Budgeting That Works For Your Peace of Mind
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Over the past 20+ years working with clients, one of the biggest factors I’ve seen in people being able to meet both their short-term and long-term financial goals is the ability to create and sustain a positive cash flow margin.

Over the past 20+ years working with clients, one of the biggest factors I’ve seen in people being able to meet both their short-term and long-term financial goals is the ability to create and sustain a positive cash flow margin.

That sounds pretty straightforward and even “easy” on paper, right? Debt.com reported last year that 93% of their respondents agreed that everyone needs a budget, but only 33% actually maintained a budget. So, why such a big gap? Why aren’t more people budgeting if they think they need it? One of the biggest explanations for the gap is that BUDGETING IS HARD!

“Many of life’s failures are people who did not realize how close they were to success when they gave up.”
Thomas Edison

Some of you reading this may be successful budgeters (gold star for you!), but the reality is that most people reading this have probably tried to put a budget together and have just fallen short in its completion. Is there a way to budget that actually works?

What is Zero-Based Budgeting?

I’ve tried numerous systems and tools through the years and the one I keep coming back to is an approach called “zero-based budgeting”. Let’s dig a little deeper…

In a nutshell, zero-based budgeting means taking your income for the month (or whatever time period you’re budgeting for) and subtracting out your expenses (including amounts to pay down debt or put into savings) until it equals zero. Don’t let the “zero” fool you…It does NOT mean operating your bank account at zero!

Zero-based budgeting means taking every dollar received for the month and assigning it a specific job or role (i.e. groceries, family vacation, etc.). It’s a forward-looking budgeting process as opposed to a backward-looking one (more on that later). It helps prevent overspending before it happens and works with what you currently have (money in the bank) versus what you might receive in the future.

Consider this example:
  • Family has $6,500 of spendable income for the month.
  • They give each dollar a job in their budget and start with the highest priority items (essential expenses) first.
  • If money is left over after funding their essential expenses, they move down the budget to put some money aside for future expenses (taxes, car repair, etc.).
  • If money is left over after funding future expenses, they can then assign some dollars to discretionary items (eating out, fun money, etc.).
  • After funding all the expenses, there was still money available to budget in this example. That means they were also able to assign some funds to other goals for the month (additional giving, increased emergency funds, extra debt payments, etc.).
  • In the end, their budget total for the month balanced out to $0.


I know this is a simplified example, but hopefully, you get the point. You only work with dollars you HAVE and you give EVERY dollar a job to reduce overspending and waste. In this example, I’m showing you a monthly budget. When the new month begins, the process starts all over again.

If this pattern repeated itself over the course of 12 months, they would have money in their bank account earmarked for:

  1. Paying down $1,200 in additional debt payments.
  2. Adding an additional $1,800 to their emergency fund.
  3. Making additional charitable gifts of $600.
  4. Contributing $600 towards college savings.
  5. Contributing $1,200 into additional retirement savings.

Why I Like Zero-Based Budgeting

This method of budgeting has many advantages in my opinion, but let’s look at how it compares to traditional budgeting:

Zero-Based BudgetingTraditional BudgetingForward-lookingBackward-lookingProactiveReactive“What do I have available to spend?”“How much did I already spend?”Prevents overspendingIdentifies overspendingCan adjust during the month“Try to do better” next monthBudget the money you currently haveBudget the money you think you’ll haveEasy to handle “irregular” expenses (car maintenance, taxes, etc.)More difficult to account for “irregular” expenses

There are many other comparisons that could be made, but the biggest in my opinion is just the proactive style versus reactive style of traditional budgeting. Instead of looking at what happened last month (traditional style) and saying “Well, I’ll try to do better next time. I shouldn’t have spent that much money on…”, you can get ahead of that overspending BEFORE it happens. Traditional budgeting is like trying to drive your car forward while only looking in the rear view mirror. 

What Is The Best Budgeting Tool?

There are lots of budgeting apps and sites available to help people with their cash flow planning, but not all of them work the same way. The key is finding one that you’re comfortable with and that you’re willing to stick with. There is a learning curve with any new process or tool.

Two of my favorite budgeting tools are YNAB (You Need A Budget) and EveryDollar (Dave Ramsey’s budgeting tool). Both offer subscription-based plans and both work off a zero-based budgeting principle.

YNAB

  • Offers a 34-day free trial
  • Can sync with your bank & credit card to pull in transactions
  • Offers free online workshops and email support
  • Allows you to set customized savings and spending goals
  • Website + Mobile Apps (Android & iPhone)
  • Good for both beginning budgeters and experienced ones


EveryDollar

  • Offers a 7-day free trial (for their premium version)
  • Comes with access to other Ramsey+ products (FinancialPeace, etc.)
  • Can sync with your bank and credit card to pull in transactions
  • Website + Mobile Apps (Android & iPhone)
  • Email support
  • Good for beginning budgeters


Closing Thoughts

I recently heard a great analogy from Jesse Machum (founder of YNAB). He was asked what made his tool (and zero-based budgeting approach) different than most of the other backward-looking tools on the market (Mint.com, Personal Capital, etc.). He drew the comparison to the Tom Cruise movie Minority Report and a CSI crime show.

Zero-Based Budgeting – it’s like Minority Report… with the precogs, they ANTICIPATED upcoming crimes and put people in jail BEFORE the crime was committed. Their job was PREVENTION.

Traditional Budgeting – it’s like CSI… they came on scene AFTER there was a dead body. Their job was figuring out what ALREADY HAPPENED to the person in an effort to solve the crime.

Don’t get me wrong, any budget (even one that looks back at your historical spending) is better than NO budget, but at least in my experience (both personally and professionally) the zero-based budgeting approach is one that really works. 

About the Author-

Brent Hoskins is a Kansas City-area fee-only financial planner. Focal Point Financial Group provides comprehensive financial planning and investment management to help individuals and families organize, grow and protect their assets through life’s transitions. As a fee-only, fiduciary, and independent financial advisor, Brent Hoskins is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice. 


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Smart Things To Do (That Many Won't) In A Down Market

By Brent Hoskins • July 13, 2022
When the stock market declines, the resulting steady drumbeat of negative news reports can drive many people to flee the markets. Making decisions out of fear (or any other emotional trigger) rarely leads to successful long-term outcomes. It's hard, because one of the most unsettling aspects of market downturns is the fact that they are out of your control. Here is a list of suggested actions to consider - which historically have resulted in helping to weather market lows. Tune Out The Noise It's ok to not check your portfolio balance when the market is falling. Turning off the financial news might be smart if it keeps you from making mistakes based on emotional decisions. Revisit Your Asset Allocation If you happen to be near retirement or in retirement, or if you simply lose sleep over downturns, you may need to reevaluate your risk tolerance. Together, we can figure out the balance of stocks and bonds best suited to your comfort level with risk and other personal circumstances. Control What You Can: Costs Expenses eat returns, and their bite is particularly painful during market corrections. We can explain options for removing high-cost investments from your portfolio in ways that minimize the taxes due from their sale. Set Realistic Expectations U.S. stock and bond markets have posted remarkable returns in the past few decades. Statistically speaking, it would be prudent to expect lower returns in the future. Together, we can develop a plan that still achieves your goals, despite potential headwinds of lower returns. Stay Diversified Downturns offer case studies in how different asset-class and sector exposures can help to insulate your portfolio. Having conversations about risk tolerance, as mentioned above, helps us to better understand your investing style and what's most important to you. With this greater insight, we can go over diversification options for your portfolio that blunt the impact of downturns while putting you on track to achieve your financial objectives. Remember, you don't have to follow the crowd and you don't have to make emotional decisions. Stick to sound investing principles, have a plan, and let us know if we can help. About the Author- Brent Hoskins is a Kansas City-area fee-only financial planner . Focal Point Financial Group provides comprehensive financial planning and investment management to help individuals and families organize, grow and protect their assets through life’s transitions. As a fee-only, fiduciary, and independent financial advisor, Brent Hoskins is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.

Chasing the Wind: The Futility of Materialism

By Brent Hoskins • July 1, 2022
Attempting to find meaning in "things" can often lead down a dangerous (and unending) path toward dissatisfaction and can put people in a vicious cycle of desiring more and more and yet feeling as if they never have enough. Solomon shares a number of helpful insights on materialism in the book of Ecclesiastes. I love the way author Randy Alcorn summarizes and paraphrases some of Solomon's statements from Ecclesiastes 5:10-15 : “Whoever loves money never has money enough” (v. 10). The more you have, the more you want. “Whoever loves wealth is never satisfied with his income” (v. 10). The more you have, the less you’re satisfied. “As goods increase, so do those who consume them” (v. 11). The more you have, the more people (including the government) will come after it. “And what benefit are they to the owner except to feast his eyes on them?” (v. 11). The more you have, the more you realize it does you no good. “The sleep of a laborer is sweet, whether he eats little or much, but the abundance of a rich man permits him no sleep” (v. 12). The more you have, the more you have to worry about. “I have seen a grievous evil under the sun: wealth hoarded to the harm of its owner” (v. 13). The more you have, the more you can hurt yourself by holding on to it. “Or wealth lost through some misfortune” (v.14). The more you have, the more you have to lose. “Naked a man comes from his mother’s womb, and as he comes, so he departs. He takes nothing from his labor that he can carry in his hand” (v. 15). The more you have, the more you’ll leave behind. So here we have someone (Solomon) who never lacked having enough money, concluding his remarks by stating: "When I surveyed all that my hands had done and what I had toiled to achieve, everything was meaningless, a chasing after the wind; nothing was gained under the sun" Ecclesiastes 2:11. Money is a tool... not something to endlessly pursuit, or you (like Solomon concluded) may just be "chasing the wind". About the Author- Brent Hoskins is a Kansas City-area fee-only financial planner . Focal Point Financial Group provides comprehensive financial planning and investment management to help individuals and families organize, grow and protect their assets through life’s transitions. As a fee-only, fiduciary, and independent financial advisor, Brent Hoskins is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
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