Monday, August 19, 2019
How to Retire Relevant Step 1: Budget
I think by now you all know how I feel about budgeting. From Day 1 I have said it is the foundation of any solid financial plan. It is named Budget Boss after all… When we look at the importance of Budgeting, sometimes it is hard to conceptualize the magnitude of it. I always give out or share alarming statistics. This amount of people do not retire with savings. That amount of people have a large amount of consumer debt. The reason why I bring these stats up is quite simple, they are all Budget Issues. They are all a simple lack of basic financial awareness. For over 3 years now I have been proclaiming the importance of a Budget and as time has gone on, I have seen my theory proven correct. A countless amount of families and individuals I help quite simply do not have a good handle on the monthly budget.
A huge inspiration for my 7-Step Relevant Retirement System was the book, “Retire Inspired,” by Chris Hogan of the Dave Ramsey Family. Chris spends a whole chapter on Budgeting. He speaks about millionaires who till this day still use a monthly budget. When I look at my clients who have retired successfully, they are much in the same. Chris isn’t speaking untruths, and neither am I. Step 1 of the Relevant Retirement System is Budgeting. If you want to retire and not be eating Puritan Beef Stew on the daily, you must handle your budget, and not have it handle you. Let’s jump into why this is so crucial.
Why is budgeting important to retirement?
I speak of “money in and money out,” quite frequently. This is where most people with debt, no savings, and no plan fall short. Your day to day checking account is ground zero for success. By the way, it always will be. The 7 Step Relevant Retirement Plan has you guessed it, 7 Steps. Do you know what step saving for retirement is? STEP 5…. Why would saving money for retirement be step 5 when the whole plan is based on saving for retirement? The reason is simple: Nothing will ever come of your retirement savings if you cannot grasp steps 1 through 4. Furthermore, Steps 2 through 7 will never, ever, ever take place if you cannot grasp step 1, THE BUDGET.
We always complain about the cost of living, even I am guilty of that. It seems like every day things cost more. I just bought a red pepper for 2 bucks, kind of ridicules. The truth is that this will never change. This is capitalism my friends and it is better than the alternative, no red peppers, or anything else for that matter. Politics aside, we must get over the fact that necessities are expensive. You can find deals, and I know many that do with great efficiency, but this system is not about that. What it is about is taking control of your money.
The budget is not about money. Well, it kind of is, but not completely. What it is about is clarity. It tells a story; it teaches you something. It tells you that you don’t make enough money. It tells you that you spend too much money. It tells you that you are house poor, or car poor. It tells you that you dine out too much, or drink too much, or shop too much. It is the window into your money personality. Read this next line very, very carefully: NO MATTER WHAT AMOUNT OF MONEY YOU MAKE IN YOUR LIFETIME, YOUR MONEY PERSONALITY IS WHAT DICTATES YOUR SUCCESS. PERIOD.
The cost of success
I just spoke about how life essentials are getting pricier all the time. The keyword in that sentence is “essentials.” So many things are not a necessity to live, yet are a necessity to success. You do not need to be debt-free to live, in fact, most people have debt. You do not need to own a home to live. You also do not need adequate insurance or retirement savings to live either. You do however need all those things to be successful. I measure success based on wealth, not income. There is a HUGE difference. To be successful you need all those things, the sad part of the story is that they all cost money. Mortgages cost money. Savings, by definition, costs you money. Insurance definitely costs money. Everything costs money. Just like we must get over that life keeps getting more expensive, we need to get over the fact that doing what is right for our financial futures also costs money. You NEED a paid-off home, an emergency fund, adequate insurance, and retirement savings to be successful. THERE IS NO WAY AROUND THIS, PERIOD. The decry of, “I cannot afford insurance or to save,” is a decry of failure. When you say you cannot afford the things that are necessary for success, or even an adequate life, you have excepted failure as your outcome. Sadly, I hear it all the time. All the time.
Creating a surplus
Again, we have established that everything costs more and more all the time. We have also established that living a successful financial life costs money too. What is the conclusion that comes from those two nuggets of knowledge? You need to create a surplus of money every month, for the rest of your life, to retire or live with any sort of relevancy. A monthly surplus is so vital that your day to day wants are to come second. It is so important that if you cannot make this happen, all the time, you will not ever achieve financial freedom. Money in and money out. That is a budget, folks. Steps 2 through 7 of the Relevant Retirement System all utilize your monthly surplus to work for you. That is why the budget is first on the list. Using the budget is how you create the surplus. Using the surplus is how you create wealth. I cannot stress this enough. Living paycheck to paycheck is a recipe for poverty. It is a recipe for despair. It is a recipe for disaster. I have read all about it. I have seen it in my client’s lives. I have seen it in my family’s lives. Most of all, I have lived it in my life. Not only did I live paycheck to paycheck, but I also lived paycheck to 3 paychecks from now. That meant my money was accounted for months and months. I couldn’t see daylight. Puke. Successful people all have extra money coming in every month, after necessities, that they use to build and protect their wealth. If you don’t have this, don’t be ashamed. Most don’t, as I have mentioned with all the stats I release on a regular basis. If you don’t have a monthly surplus you need to understand one important thing, you are on the road to financial failure and it needs to change, now.
Long-term effects of a surplus
I have stressed the importance of a surplus every month. Let’s look at why that will lead to success. We all know that having debt is problematic. It ruins lives, families, and futures. Breaking even is better, but not by much. Just eking through life will allow you to do that, just get by. That is until disaster strikes, which it will. When you create a monthly surplus the effects are tremendous. Sadly, it takes time. Eating right and working out are the same thing. About 7 months ago I hit the highest weight I ever had seen. When I hopped on the scale and it showed 183, I almost puked. I had never been that heavy in my life. I am not a tall man, but I had managed to gain a belly, along with other big and soft body parts. I decided that was it. No more crap, I must take weight loss seriously. I changed my diet. I cut out carbs and I cut out sugar. I did that for about 4 weeks and started to see results. 5 pounds were gone. The next test was a significant one though. Christmas. Food, food, food. Desert, desert, desert. Not me though. Not a spoonful of cake, not a bit of potato. The potato part was tough as Portuguese potatoes might be the most delicious carbohydrate in the world. Since my adoption of a new diet and a new workout regime 8 months ago, I have lost over 15 pounds, kept it off, and seen muscles where flab used to be. I like looking at the naked guy in the mirror now, and that is a huge change from before.
Your money is no different. You must tough out the days of unseen results. Mediocre savings amounts. Interest heavy debt payments while the principle barely budges. Nights home when friends are “living their best life.” That’s the pain. That’s the “no cake” at Christmas. That is where most people slip and fail to succeed. Below the surface, there is a lot going on. What’s below the surface? A slow build of savings. A slow decrease and elimination of debt. An understanding of how wealth really works. A bank account with a positive balance instead of negative. A naked guy in the mirror who smiles instead of frowns. Over time this is how wealth is created.
Standard of Living
Your budget helps you determine what you need to live on every month. The bare necessities are almost completely non-negotiable, although you can find ways to shave them down. Where the budget and creating a surplus come into play for you is that it allows you to determine what type of standard of living you want. You’ve created a surplus and decide that you want a vacation every year. Put it in the budget. You created a surplus and decided you want a new dress on your birthday. Put it in the budget. You created a surplus and decided you want to enjoy your life while you are looking towards the future. You guessed it, put it in the budget.
When you create the budget and use it to create the surplus, you have created your future. What does that mean? It means you have a clear understanding of what you need to live the life you have to, but also the life you want to. Where this is extremely important is during retirement. We know everything costs more all the time. How about 20, 30, or 40 years from now. Can you even imagine how much a cup of coffee will be then? If you have no concept of what you need to live the life you want now, you are in for a very serious rude awakening in retirement. I say this all the time, “Either you choose the retirement you want to live, or you will have no choice.”
This is your future needs calculation. This is part 1b of the Relevant Retirement System. This is the number that will dictate how you move forward with your retirement program. You must know what you need to survive on during your retirement years. You only know that by having a handle on what you need to survive on now. You only know what you need to survive on now by having a budget. I can already hear what you have to say. “How will I know what things cost in the future, 30 years is very far away?” A simple inflation calculator is helpful. Also, understand that this number will change. It must be revisited, adjusted and solidified over time. The key is to have a rough idea of what retirement will actually cost you. In Step 5 of the Relevant Retirement System, this number will be revisited. It is the base number for your savings, protection and investment programs. It is meant to scare you. Embrace the fear.
Earlier in the year, I hosted a Budget Creation Workshop with a dear friend and colleague of mine, Shawna Ireland of the website, www.moneymomma.ca. To our surprise, our local radio station asked us to come on and talk about the workshop along with other money topics. Near the end of the interview, the radio host mentioned one of their personalities, Bruce Sellery, had proclaimed that budgets were foolish. As we listened to the clip of Bruce decrying the uselessness of budgets, because people simply do not follow them, I began to smirk. Saying a budget is useless because someone doesn’t follow it is about as smart as saying eating healthy doesn’t work because junk food tastes too good. My response to the theory was to politely disagree with Bruce, mainly because I was live on the radio. What I wanted to say was, “You literally have no clue what you are talking about.” All the wisest, most followed, most trusted financial Gurus agree that a budget is essential to any dynamic financial plan.
Do not, and I repeat do not, fall victim to Budget Myths. Some of those include that a budget is too restrictive and cannot be followed. WRONG. A budget is what allows you to do whatever you want because it gives you the clarity to prioritize your spending instead of winging it. Oh yeah, and YOU make YOUR budget so if it is too restrictive, ADJUST THE BUDGET!!! Another myth is that you should just make more money. Hey, I am all for making more money, TRUST ME, but here is where that option falls short. Firstly, making more money isn’t always as easy as it seems. You could have restrictions like location, time, education, economy and family dynamics that prohibit you from simply making more money at the flip of a switch. Yes, strive to make more money, but that doesn’t negate the importance of the budget, leading to point number two. Secondly, even if you make more money, you can blow it just as easy or even easier than someone who makes less. I see people all the time with incomes in the 6-figure range living paycheck to paycheck. You may say, “Well if I made that kind of money, I would be smart with it.” Would you? Would you really? If you cannot master a budget with a small amount of money, what makes you think having more money will be any different. All more money does is allow you to spend more and acquire more debt as banks will be more than willing to help you dig that hole. It is proper money management that makes you wealthy, not earnings!
Some of my most successful clients make very little money yet have amassed large net-worths. What is large net worth? I am talking in the high 6-figure range and even in the million-dollar or multi-million-dollar range. All that for someone who brings in less than $2000 a month. Yes, it is true. How you spend your money will determine your success far greater than how much money you make. Why else do lottery winners and star athletes go broke at a far greater rate than the average person? It is all about behavior, not numbers. Yes, the numbers are important. But your mindset holds far greater importance in terms of Retiring Relevant. Dave Ramsey, one of my favorite financial minds, calls this intentionality. It is the key to your success.
I take budgets very seriously and so should you. As mentioned, it is Step 1 for a reason. This step is essentially the easiest step of the whole retirement system, yet it is the one most people have trouble with. It requires diligence, astuteness, self-control, reflection, mindfulness and above all, dedication. If you can master this step, the rest of the steps will make complete sense. With my clients, it is the step I have the least control over. It is not a product I can sell to make their lives better. It is a mindset THEY must be in to make THEIR lives better. It is the step where I provide the tools, teach the lesson, and hope they follow the path. If they do our conservations get a lot sexier in the future. Mortgage paydown, juicy investment accounts, early retirement, leaving a lasting legacy. Those are the things I really want to discuss with them. If we cannot master the budget, they are all out of reach. A budget is how you take control of your money and as my main man Chris Hogan says, “You never outgrow the need for it.”
“You must gain control of your money, or the lack of it will forever control you.” – Dave Ramsey
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