Personal Finance: Budgeting & Psychology of Spending by @Phroogal

Jason Vitug@jasonvitug

Personal Finance: Creating a Spending PlanBudget For The Life You Want

Introduction

• The plan is to discuss the benefits and process of budgeting.

• The goal is to understand how budgeting can lead to living richer lives.

• The takeaway is to know key terms, identify your dream lifestyle, set financial goals and start the budgeting process.

www.phroogal.com@phroogal

Do you want to be the Starbucks loving apartment renter or the Folgers Crystal’s

homeowner?

Saving a few extra dollars a month won’t get you into a

new home. ----------

Knowing exactly where your money is going will help you reach your financial goals.

Psychology of Spending

• Are you seeking instant gratification delaying true satisfaction.

• Do you know the differences between “needs and wants?”

• Are you sacrificing “what you love for what you like?”


Spending Habits

• Habit Spending– Not out of necessity or wants just habitual (e.g. morning coffee,

lunches, brand loyalty).• Bargain Hunting

– Proactively seeking discounts and sales to validate a purchase that may be unnecessary.

• Impulse Buying– Perception of value or want/need from actual reality.

• Retail Therapy– Mood enhancing because it mimics the feeling you’re in control.


Saving versus Spending

Spending over Saving• Unknown Future: Spend rather than save because instant

gratification is now and future need is unknown.• Present Bias: Making inconsistent decisions over time favoring

instant gratification over long term returns.

Savings over Spending• Prioritize saving money immediately and use automation tools.• Reward yourself for reaching savings goals.• Build wealth and avoid lifestyle inflation.


What tool can help you prioritize savings, curb spending and achieve

your goals?

The Six Letter Word

BUDGET and the reasons we don’t:• Associated with

limitations.• Realizing there

might not be enough money.

• Fear lifestyle change.


Budget = Spending Plan

What is a budget?

• Defined as a financial spending plan.– Helps achieve quantifiable financial goals.– A tool to measure performance and cope with

potential adverse situations.• A financial framework to support lifestyle

choices.– Includes income, expenses, financial goals, savings

and debt repayment plans.


Budgeting mindset

Excuses to Start How to Start• Tedious and boring• Easy to procrastinate• Feeling there is never enough

money• Hard to confront past decisions• Goals are overwhelming• Money isn’t an issue• Fear of lifestyle changes

• Be specific and think success• Stay realistic and organized• Track everything (money

in/out)• Monitor progress and expect

setbacks• Reward yourself along the way• Make it easy and use free tools


Budgeting Advantages > Disadvantages

Reasons why you should budget

• Creates a framework to reach milestones and achieve quantifiable goals.

• Helps you buy things you need and want through prioritization.

• Allocates resources and reduce waste.• Supports reaching your dream lifestyle.


A budget isn’t an exercise at deprivation but a tool to

increase awareness of what’s happening with your money.

Budgeting process

• Calculate your net worth• Determine what you want to accomplish

– Lifestyle choice (how you want to live)– Financial goals (what you want to buy/achieve)

• Track your spending– Debit/credit cards, receipts, software programs, mobile apps

• Develop your budget– Calculate all income sources– Identify fixed and variable expenses– Set savings and debt repayment goals

• Implement your budget• Analyze your budget and make adjustments

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Calculate your financial wealth

• Calculate your Net Worth– Net worth is the amount in which your assets

exceed your liabilities. The difference between what you own versus what you owe.

• List Assets– Savings, property, investments, etc.

• List Liabilities– Debts owed, loans, mortgages, taxes.


Envision your dream lifestyle

• A lifestyle goal is how you live or plan to live your life. It’s the style of living that reflects your attitudes and values.

• Don’t confuse living a lifestyle with the ability to purchase and consume. From buying expensive cars or homes and to another extreme frugality.

• Envision the lifestyle you want to live.• Then, identify and prioritize the financial goals.


What are your financial goals?

Characteristics of financial goals

• Specific– A cost or price point– Timeframe and deadlines

• Measureable• Reasonable and realistic


Identify your financial goals

• What do you want to accomplish?– Financial goals are monetarily quantifiable aspects

of your life.– They are things that can be purchased such as

goods, education and experiences.– They are specific goals such as savings goals, debt

repayment and college tuition.


Financial Goals: Savings • Emergency fund

– Calculate monthly living expenses and save 6 months in a liquid savings account.

• Short-term goals– Holiday spending,

vacations and big ticket items.

• Mid-term goals– Mortgage down payment,

car purchases, etc.• Long-term goals

– 401(k), IRA contributions, investments.


Financial Goals: Debt-Free

oo

• Pay off all debt obligations.– Debt is a ball and chain

preventing you from achieving financial freedom.

• Discover debt repayment options.

• Identify additional funds to maximize debt repayment.


Budgets should evolve as goals are reached

and desired change in lifestyle.

Starting a Budget

• Stay clear of mental accounting. – Use the Traditional or Automated methods.

• Paper/Excel or software (e.g. Mint.com).

• Learn if you’re living beyond your means.– Categorize an entire month’s income and expenses.

Calculate the difference to determine how much money is coming in versus going out.

– Realization you may need to cut back to achieve goals.


Basic Elements of a Monthly Budget


FIXED EXPENSES:Rent/Mortgage. $Credit payments $Insurance. $Medical $Other $

FLEXIBLE EXPENSES:Food $Clothing $Transportation $Household $Personal $Entertainment $Other $TOTAL EXPENSES $

INCOME SOURCESMonthly Take-Home Pay $Interest Income

$Dividend Payments

$Additional Income

$

TOTAL MONTHLY INCOME $LESS TOTAL EXPENSES

$NET (Income – Expenses) $

SAVINGS GOALSEmergency Fund

$Savings

$Certificates

$Holiday / Vacation

$Other Savings

$

Budget Method: Step-by-step

1. Calculate your income and expenses.2. Make a list of all income sources and calculate total monthly income.3. Keep a record of one month’s fixed expenses and discretionary

spending. 4. Organize based on categories and total expenses such as housing,

transportation, food, utilities, credit card payments, etc.5. Using paper or a spreadsheet, calculate your income compared to your

expenses.6. Analyze the results and calculate how much you can save and how much

more you can pay towards debt.7. Determine where you can decrease fixed expenses and cut spending to

free up money to prioritize debt repayment and grow savings.8. Adjust your budget accordingly as financial goals are met.


Budget Methods: Buckets

• Difficult to track every little expense thus making simple bucket methods useful.• Caveat: The more details you know about your spending habits the better.• 60 Percent

– 60% on monthly expenses. Includes housing, utilities, food, transportation and other fixed payments.

– 10% on retirement, 10% on short term savings, 10% on debt reduction, 10% on spending• 70-20-10

– 70% on living expenses. Monthly expenses such as rent and car payments, memberships, and discretionary spending.

– 20% on savings goals. Money save for retirement (10%), emergencies (5%) and specific goals (5%).– 10% on Debt Repayment. Pay down debt obligations and credit cards.

• 50-30-20– 50% on fixed costs. Monthly expenses such as rent and car payments, memberships,

subscriptions, etc.– 20% on financial goals. Money set aside for debt repayment and savings/retirement goals.– 30% on personal spending. Discretionary flexible spending.

50-30-20 Courtesy of Laura Shin, Learnvest


The right budget doesn’t keep you from spending but tells you

how to save and spend your money to maximize enjoyment.

Budgeting should help you…

1. Save and spend your money.2. Pay yourself first.3. Repay debt and loan obligations.4. Reduce expenses.5. Increase income earnings.6. Focus attention on priorities.7. Live your dream lifestyle.


Budget Pitfalls

• Unknown personal motivations.

• Remains static.• Restricts living in

the present moment.

• Budgeting for the life you want but can’t afford today.


Stay motivated

• Visualize success• Stay organized• Be realistic• Track and monitor progress• Expect setbacks• Reward yourself along the way


Resources

• Net worth calculator: http://goo.gl/V6cb33

• Excel budgeting worksheet: http://goo.gl/V6cb33

• Software budgeting tools– Ask your bank or credit union about budgeting tools tied to your

accounts.– Free budget tools: Mint.com and Personal Capital.

• Ask questions on budgeting: Phroogal.com.• Debt Repayment/Budgeting Tools

– Debt Payoff Calculators– General debt payoff tool: ReadyforZero– Manage student loans: Tuition.IO– Student loan consolidations: CUStudentLoans


http://goo.gl/V6cb33






http://www.mint.com/

http://www.personalcapital.com/

http://www.phroogal.com/

http://www.phroogal.com/question/4324/What-is-the-debt-avalanche-and-debt-snowball-method

http://www.readyforzero.com/

http://www.tuition.io/

http://www.custudentloans.com/phroogal

What’s the secret equation to wealth?

Wealth = Money In - Money Out

Learn more about budgets and spending plans at

www.phroogal.com

http://www.phroogal.com/

Personal Finance: Budgeting & Psychology of Spending by @Phroogal

Economy & Finance

Transcript of Personal Finance: Budgeting & Psychology of Spending by @Phroogal