Much of learning how to spend is learning how to not spend. Before you learn how to tighten your belt though, you need to deeply understand the core of your budget.
Thrift, frugality, and budgeting can quickly slide into self-denial, jealousy, and resentment if you do it wrong.
However, if you take the time to align budget with your goals, then you will more effectively be able to curb your undesired spending.
On Friday, March 18, 2022, Megan Russell was interviewed by Michael Morton of Financial Planning for Entrepreneurs podcast. Michael Morton is the founder of Morton Financial Advice where he provides hourly or subscription-based financial planning and wealth management.
In this podcast, we discuss why spending is the core of your financial plan, how to align your spending with your goals, and how to use Core Values Budgeting to identify budgeting changes.
The episode was released on Tuesday, April 5, 2022. You can listen to the audio here:
Spending is Heart of a Financial Plan
[00:01:52] Megan: Spending and saving are just such a core element of financial planning, because if you don’t have savings, then you can’t really support long-term goals. And so you have to not spend so that you can have some savings so that you can support those long-term goals.
Mike and I can’t do anything with financial planning if you don’t have any savings to work with. What sort of plan would you have?
Everything really starts with: How are you going to spend your money? Where are you going to spend your money? When are you going to spend your money?
Because the goal in the end is to spend it. You either spend it in the long-term or spend it in the short-term. You have got to spend it to have your goals happen.
The goal of everything that we do is spending money, so we’re going to talk about how to do it well.
[00:02:40] Mike: What could be more fun than talking about how to spend money? So this is great. I love it. That’s right I hadn’t thought about it that way, Megan, that all of it is spending either now or in the future. Do you always think about that way in terms of the word “savings” is really future spending?
[00:02:58] Megan: The economist’s term would be deferred compensation, but the idea is you’re going to wait and then you’re going to use it later.
If you think about it as savings, it’s hard sometimes to switch into spending. “Okay, I’ve been saving it for a really long time and protecting it here in this nice, safe little retirement account, but the time has come for it to not be safe in the retirement account anymore. The time has come to spend it.”
It is helpful to think about it as the your future spending that you’re setting aside. We’re going to let it grow real big so it can support a whole bunch of financial goals. But at some point the savings needs to turn into spending. Otherwise, 1) you’ll have an estate problem and 2) you won’t get to enjoy it. You worked really hard for all of that. You deserve to enjoy it at some point.
[00:03:50] Mike: Yes. This is an estate problem. That’s okay. We can help you with…
[00:03:54] Megan: It’s a very nice estate problem.
[00:03:58] Mike: …an estate problem and we want you to spend it. We want you to enjoy your life and spend. I never really thought about that. So when we say to young people just starting out, maybe you want to save 15% or 20% of your income for future spending, it’s really spending a hundred percent, but we’ll just spend some of that 10 or 15 or 20% in the future right?
[00:04:20] Megan: When it’s compounded and gotten really big.
[00:04:22] Mike: Yeah, yeah, hopefully. Okay. So I love that. So the first section here we want to talk about was really focusing on healthy spending. And what do you mean by healthy spending?
Core Budgeting: Budget for Joy
[00:04:38] Megan: A lot of people, when they first start out trying to figure out where their savings are going to come from or what their budget is going to look like, they’ll turn to, bloggers who are like, “Here’s a budgeting hack” or “Here’s how much you should allocate to your food.” People will give all sorts of recommendations there.
The problem is that they’re trying to take a cookie cutter and somehow create a joyful life out of it. Your life is going to have joy and goals and beauty that the cookie cutter is going to just chop out and you won’t have that anymore.
Instead of cutting away the something that’s your joy, you need to figure out What is this money for? What’s it for today? What is it for in the future? What am I going to spend it on?
Then, focus all of your spending and your saving and your budgeting around those concepts.
So in order to turn something that’s not so philosophical into something that’s more actionable, I came up with the concept of Core Values Budgeting.
This is where you write down every type of thing that you could or do spend money on — you don’t want to be too vague, but be as specific as makes sense for your spending and habits. You could start with the ones that I have in my article, I’ve got a bunch of ideas there.
After you have that big list, you imagine that in one of the categories you’ve listed, you will never be allowed to spend again. It’s a pretty big imagining, but you just imagine I’m never going to be able to buy a Christmas gift again. And you sit with that and you see how you feel. And as you go through the list, you imagine them. And as soon as you pick one where you think “That’s not too bad that I could not spend money on that one.” You cross it off and you write a one next to it; that’s the first one to go. And you repeat the process again and again. You find number two. Where’s three? Where’s four? What’s the fifth one you’re going to cut out? What’s the 25th one you’re going to cut out?
You keep going until what you’re looking at are things that you just can’t imagine a happy life without. If you cut it, you’re going to be so sad. It’s going to be miserable. Like maybe I might cut out eating at home before I cut out eating out because I love eating out. I think it’s really awesome.
I’m not thinking about how much it costs at this stage. Yeah, eating out costs a lot. My financial planner brain goes “I don’t know if I want to eat out every day,” but in terms of joy, I do want to eat out every day. It’s awesome and I love it. It’s such a rewarding experience.
So we’re not thinking about how much things cost. We’re not thinking about the practicality necessarily. You do have to somewhat think about it. Maybe don’t cross out all of your food items but do you know which is the one that you want to keep the most? What brings you the most joy? And after you’ve crossed it off and you found what’s left, I call what’s left your core budget.
That’s the core of your spending that supports your financial goals that supports the life you want to live.
Then, when you read any budgeting article, when you hear any budgeting hack, you protect your core and are ruthless with everything else. You can make whatever cuts you want. You can decide.
Imagine you are shopping and see some really cool necklace. You think, “Oh, I want to buy this necklace. That’s really cool,” but you remember that jewelry was the fifth one to go in your budget. And so you’re skeptical of this purchase. You think to yourself, “Do I really need to buy? I don’t need to buy that. If I don’t buy this, I can eat out and I like eating out and that’s at the core of my budget.”
That’s the concept of core values budgeting. You cut out the stuff that you don’t want as much. You may still like it, but it’s the first to go. Then, you leave your core intact.
[00:08:50] Mike: Wow. Okay. So much there. Thank you, Megan, for walking through both the philosophy and strategy, and then the, how we actually can implement this and try this out. So I have a few questions. If I can remember them.
1. You started with the sort of cookie cutter, so getting back to that idea of “Here’s a budget you should use” or “you should spend this percent” — Often it’s presets like, “What percent do people spend in dining out?” I have this with clients. They will come in and say, “Is there anything in my budget where I’m really different than your other clients?” Does it matter?
[00:09:25] Megan: My answer might be like, “I hope so.” I hope you’re spending differently than my other clients, because that would mean that you have joy that you’re supporting with your budget that’s unique to you.
[00:09:36] Mike: That’s right. But so many people get caught up in, “Am I spending the right amount based on these, you call them cookie cutter, budgets?” or “What is the averages?” We read all kinds of “Here’s what the average American spends on X, Y, or Z. Am I within that range?” So my question there is: Is there any value in their process at all?
[00:10:06] Megan: I think at the end of the day, the primary goal of budgeting is to make sure that your spending fits within your means, and that the amount of savings that you have supports the goals that you have in the future. So if you meet those requirements, it doesn’t matter if somehow you’ve managed to eat out every day of the week, and made it all true. If you fit within your budget, you’re eating out every day of the week, and you’re saving enough to support your long-term goals, it doesn’t matter that you’re eating out every day of the week and there’s other people saving money cooking at home.
In that sense, it doesn’t really matter what the cookie cutter says. So long as you can make the math work so it fits within your means and you have the savings to support your long-term, you’re good to go. You’ve got a solid financial plan there.
I think there can be help if you have no idea what your goals are, if you’re just really struggling there. I know when I first started spending money as a kid, I had no idea what brought me joy in life and having a concept of what normal people or the average person might spend on eating out or what the budget blogger recommends I cook at home or what this person recommends that I do with my clothing budget — I think that can be super helpful.
So there’s definitely a place for knowing what’s the path most frequently taken. But at the end of the day, a joyful life is not forged by taking the common path. It’s by creating the path that brings you joy. So I think in the long run, you want to have a budget that really just makes you so happy. Every dollar you’re spending you think to yourself, that is a dollar well spent.
[00:11:50] Mike: A budget that makes you happy. Yeah, absolutely. And I love, you know, a few things there. One you said when you’re younger, maybe you got to try out different spending and see what brings you joy. I’ve got kids as well, so I see this all the time. I think “I can’t believe you’re spending your money on that thing, are you sure?” And yeah, they’re just trying it out. They’re like, yeah, I’m pretty sure I’m going to try it. I’m going to get that. And so they’re figuring it out. And even when you get to that young adult stage, same thing, like figuring out, spending money, trying things, figure out what works for you and for your family. So that’s really important to recognize that yeah, some of it, life is an experiment. Go for it, see how it feels. And I do focus a lot on that saying “How did that feel for you?” and sit with that for a minute and say, “Wow, like you said, that felt amazing.” or “I could do without it.” We’ll get back that kind of feeling during this exercise.
How Much Should I Save?
Mike: The other thing I had a question on was you mentioned the budget: as long as you’re saving enough spending the right amount, saving the right amount for future spending. At a high level, how do you think of are you saving enough? Do you have to go through a whole financial plan or do you have a rule of thumb in terms of that sort of overall budget? How do you think about that?
[00:13:11] Megan: There’s definitely some rules of thumb for the most common frequently trekked paths. The generic financial advice would be that you should save 15% of your take-home pay. That number is generated, assuming a working career between age 25 and age 65. So, that’s where that math comes from. So if you’re not doing exactly that career path, then it might require some math to figure out. Should it be higher? Should it be lower?
Then also there’s the financial advice that you should save about 10% for unknowns. That’s the emergencies that you’re not thinking about that aren’t part of your joy. Like when your roof suddenly gets a giant hole in it and you need to put a new one on. I don’t find joy in that spending, but I do find joy in having a roof.
You’ve got a budget for those things that you don’t know when its going to happen. When your fridge breaks and all the food spoils, you have to have something in savings to support that.
Generally about 10% is a good benchmark there. You might go higher or lower depending on how much risk for emergencies you have. But those are kind of the standard financial planning, cookie cutter suggestions. A financial plan could tailor it closer to your actual needs. For example, if you’re saving for something like a down payment on a house, obviously that doesn’t fit in either of those two buckets. It will require more savings to come on top of those.
[00:14:36] Mike: I like that too. We can just leave it at that for now. We could dive into that future podcast or whatever people are interested in, but I like that. Because we’re focusing, on joyful, healthy spending, the 15% that Megan just mentioned is if you work from 25 to 65 and you save for future spending 15% throughout that time, then you should be okay for being able to retire and continuing that same lifestyle. So we’re not saying what you’re spending the money on, but that is a good rule of thumb to at least get started. That’s how Bmathematics works out in that case. It’s straight up math.
[00:15:33] Megan: Yeah. And the scenario, where you’re like me, you really enjoy eating out, by saving 15% over your working career now, the idea is that after age 65, you can continue to eat out every day of the week. So whatever is your joy now, the 15% is there to support it after you step away from your work.
[00:15:52] Mike: And quick question, you mentioned 15% of your “take home pay”?
[00:15:57] Megan: That’s right. So that’s after your taxes have come out.
[00:16:01] Mike: After-taxes. So take a look at that 15%. Okay.
More on the Budgeting Exercise
Mike: Now I want to get to how we’re focusing on the healthy spending. You walked us through the idea that you categorize all your spending that you did last year, or you’re thinking about doing and — Let me ask this: How many categories would you say you should aim for?
Because we’re going to start, we’re going to start crossing them off. So we’re probably more than 10. I’m guessing so many. So where are we?
[00:16:33] Megan: When I did it, I filled a piece of paper. It was columns and columns filling a piece of paper. I was probably more granular than my article was. You want to make sure that you really know what’s important to you, and I found the exercise very enlightening.
It’s not as important what’s first versus second. What’s really important is what are the first ten to go? What are the next 10 to go? So if you’re like, “I don’t know. Should I cross off movie tickets next? Or should I cross off media subscriptions?” Just cross them both off and put numbers next to them and keep going.
[00:17:10] Mike: I can’t do without my media subscriptions. We’re in a pandemic.
[00:17:15] Megan: I know right? Keep it!
[00:17:15] Mike: All right. So now I can see we’re talking quite a piece of paper full of stuff.
[00:17:19] Megan: That’s when I did it, I think any level though is helpful. So even if you want to be like “Entertainment,” you could clump it together. And then at the moment when you’re like I would cross off entertainment, except I don’t want to lose Netflix. Just add Netflix to the list, cross off entertainment and give it a number. So you don’t have to start with the granularity if you don’t want to, you could start with big budgeting categories and when you’re realizing how you’re feeling, make note of it and acknowledge what the complexity was.
[00:17:49] Mike: Yeah. Two quick points. Love that. I’m also thinking for myself, like looking backwards over the last year would be a good exercise as well. A lot of my clients find that value of “Oh, I didn’t know all these things I spent money on.” So I can see that just as I’m writing on a piece of paper all the categories, I could look backwards and add more “Oh yeah, I spent money on this, spent money on that.” So that would be helpful in terms of writing things out.
And then I love the way you said, “How does that make you feel?” which is where you start it with. When you’re thinking about what you’re going to cross off, think about how you would feel if you never got to spend money on that category. And that’s really important. And I use the word feeling a lot because we get in our heads about thinking, “Oh, this is how life would be” and “This would be fun” or “This would be bad or good” or whatever, but try to imagine yourself in that future situation and then feel how you would feel and that I find to be very illuminating.
Handling Love-Hate Categories
[00:18:50] Megan: Yeah. And a really tricky one for a lot of parents is when you’re getting to the childcare line on your budget, because most of us have a disgruntled relationship with childcare. It’s super important. Our kids are super important to us. They’re one of our biggest values. But then at the same time, childcare costs a lot of money and it’s not always everything that you want it to be. And it feels like sometimes you’re paying money but you’re not really capturing the reward that you were hoping you’d get out of it. So some of us parents have a mixed relationship with our childcare budget.
But when you get to childcare expenditures, imagine what it would be like if you couldn’t spend money on childcare. So that might mean that one of you stays home. That might mean that you have to move closer to family. It might mean that you were swapping childcare with a neighbor.
Imagine how you’re feeling, and it will help you find where to put it in your budget. If it is deep in the core of your budget, maybe it’ll help your relationship with your childcare become stronger and happy about it. Or maybe it’s actually closer to the edge, and you’re realizing this is a really large expense that I have that I actually do have another solution for, I have a way that I might be happy.
When you’re doing the exercise, you might find something that you feel is non-negotiable and actually find ways that it maybe is more negotiable.
However to be clear, just because you put childcare either at the core or on the outside, it doesn’t mean you have to immediately change your spending. Later, we’ll talk about budgeting hacks and how to find savings in your budgeting categories. But this first step is just to figure out what are the things that are working so well, and you’re so happy about, and you want to keep doing that we’re really budgeting for. We’re making this budget so you can keep those. And what are the things that are less important to you personally that we could use to find savings to fuel the rest of your budget? And so it doesn’t matter where it lands at this point for how you’re going to find savings or not find savings, but it can be helpful to sit with those feelings and figure out which one it really lands in.
There will be some difficult ones, and I find childcare is one for a lot of people, where you’ll really have to sit with it and figure out how you really feel.
[00:21:13] Mike: Yeah. Oh my gosh. So much in there, I love the sitting with these and some of them will be big items, so you mentioned, that you can also break them down. So that childcare might be, I was thinking it might be broken down. You know, maybe it is preschool and before school or after school or the younger kid or the older kids or the summer camps. There’s lots of different pieces to childcare, and so some of them might bring you a lot of value and joy. “Oh, my kids love this and I love this and that’s great.” And other ones like you said, “I’m not so sure.” And you don’t have to decide right away. Even pausing and saying “I’m not so sure this is so great.”
Now you’re building awareness in aligning your spending with your values for your whole family. And some of them will be difficult and sit with that and say, is there another solution? I often find that we’re not talking dollars, I love you mentioned that we’re not talking how many dollars is it, what will I save? Or what am I spending? It’s just literally, is this a right category of expenses that brings our family and brings me joy in my life.
[00:22:21] Megan: And you’re not looking at it in isolation. So it’s not childcare joy, not joy. It’s which one brings you more joy buying jewelry or your childcare? So you’re looking at it all in comparison to the other things still left on your budget. What brings you more joy? The haircuts or the childcare? We know which one’s more expensive. Everybody knows which one’s more expensive, so we’re not in debate there. There will be one that’s more expensive, but it’s not about that. It’s which one would you get rid of first? And which one would you keep?
A Bit About Megan’s Core Budget
[00:22:57] Mike: Yeah. So as you’ve gone through this exercise, either personally, or with some clients or some friends, was there anything that you really found you weren’t expecting, as you went through this, something that surprises you or something that you found interesting.
[00:23:13] Megan: When I did it personally, I found that gift giving was really important to me. I was not fast to get rid of gifts. I hung on to them a long time through the process. I knew that gift giving generically brought me joy, and I knew that I really liked getting gifts for people, but I didn’t realize how many things I was willing to sacrifice before I was willing to sacrifice gift giving.
That might be one reason why, when you read the article, there’s a lot of gift categories. I didn’t just say “Gifts.” There’s anniversary gifts, birthday gifts, just because gifts, Christmas gifts. They are all in my version of the really long list. And that’s because for me, there was a different line for each one of those. I wasn’t going to give up birthday gifts, that one hung up on until the end, it was really deep down there in my core. And that was surprising to me and something that I was glad that I learned through the exercise.
[00:24:11] Mike: Yeah. And I also wanted to ask specifically on the exercise, you mentioned that you’re putting the line through them in order and labeling them 1, 2, 3 is there a reason for having the numbers next to those crossed off lines?
[00:24:24] Megan: I liked having the numbers because after the fact I could figure out what was the first set to go. And then when you’re all done with the exercise and you can look and see, “Okay, this is the first set to go. This is my core. Here’s how everything else goes in between.” Then you know immediately what you should apply budgeting hacks to.
So when you hear somebody who says, “Here’s how you save money when you’re shopping and here’s how you cut back in your spending” and they’ve got cool tips and tricks. What should you apply it to? That stuff you whacked off right at the beginning, because you’re willing to not spend any money potentially if you had to. So cutting it back, cutting it way back, cutting it in half, finding the largest expense in your least liked category and eliminating it. There’s a lot of savings to be gained through that exercise. And we’ve already acknowledged through this core values budgeting that there’s not very much joy that’s lost in that category comparatively speaking.
You might love all of your budget categories way more than I love mine, but at the same time, comparatively speaking, there’s less joy from that outer edge budget item. And so finding the largest expense and getting rid of it is a fast, easy low-hanging fruit of savings that you’ll probably be able to keep doing. If you cut something from your core — for example, if I was like, “Oh, I guess I just won’t spend as much on birthday gifts.” That would be really hard for me, and I probably wouldn’t do it for very long.
Other Life Planning Exercises
[00:25:54] Mike: Yeah. That’s an interesting point too, because behaviorally, you know, then you’re not going to stick with the whole exercise. You’ll throw out the whole thing, right? “Oh, geez. I can’t do this. I’m not sticking with it.” So I love this. I love that you put a specific exercise around aligning your spending with what is in your core.
You use the word core, and I use that all the time. I use George Kinder’s life planning work, and it’s all about core values and using some specific exercises to try to get at that. And this one’s fantastic. A specific implementation exercise to try to take it from this philosophical “Of course you should spend on things that bring you joy. What is that? Here is something that you can spend an hour to get started, write it down and start working on it.” I’m definitely going to do this. I’m excited to go through this for myself and my family and just kind of see what falls out for me. So I’m definitely gonna report back on that.
Now, we have a lot of other ideas, right? You mentioned budgeting, hacks and tips and tricks. And I mentioned at the very start of this that Megan has a number of articles around various healthy spending and how to spend because your entire salary and money is all about spending now and in the future. So we’ll do those, I think, as other podcasts and they’ll come out, over the spring and summer. And I think we’ll put a button in this one for now, because I think we’ve gotten through why are we talking about it. And then the specific exercise. Is there anything else, Megan, to mention on this?
[00:27:30] Megan: I have an anecdotal story to close this out. So this is from a book. I read the crazy rich Asian series. If anybody has ever seen the movie or read the books, this is a story from that. There’s a scene that I really love that I think is the perfect picture of core values budgeting.
There’s this one character Astrid Leong, she’s one of the wealthiest women in Singapore. She doesn’t need to budget necessarily. She has such a large amount of assets and a trust fund and all sorts of things that she’s very well off. There’s a scene where she’s in the supermarket. She has her child with her. She’s shopping for groceries. She’s at the checkout counter. She gets a phone call. On the phone, she hears from her cousin. Her cousin is trying to help her buy art. The art is going to cost a hundred million dollars and she’s like, “Yes. Buy it. I want it. I want it.” Art is her passion.
At the same time, interspersed in the scene, she’s telling her son that he can’t buy frozen peas. “No, we don’t need those.” And she’s pulling super saver coupons out of her wallet to give them to the cashier to pay for her groceries.
I just love this scene so much because you can tell exactly what’s going on. Art is at her core. She’s not going to make cuts. She wants that art for a hundred million dollars. Yes, she very much does. But food is not at her core. She’s got super saver coupons. She’s saying no to impulse purchases. She’s got a mission here to save the money because she does not care enough about this budget to want to spend any more than she has to. And that’s core values budgeting, blown up into the big movie, Crazy Rich Asians scale.
You want to be the kind of person who says, “Yes, I will eat out.” and you have the means and the budget to do so. And the kind of person who’s saying, “No, I’m not going to get a haircut that doesn’t bring me joy. That doesn’t bring me value. I’ll cut my own hair.”
You want to know what those things are, and you want to have the super saver coupons ready to save on the one that doesn’t matter as much.
[00:29:45] Mike: Oh my goodness. I love it. And what a great visual to put home, why this is important. And let me tell you that when you do this exercise, I’m excited to do it, but in general, when you are spending money on the things that bring you the most joy, you will feel that, and it’s going to bring a lot more happiness into your life and will, continue the path you’re already on in terms of aligning your spending with your values and bringing more joy into your life.
Megan, thank you so much for writing the article, explaining it today and helping us understand why it’s important and I look forward to a lot more on future episodes.
Megan: Thanks so much.
Photo by author.