Podcast: Obermeyer Wood's Dollars and Sense - Episode Two
Obermeyer Wood’s Dollars and Sense Podcast - Episode Two
In this episode, we introduce a few methods on how to create a budget that works for you and how we can reframe our view on budgeting.
Effie:
It's payday. Time to enjoy the fruits of your labor. You know you have to pay for things like rent and groceries, but right now, it feels like you have so much money in your account. I'm sure all that will work itself out later, right? Not exactly. Without a budget, it's going to be pretty hard to allocate your funds where you want them to be, so let's talk about it. Obermeyer Wood Investment Counsel presents Dollars and Sense, a podcast where we talk about our dollars in a way that makes sense.
Welcome to Dollars and Sense. I'm your host, Effie, and in this episode, we'll be talking about budgeting. Now, now, budgeting doesn't have to be a scary thing. It could actually be empowering. I mean, think about it. You get to decide where you want your money to go.
Ali Phillips:
I would say budgeting is not a four letter word. People are so scared of budgeting. It's really think of it in terms of being empowering from a knowledge point of view.
Effie:
This is Ali.
Ali Phillips:
My name is Ali Phillips. I'm here at Obermeyer Wood Investment Counsel, and I'm executive vice president and partner at the firm.
Effie:
What is a budget?
Ali Phillips:
Budget just means is that you don't want to overspend each month. You want to know what money you have coming in.
Effie:
Knowing what money you have coming in, AKA your income, is the first step to creating your budget. The next step would be looking at your expenses and determining what's discretionary and what's non-discretionary.
Ali Phillips:
Non-discretionary things are utilities, things that you have to pay every single month, then discretionary are entertainment, going out, things such as that.
Kimbo:
Discretionary is like going out to eat, buying clothes, charity.
Effie:
There are very different formulas that people already use to determine what percentage of their income should be for non-discretionary spending versus discretionary spending. Up first, we have the 50/20/30 rule. This rule suggests that 50% of your income goes to needs, 30% goes to your wants, and lastly, 20% goes to your savings and investing. There's also the 80/20 rule. The aim in that rule is to save 20% of your income, and then 80% is yours to spend. Lastly, a general guide that's most commonly found is to save 15% of your income.
Roger Hennefeld:
In my experience, saving 15 to 25% of your earned income and investing it, leads to financial security.
Effie:
This is Roger.
Roger Hennefeld:
My name is Roger Hennefeld, vice president of trading and investments here at Obermeyer Wood.
Effie:
Roger believes that saving 15% of your income is a great starting point.
Roger Hennefeld:
If you budget all of those expenses to be less than 85% of your current take home pay, you will be able to maintain your current standard of living. You'll be living within your means.
Effie:
While you can't guarantee that you'll be worry free about money for the rest of your life, you can definitely make it easier on yourself. Roger is saying that saving 15% of your income is one of those ways.
Brooke:
Do it in a way that's a bit more savvy.
Effie:
There are so many ways you can budget, and the three that I mentioned are only some of those ways. The key thing is to live within your means and make sure that you're saving.
Ali Phillips:
Know in terms of what money is coming in, know in terms of what you want to spend it on, and make sure as best you can to be a able to live within that budget.
Effie:
But wait, why are we saving money in the first place? I mean, we all know we should save money, but what's the real motivation. Sure, we should be saving money within our emerging fund, like we talked about in the last episode, however, beyond that, why are we saving more? Let's rewind a bit.
Effie:
One of the questions that we need to ask ourselves before we even create a budget is the question of our values. Once you know the difference between discretionary and non-discretionary spending, it is up to you to determine how you can allocate your funds in a way to make your life the most fulfilling.
Kimbo:
If you get everything else sorted out, you can spend without guilt on the things you love.
Effie:
You might want to take out a pencil and journal this down. What are the things in life that you absolutely love to do? What are some experiences or items that you feel like you can't live without?
Kimbo:
There's people that love shoes.
Luke:
I love cars, I always have.
Ali Phillips:
Big trip during the summer.
Effie:
Everyone has different values, and your goal should be to spend based on those values. Ramit Sethi, who's a popular author, said this, spend extravagantly on things you love and cut costs mercilessly on things you don't. So when you're evaluating your discretionary spending, ask yourself this, am I really using this money in a way that makes me most fulfilled? Am I buying lattes even though I'm more of a tea person? Focusing on how we can best spend our money is a good way for us to not get discouraged when it comes to saving our money.
Brooke:
I think you can find creative ways within your budget and your expenses to still do what you want to do, but also meet your savings goals.
Effie:
After we draft up a budget, what are some tips and tricks that can help us?
Luke:
As far as tools go, there's multiple applications that help you manage your cash inflows with your cash outflows.
Brooke:
My husband and I use You Need a Budget.
Luke:
One that I use is called Personal Capital. There's another one called Mint, too, that people use frequently. Going to a traditional cash budget is definitely the most productive way to save money, is what we've found.
Effie:
Like a lot of other things in personal finance, self-awareness is key to understanding the best way of managing your money. Do you feel like getting a budgeting tool like Mint or Personal Capital would be useful, or do you think a envelope system, like Luke mentioned, would be the best for you? Just to clarify, Mint and Personal Capital are all digital tools, while an envelope system is when you use cash only for all your budgeting needs.
Luke:
Swiping my card was way too easy, relative to pulling cash out and watching myself spend money. That psychology just in itself helped Sawncy and I start saving more.
Effie:
Another tool is automation.
Kimbo:
Automate as much as you can, so don't spend every month pouring over your cell phone bill; automate that.
Effie:
All in all, finding a budget that works for you is going to take time, so be patient with yourself.
Brooke:
As far as budgeting, it takes time to understand what's best for you.
Nick:
So yeah, everyone has a happy balance to find.
Kimbo:
It doesn't matter how much money you make. Spend less than you earn, and you'll be okay
Effie:
After we learn how to budget our day to day. Then we can look ahead to investing, and we'll speak about that in the next episode. The Obermeyer Wood's Dollars and Sense podcast is created by Obermeyer Wood Investment Council, an SEC-registered investment advisor. The information provided is for informational and educational purposes only, and does not constitute financial investment, tax, or legal advice. Statements by individuals reflect only their views and not those of Obermeyer Wood Investment Council, LLLP. The information in this podcast is not intended as investment recommendation or financial planning advice, and should not be used to make investment decisions. For more information about Obermeyer Wood Investment Council and its services, please visit us on the web at www.obermeyerwood.com.