Budgeting Tips | Money Talk

Why Budgeting is A Powerful Tool Everyone Must Have

I’ve mentioned in my previous posts how I neglected my finances for a long time. The funny thing is I budgeted for years before I got serious about my financial situation. You would think I knew what I was doing, but I had no idea.

Back in 2015, I started my first professional job out of school and I got a pretty decent salary ($50k).  I was delighted. Growing up in Colombia, I never dreamt of making that kind of money. I told myself that it was time to get my life together, but I also wanted to live life like never before. That alone was a bit conflicting. 

The summer before I started that job I took 3 months off to focus on the CPA exam and racked up a lot of debt to support my expenses during that time. The thing is, I lived rent-free with my boyfriend at the time, and before quitting, I was making $20 per hour as a full-time property manager. I could have saved up to cover my expenses during my time off. I was irresponsibly spending money on massages, hair, nails, and eating out. 

In 2015, I had $60k in debt between the car loan, student loans, personal loans, and credit cards. I felt like I was drowning and needed out so I began budgeting. I used the Mint App to set up a budget and began tracking my expenses. I became more aware of my spending habits and made some significant changes. I also rented an apartment on my own, so budgeting became the tool I used to make sure all bills were paid. I began attacking the debt and it was great. I would make extra payments each month and slowly paid off some credit cards and personal loans. 

However, I did have a “Misc. Expenses” budget item where I would dump random expenses. I remember the budget was $300 and actual spending was  $500-$600 per month. I would still go on shopping sprees pretty often and eat out quite a lot. Ross was my biggest weakness. I would always spend a couple of hundred dollars buying random items, shoes, and clothes each visit. Buying a lot for cheap is my kind of thing, except it adds up real quick 😖. If I had just put that towards paying down student loans, I would be closer to paying them off. 

By the end of 2017, I paid off all personal debt, except for my student loans. I had moved in with Ryan which allowed me to decrease my household expenses by 1/2.  This accelerated my debt pay-down.  Once I paid off my car loan and eliminated card debt, I had an extra $300, and instead of paying off my student loans, what did I do?! I slowly started drifting back into the shopping sprees, massages, etc. 

It wasn’t until late 2018 that it finally hit me. As newlyweds, Ryan and I were talking about finances and I realized that he was already set with a good amount of investments. On the other hand, I was already 27 and had nothing to my name. Our wedding was financed with a credit card which added to my debt and I had also gotten a new student loan to start my MBA program. This got me really depressed. I was disappointed in myself for all of the bad choices I had made until that point. That’s when it all changed. I have since improved my financial picture and the way I think about finances. It took a while, but the important thing is that I did. 

What I did differently in 2018 vs 2015: 

  • Set specific goals 
  • Figured out why these goals were important and how they would get me closer to my ideal life
  • I envisioned (and wrote it down) a life where I had my finances in order and how great it would be
  • Created my net worth statement which detailed what I owned minus what I owed. (I was negative $58k and that was painful!) 
  • Made a flexible plan to build my wealth 
  • I continued to keep myself accountable and got an accountability buddy.

My main goal was to save money to buy an investment property. All I needed to do was reduce discretionary spending. Bye-bye to Misc. Expense Category! 

Before 2018, I was budgeting so I could pay my bills and pay down debt. I wasn’t thinking about the future Katherine. Truth be told, I didn’t even understand how retirement accounts worked or the importance of having one until I was offered the option at my job after college in 2015.

I lacked commitment to my financial well-being.  This is why after paying $40k in debt, I managed to get myself right back up real quick. 

Nowadays, when I budget, I am focusing on building a sustainable lifestyle that will allow me to live the best life while securing a better financial future. As you can already tell from my blog, I am obsessed with building my wealth through real estate investing.  

Budgeting is a means to an end and once I attached meaning to it, it became one of the most powerful tools in my personal finance journey. I keep it fun by challenging myself each month. For example, I aim to decrease target spending for one item (currently groceries) and start getting creative on how to do so without sacrificing my quality of life. I am definitely not eating ramen noodles every day. 

My financial buddy, Nicole, keeps me accountable when I begin to deviate. For example, earlier this year, she gave me a virtual slap and pep talk when I wanted to finance a new car that didn’t need. We meet every month and talk about our finances. However, we also talk about money all throughout the month. 

I honestly can’t recall the last time I went on a shopping spree. I have now replaced Ross and Victoria Secret with Home Depot and Harbor Freight. I invest more than I spend and it feels way more satisfying. I don’t have to deal with buyer’s remorse anymore.

At this time I only spend 40% of my income and while I am not sure how I will do it, my goal within the next year is to hit 30%.  Let’s see if I can make this happen!

Correction, I will make this happen and budgeting is the tool that will get me there! 

Currently, what I do with the money I don’t spend is pay down debt, save for an emergency fund, and invest. I know my strategy goes against common advice and the Dave Ramsey ideology, but I will talk about why I do things the way I do in a later blog post. 

What about you, do you budget? What is your experience with and overall thoughts on budgeting?

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