Still to this day I don’t understand budgets.
I have hated them back when I was young an idiot with my finances. But I still don’t like budgets.
I think they are boring, and a waste of time.
“But Loui? How can you save money if you don’t do budgets?”
There is a law called Parkinson’s law.
It states that:
“Work expands so as to fill the time available for its completion”
Putted in other words. If you give a project two weeks, you are likely to come up with tasks that takes about two weeks to complete. And the same goes for our finances.
If we earn 3000 $/month and we would like to save the largest amount of those money. The traditional way of figuring out how much money we can save would go something like this:
- Do a budget in the start of the month
- Figure out how much you can save
- Save and invest that amount
What is wrong about that is that we focus on the budget first. Just like Parkinson’s law affects deadlines on projects. It effects the same way on our finances.
If we budget 400 $/month for groceries, that is likely the amount we are going to spend on our groceries.
If we however look at how much we want to save, and make that the first thing we put aside. Parkinson’s law is going to work its magic for us.
Lets say the we make 3000 $/month, and we would like to save 50 % of that (1500 $). That would be the first thing we do when a paycheck arrives.
From there, our job is just to live on whats left.
I have even done periods where after what I have saved and invested, my account balance would be zero. So I knew whenever I wanted to buy something, my account would go in debt. That of course was just an experiment to see if I could spend even less by doing that. And I did. But it was tough.
I would recommend people try out such an experiment. Start a month with nothing on your account.
There is two reasons why it is has some benefits:
- You are going to love just to have SOME money on your account the next month.
- You are likely going to save and invest more than you normal would.
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Hi Loui,
I understand your points, and having as small an amount as possible on my account at the beginning of the month, usually helps me spend less money too.
BUT, you have to realize that most families today can’t live without a budget. If you’ve ever seen the danish TV Show “Luksusfælden” (The Luxury Trap, red.), you’d know that most people who end up in economic ruin, didn’t have a budget (or didn’t adhere to it). To me, a budget is absolutely vital, because it clearly expose the shit that you spend your money on. I look at our budget monthly, to see if there are areas that we can find save on. When you have a mortgage, a car, a wife, a kid and insurances to go with the above, you need a budget ?
This is the concept of “Pay ourself first”.
It actually took me some time to really understand this, but it makes a huge difference.
I think it was in Rich Dad, Poor Dad I stumpled upon it for the first time…
/J
Hi Jesper,
You are totally right.
And it is most important lesson you can learn yourself.
All the best,
Loui
I disagree. While the concept Loui describe above makes good sense, it’s not what Rich Dad mean, when he says: Pay yourself first. When you receive your salary from your employer – you’ve already paid somebody else first – the government (and your employer – you’ve paid with your time) 😉
When Rich Dad says “Pay yourself first”, it means you should have an income structure, which will allow you to defer paying taxes for as long as possible. That is the whole essence of Rich Dad, Poor Dad – because this is the main difference between the rich and the poor. The rich always finds way to defer their taxes – and thus pay them selves first 😉
Okay. Might be so. I don’t remember the text exactly ? Nevertheless, my initial understanding of it learned me to think “Spending = income – investment/saving” instead of “investment/saving = income – spending”.
That enabled me to save a ton of cash 🙂
I understand ? Don’t get me wrong, if whatever you got out of Rich Dad, Poor Dad has put you in a better position, then that’s really all you need.
I never quite understood the people who tried to save up, based on what they had left at the end of the month, but apparently that’s the default for a lot of people. I guess it depends on your money blueprint (what you learned growing up).
“Spending = income – investment/saving” instead of “investment/saving = income – spending” is a good way of putting it. Unfortunately, I doubt that everybody will be able to see the big difference right away ?