How to budget without giving up your lifestyle

Ben Brett 15 December 2020

When it comes to devising a financial plan, each person’s circumstances are different. Because we all have different goals, we all have different strategies on how we should go about our finances. Despite this, there is one fundamental truth that applies to everyone regardless of their financial situation:

“If you fail to plan how you intend to spend your money, you will never achieve financial success”

I read an article recently that said 60% of NBA players go broke within five years of departing the league. This is despite the average season salary being $7.7 million. It doesn’t matter how much you earn or even how much you make from investments, if you don’t have a plan on how you want to spend your money, you won’t succeed.

So let’s talk about budgets…

Nothing invokes fear like the word “budget”. We’ve all tried them; we’ve all hated them and we’ve all given up on them.

I’ve spent many years now thinking deeply about budgets. What makes them work? What makes them fail? Why don’t they work for the vast majority of people? And I’ve come to a pretty solid conclusion.

“People are budgeting in the wrong order.”

So how does a usual budget work?

Most people go about their budgeting in the following manner.

They start by sitting down and coming up with their non-discretionary expenses. They write down their rent or mortgage repayments, their electricity and their car registration costs.

So far, so good. This is exactly what we should be doing. It’s at this point however that people get lost and work in the wrong order.

Once they’ve worked out how much their ‘non-discretionary’ expenses are, instead of moving on to their ‘discretionary’ expenses which make up all the fun things in life, they instead start thinking about how much they can save.

They’ll say to themselves “If I spent the absolute bare-minimum in life to stay alive, I could then save this giant amount of money!”. They then start dreaming about all the things they can do with that money.

Finally, once they have anchored themselves to a savings figure, they start incorporating lifestyle expenses like holidays, coffees, restaurants and clothes. Now where this goes wrong is because they have already determined how much they ‘could save’, they tend to allow a lot less for these fun things then they truly want as they want to ‘do the sensible thing’.

So where does this budget go wrong?

This type of budget works really well for the first couple of weeks. They are saving huge amounts of money and really doing a great job of not spending money on lifestyle expenses.

And then something happens…

Your friend’s birthday comes up and she wants to do a weekend away. Your car breaks and you decide you need to upgrade. Your child suddenly needs braces. It doesn’t matter what it is, it’s always something. You then find yourself dipping into your savings to cover this shortfall. When it comes to balancing this immediate need with an arbitrary savings figure you’ve determined, the immediate need wins.

And then it all goes downhill.

Something else comes up and you dip into your savings again. You decide you need a bit more this week because it’s been a hard week and you dip into it again. Suddenly you find yourself disheartened that you didn’t stick to your budget and decide it didn’t work in the first place.

But it doesn’t have to be this way!

This could all have been avoided if you changed up the steps and did them in the right order. Instead of working out your savings figure first and then determining how much money you will spend on fun expenses, you need to do them in reverse.

The steps are as follows:

Step One: Work out your ‘non-discretionary’ expenses

These are all the bills in life you just have to pay. Things like your car registration, electricity, childcare etc. You want this to be as low as possible so if there is an opportunity to reduce some areas without affecting your lifestyle, then do it. But mostly, these are just the costs of living.

Step Two: Work out your ‘discretionary’ expenses which are your lifestyle costs

These are all the costs which aren’t compulsory. Things like holidays, coffees, restaurants, clothes and weekends away. Don’t write down how much you think a person like you “should spend”, work out how much you actually spend.

You can go through your bank statements if you have to but make sure this is a figure which matches your current lifestyle. If it is too much money, that’s ok, we will come back to this.

Step Three: Work out how much you can save

This is where this process differs from how people usually go about budgeting. Only after you’ve worked how much your life costs to live should you work how much you can save.

Now this figure is not going to be as big as a usual budget. This may seem disheartening but a small amount saved consistently over a long period of time is always better than a larger amount only saved for a few weeks before you give up.

At this point, it’s time to reflect on whether this is enough savings to achieve your long-term goals. Saving for the sake of saving never works. You need to be clear on what you are saving this money for so you can ask yourself “is this enough?”.

Now if it is not enough, you’re going to need to reduce your lifestyle expenses. But this is the important part, “only reduce your lifestyle expenses as much as you need to achieve your goals”.

Before you give up any parts of your lifestyle, think deeply about the trade off you are making. Is this something you truly want? Be prepared that in the moment when you want to go on holiday or to buy that cute dress, you are going to need to remember why you’ve made that trade-off and be confident to stick to it.

Only now should you start reducing your lifestyle expenses, but you need to ensure that you protect your lifestyle.

When reducing things from your lifestyle expenses, start with the things that bring you the least joy. Maybe cut a streaming service you don’t use? Or maybe you can bring your lunch into work? Whatever it is, work out the order of what brings you the least joy to the most and work up the list (even if it’s small). Pro tip, don’t ever cut coffee. It’s important and you definitely need it.

Finally once you have a plan, it’s time to set up different accounts to capture your discretionary, non-discretionary and savings. You want clear oversight over how much is going into these accounts and to ensure you don’t use one account for another reason.

As part of our process at Bounce Financial, we go through these steps for you to come up with what we call, “your life number”. We then work with you to map out your goals and help you identify how much (if at all) you need to reduce your lifestyle. If you have any questions or want to have a chat about whether financial advice is right for you, please reach out.

This post is from our resident Financial Planner Ben Brett, check out his details in the About Us section.

Want more information like this? Of course you do, sign up to our newsletter and we’ll keep you informed.

Posted in: Ben Brett, Budgeting

About the author: Ben Brett

Ben Brett owns and operates Bounce Financial with his wife, Cara. Having started his career as a Corporate Lawyer, Ben has always had a passion for helping make the complex things simple. Follow Ben on Instagram @bouncefinancial or on LinkedIn at www.linkedin.com/in/ben-brett/