Episode 6 - Building Wealth Through Smart Family Budgeting

Have you ever felt the tug-of-war between wanting to enjoy life and needing to keep your wallet in check? Let's unravel the complex emotions surrounding family budgeting and find a wonderful balance. In this episode, I'm peeling back the layers of financial planning with the kind of zeal that can only spark from a Certified Financial PlannerTM and family wealth strategist. 

We'll tackle the dual nature of budgeting—its power as an ally for clear spending and wealth-building and its potential downsides when strictness overshadows life's joys. From the simplicity of the envelope method to the intricacy of detailed budgeting, you'll learn how to craft a life where financial clarity and independence go hand-in-hand with enjoying the fruits of your labor.

Full transcript

Hello and welcome to the Beyond Budgets® podcast, where we help parents transform their relationship with money. I'm your host Deb Meyer, a Certified Financial PlannerTM, award-winning author of Redefining Family Wealth, and founder of WorthyNest®. More importantly, I'm a mom of three boys, wild boys, ranging in age from 8 to 14.

Deb Meyer (00:01.174)

Hello and welcome to episode six of the Beyond Budgets podcast, where we're going to talk about budgeting. I know the podcast name lends itself to going beyond budgets, but I would be remiss if we didn't talk at least a little bit about budgets in one of the many episodes we're going to be having for this podcast. So for a lot of people, the word budget does evoke some pretty strong emotions. For you, it might be something more restrictive.

Something that seems difficult and burdensome, or maybe you have a positive view of budgeting. You see it as a tool for freedom to really achieve your financial goals. Wherever you fall on that spectrum, this episode is going to be valuable to you. First, we're going to talk about some of the benefits and negative aspects of budgeting. Then we're going deep into two different types of budgets. The envelope budget, which is a pretty good starting budget, especially for new college grads or high school grads that are going into the working world right away, OR the detailed budget, which most families would fall into after they've been budgeting for a few years and can reasonably predict what their recurring expenses are and even discretionary and get into more of the weeds with each and every line item. Okay, so let's start first with the benefits of budgeting.

I'm a self-proclaimed money nerd, so I enjoy budgeting. I think it's great because you get a clear plan for spending. You also can use it as a tool. If you don't have a budget, you have no idea where the money is going that you're bringing in each month. And that becomes extremely difficult to monitor. You have absolutely no baseline to go against. So if you want to build wealth, as we talked about in...

an earlier episode with Dr. Sarah Stanley-Fallah, one of the key tools is living within your means, but also being able to monitor and see where your spending is so that you have a clear idea of where the current money is going and where you want money to be going in the future. All right, so those are the two main advantages of budgeting.

The disadvantages, if you look at it from this perspective, let's just say you're really into budgeting and you're so rigid with the budget that you and your spouse argue about budgeting. Maybe there's a big life change in your situation and you or your spouse is so gung-ho on the budget that you're not taking into account those life changes and how that's going to impact your day-to-day spending. The other piece that comes to mind for a lot of my clients and not a lot, but a few, is being overly budget conscious to the point that you're not really enjoying your life.

You know, when you think about going out with friends or family members to restaurants or entertainment, that all costs money. So if you were being extremely budget conscious, extremely frugal, you wouldn't be going out to eat, you wouldn't be going out to concerts or sports events, whatever the case may be.

And you're potentially missing out on some great experiences in life because you're so budget-conscious. So those would be the negatives if you took budgeting to an extreme. And I guess where most people want to be is in that kind of happy middle where you see budget as a tool for freedom, a clear pathway for spending, but you're also not so budget conscious that you're, you know, missing out on the important moments in life today.

Okay, let's talk about the two main types of budgets. So there's the envelope budget and the detailed budget. We'll talk about the envelope budget first. This is a really good budgeting tool, ideally for new college grads, or if your son or daughter chooses not to go to college, let's just say they graduate high school and they're going out into the working world full-time right after high school, this is a great tool to start teaching them.

The main benefit of this is you can't spend more than you earn. You're essentially taking whatever paycheck or earnings you have and divvying it up into different physical envelopes. I know it sounds a little old school, but it really can help. If you have someone who struggles with spending more than they earn, this really forces the issue because if they don't have money in the envelope, they can't go and spend that money.

Deb Meyer (04:41.202)

Or if they need to take out of one envelope and move it to a different discretionary envelope, they have to learn that there are trade-offs with any of the spending decisions they're making. When you think about the expenses and the different categories, there's gonna be some envelopes for fixed expenses. Those are more required expenses or things that you can reasonably predict month to month.

Rent would be a good example, or if you have a mortgage payment, that's another example. Insurance, let's say auto insurance, I would leave health insurance alone because again, if you're using this envelope system, hopefully you're already in a position where the health insurance is taken out of a paycheck and your employer is handling that. So this is really funds in your bank account, you're withdrawing those funds to put these in the physical envelopes.

And before I go any further on the different types of expenses, I will acknowledge there are ways to do this online as well. If you don't want the physical envelopes lying around your home, you can take it online and there are some budgeting tools like Qube Money or Goodbudget.

But the key part here is to realize, okay, what's each and every spending category that you have from a fixed expense perspective? That could also include car payment, maybe utilities. Utilities are harder because you don't always know month to month what that utility bill is going to be. It's not going to be the same exact one every single month. Although there are some utility companies that do allow, especially like I know when we lived in Missouri, Ameren was our main provider and I think they did have like a budgeted utility billing system where you could pay a similar amount each month and just spread it out over the year.

Even though obviously in winter you're going to be using the heat more, in summer you're going to be using the air conditioning more, they still allowed for certain payment plans to be able to budget it a little bit better and keep that same dollar amount month to month.

Deb Meyer (06:58.406)

But you'd have to inquire directly with the utility company on something like that. With discretionary expenses, the key difference is there that you're in control of that. You get to decide how much you want to spend on dining out or entertainment or if you're a parent, kids camps. Any kid-related expenses that aren't just basic needs like food, clothing, shelter, things like that.

People with more disposable income, higher income that feel like they want to give their kids every little luxury and that's great if they have room in their budget for it. But trying to come up with a kind of month-to-month budget that you can follow is helpful with this envelope system to say, okay, at most I'm gonna spend $100 on this discretionary category. And if I...

go over that hundred, I have to take it from one of the other discretionary envelopes. I'm not going to go in the red and have to borrow from a savings account or something like that. Travel would be another example of a discretionary expense. So some people spend a modest amount on travel and others are taking big international trips. Again, it just depends. For someone using an envelope budget, that's going to likely be a smaller portion.

Perhaps with that one, it'd be better to automate that into a savings account instead of having it month to month because most travel expenses don't happen monthly. You might have two trips a year. And so you're just naturally putting a set amount each month aside for those travel expenses. One of the things I want to point out in this envelope system too, is that I have a 14-year-old and I'm trying to teach him good budgeting habits.

Right now he has a debit card linked to his bank account and one of the things we found recently was he had signed up for some recurring subscriptions on Amazon. Amazon Prime and then I think he also somehow signed up for an Audible trial that turned into a subscription even though he never listens to books.

Deb Meyer (09:19.394)

Just as an example, if you're a parent trying to help your kid establish good money habits, be careful to monitor those accounts that they have linked to their debit card because it really can add up with the recurring charges. And again, that's another reason why I think this envelope system could be a little bit better. And it's something I might consider moving him towards instead of just having the online and debit card.

I don't have the statistic in front of me, but I know with credit cards, you end up spending a lot more when you're using a credit card, unless you're the type of person who pays it off in full each month and gets reward points or something like that. If you're just making the minimum payments and things like that, you're more apt to spend more when you're using a card rather than taking out physical cash. So that's why this envelope budget can be really helpful if you're having trouble sticking to a budget or if you're new to budgeting.

In either of those scenarios, the envelope budget is a good one for you to consider. And then one other thing I'll mention with the envelope budget is just to focus on automating any savings. The goal would be above and beyond if you're contributing to a retirement account at work, you want to be able to save some additional funds either in a liquid cash emergency fund or what I like to sometimes call an opportunity fund.

Or you could also be putting that towards a different savings goal. But the key in any of this is to think about the paycheck coming in and making sure after that paycheck comes in, that you're allocating money to these envelopes for the expenses, but also trying to shift a certain dollar amount that you know is going to go into savings each month. Only you can decide what that dollar amount is going to be, based on your particular living expenses.

Okay, let's take a quick break. One thing I want to emphasize is just how much I appreciate you listening to this podcast. I hope you're getting a lot out of it. And I want to stress that it's a new podcast. Any listeners that are tuning in today, I encourage you to leave a rating or review if you're enjoying it and you haven't already left that.

Deb Meyer (11:42.166)

Also, if you find any particular episode beneficial, please share it with a friend or a family member or if you're finding them all beneficial, go ahead, share broadly with friends and family members. This is a labor of love. It's something that has been on my heart for a long time. I have shared with some personal friends and family members that I had the idea for this podcast back in…

I guess it was May of 2022. And I'm here recording in the new year of 2024. But yeah, I didn't launch it until November of 2023. It took a long time for this to come to fruition. And it's something that I genuinely hope will benefit a lot of people. I have been a long-time financial planner and CPA and just trying to...

help with education and putting some good information out there. Any sharing, ratings, reviews are all really appreciated.

OK, let's shift gears and talk about the detailed budget. From a detailed budget perspective, I have a really good article on my website, and I will include all the links in the show notes.

This particular one is going to be a little bit more complicated to explain. So if you're listening to this in the car or working out whatever the case may be, you might want to pause it and relisten at a time where you could jot down some notes or read through the article in more detail. But there are five parts to this more detailed budget and it's something I keep in Excel. I know there are other budgeting tools out there that...

are good from a tracking perspective. And I mentioned Monarch Money in a prior episode, just briefly. That could be an option if you want to look at it from an online perspective and get a good budgeting framework. But this is an alternative that you could produce on your own in Excel. And one of the other things, I already have a template for you on the website: worthynest.com/resources.

Deb Meyer (13:57.162)

You'll see two different Excel templates, one for married couples and one for single persons. And yeah, so it has all of these categories already populated for you. All right, Part One would be the recurring income, a gross income. Let's just say your salary is $100,000. You can put that in as your recurring gross income.

Now I know that gets a little bit tricky for some families. Let's just say you have a bonus potential at the end of each year, and that's technically part of your gross income. I don't always like to count on that unless you know that's something reasonable to assume year after year. If it's something based on the company's performance that you're working for, or let's say you're an entrepreneur and you have these goals for what you could do in your business, but you're not quite sure if you're gonna reach them or not.

I wouldn't count on any of those kind of extra funds within your budget. If you happen to have those extra funds, that's great. You can put that towards a different savings goal when the time comes and it's actually paid out or use it to pay off debt, whatever the case may be. But for most families, it's good to really focus on the core salary or income that you know is a reasonable prediction of what you can get.

In my personal situation, my husband's compensation is largely bonuses, just because he has a lower base salary. So with him, when we budget, we figure in some of those bonuses because he's been doing this for several years and we have a good idea of what that recurring number looks like. But if we weren't sure about it or the economy was looking scary in terms of his earnings potential, we would definitely look to do the lower numbers and be conservative in our budgeting as well.

Okay, let's move on to Part Two, which is the fixed expenses or required expenses. As I shared in the envelope budget section, a lot of these expenses you know are going to happen with regularity. They're set dollar amounts or if they're not set dollar amounts like utilities, you can reasonably predict and you know month after month they're going to be due.

Deb Meyer (16:25.082)

There's no getting around them. For some families, an insurance bill might come up once a year. You might want to look into a payment plan where you can spread out those payments throughout the entire year. Let's say you have life insurance, but the premium is $800 for the year. Again, you may want to contact that insurance company and see “OK, is there a way I can split up that $800 annually into incremental monthly payments?”

Deb Meyer (17:07.55)

The insurance is one piece. Private school tuition would be another example of one you might want to consider for payment plans. I think at least for the private Catholic schools, they use what's called FACTS, F-A-C-T-S. There is a small administrative fee to use these services, but again, it's usually not that much relative to the cost of what you're paying.

So if you're looking at a, you know, $6,000 or $7,000 a year bill, being able to split that up into incremental payments can be helpful from a budgeting perspective unless you happen to already have the savings readily available. Typically if they're giving discounts on paying in full or paying in advance, it's not that much, especially at some of these private Catholic schools.

Again, be cognizant of fees, but understand that some of these bills you can negotiate so you can pay them in more, you know, a more regular cadence, whether it's monthly or quarterly. And then the goal with fixed expenses, I didn't mention this earlier, but it's an important rule of thumb to consider would be no more than 50% of your gross income goes towards fixed expenses.

That includes your mortgage, that includes any car payments, it includes utilities, insurance bills, anything that you know with reasonable certainty, you're going to have to pay month in, month out. Try to keep that at 50% or lower of your gross income. And then Part Three is discretionary expenses. That is going to be very specific to you and your family.

If you like to travel a lot, your travel line items can be a little bit higher than someone who doesn't put as high a priority on travel. For charitable giving, I have a lot of clients that put that in the discretionary line item, but for some, if they're really serious about tithing and giving 10% of their income they might move it to that fixed income or that fixed expense section Part Two. The goal with Part Three or discretionary expenses would be to aim for no more than 30% of your gross income in these areas.

Deb Meyer (19:26.802)

If you think about food, groceries, dining out, all of those things, if you separate groceries because that's more of a necessity and you can save some money on groceries versus going out to eat, you could divide them up into two different sections. But at least for the purposes of the template I have online, I do include food as both groceries and dining out all in discretionary sections.

And this is where I find most of my (at least the clients that I work with) struggle the most … where we might not get into an expensive mortgage or house payment, but when you look at all of the different discretionary expenses associated with the family, it's challenging to stay in that 30% of income or under.

All right, Part Four is payroll deductions and annual expenses. This is the section where you'd include health, dental, and vision insurance. Those are all automatic deductions if you're employed by a traditional employer. Employer-sponsored retirement contributions. Let's say you're contributing 6% to your retirement plan because you get a nice little employer match. That's where I would put this in Part Four.

And then I also kind of think through any annual expenses that might not be covered in the fixed or discretionary sections, Part Two or Part Three. Let's just say your neighborhood charges an annual assessment of $200 to keep the grounds looking nice. That's where this dollar amount could go. Or let's say you pay personal property tax of $500 a year on your car.

That's where this would go. You want to be able to include it, but it's a bill that only comes once a year and you don't have the option of paying it in increments at a different time. In the state of Florida, most of the communities have ongoing HOA fees. So those are more of a recurring expense and those can get figured into the fixed expense section. But for families in Missouri, most of the neighborhoods do not have big HOAs. They just have a once-a-year assessment for their neighborhood. That's where this Part Four would come into play.

Deb Meyer (21:49.51)

And then the other piece you want to kind of think through is income tax. On the detailed budget, I have it very intentionally looking at the annual numbers first and then trying to figure out on a monthly basis what that equates to. Divide those annual numbers by 12, at least from a gross income perspective, because people can get paid on different dates.

Some employers choose to pay on a bi-weekly schedule, so you get a total of 26 payments a year. One month you might have three paychecks, but another month you only have two paychecks, so they don't end up being exact monthly amounts that you can count on. Being able to budget on more of an annual basis helps you fill in some of those bigger dollar amounts on the income side and the income tax side.

And then with the fixed and discretionary expenses, you might only know them in terms of what you would spend monthly. And then you're multiplying that number by 12 to come up with the annual column. Again, the template is really helpful if you download that from the website. It's going to walk you through it and it's completely free to download.

OK, income tax. One last point on that is, if you have similar income year after year, usually you can look at your prior year's tax return and get a reasonable estimate of what that income tax looks like. If you had a substantial refund or a substantial amount you had to pay, you know that the withholding that you're doing from your job either isn't covering enough or it's too much withholding and you need to scale that back.

So, being able to look through your prior year’s tax return and see if there's, and when I say substantial, I would say at least a $3,000 per year difference. Either it's a $3,000 refund or overpayment OR a $3,000 underpayment. There could be something mixed up there in terms of what your withholding is relative to the actual taxes.

Deb Meyer (24:08.522)

Now with self-employed or entrepreneurs, it's gonna be a lot more tricky to figure out. And that's why most entrepreneurs or self-employed people hire a CPA or other tax advisor who can not only prepare their annual income tax returns but also prepare projections and monitor the estimated taxes for them. If you're in a traditional W-2 role and not an entrepreneur, you usually self-prepare and can work off of your prior year's tax return.

But if you're in a more complicated tax situation, like an entrepreneur or self-employed person, usually you want to pay that extra money to get a professional tax advisor who's going to accurately predict it, not only for prior year, but project it out for the current tax year and give you a better understanding of what to expect throughout the year. All right, that brings us to Part Five, the surplus, if any.

So after you fill out all of this, you have your income in Section One, you have different expenses and retirement savings in Sections Two, Three, and Four. And then anything that's left over would be additional savings that you could consider. If you do have a surplus, that means extra money. That's where it could be helpful to talk to a financial advisor, especially a fiduciary one that's going to work in your best interest and help produce a plan on where to best save that extra money.

If you are not in a surplus situation, if you're finding that you're in the negative in Part Five, then it's going back to the drawing board and saying, “okay, are there any expenses that I can decrease or reallocate?” If it's, you know, right now your car payment is $500 a month, “could I get into a car that's only $300 a month?” Something like that. S

Just brainstorm different ways that you might be able to lower those financial obligations. And then with Part Five, if you find yourself in a negative situation, maybe it's a matter of increasing your income, taking a side job, or trying to produce a side business that you know could be profitable fairly quickly. Those are examples of things that you could do to increase your income.

The only hardship if you're increasing the income is you are going to pay more in tax on that and trying to figure that into the calculation can be a bit more difficult. Don't always assume every dollar that you earn in a side hustle is going to go directly to offset the expenses you have to reserve for taxes.

Okay, I hope you have a wonderful day. Thanks so much for joining.

Deb MeyerWorthyNest LLCfamily finance, beyond budgets, family budgeting, financial future, spending plan, wealth-building strategy, fiscal responsibility, detailed budget, budgeting methods, envelope budget, fixed expenses, financial clarity, financial independence, budgeting templates, financial planning, income estimates, payment plans, recurring income, financial control, quality of life, financial pattersComment