path to Financial Independence starts with investing in your financial goals first. Whether these goals are building up an emergency fund, paying down your student loans or even longer term goals like saving for your kid's college fund or investing for your retirement. Your priority is your financial health. You may be asking yourself why we put so much importance in paying yourself first, before spending any portion of your paycheck on, say, a happy hour with friends.
The majority of retirees are short over $575,000 in savings to retire successfully.
You’d think this would be enough to scare most people into saving better, as this shortage in savings means that most people are not asking themselves if they can Retire Early, most people are asking themselves if they can retire EVER.
Seriously, Bruh. Listen. You have to pay yourself first
Key Takeaway: You are the most important investment in your financial future. Invest in yourself first.
Pay Yourself First increases the likelihood that you will succeed in your financial goals. Pay yourself First converts saving money from a desire into a necessity. Your retirement and your emergency fund savings become a bill that you MUST pay every month. Your financial future is your biggest responsibility. Prioritize your financial future over and above all of your other bills. You gotta get that first piece of chicken.
Next Steps: Prioritize your financial future
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Hi, That’s me. I’m Marco Sison. I am a survivor of the corporate rat race. I started Nomad FIRE to show you an alternative to the stress and grind of 70-hour weeks to pay off a mortgage, student loans, and countless bills. After getting laid off in 2015, I said screw it all and retired early at 41 years old.