The number one obstacle to financial freedom is not knowing your own balance sheet. Yes, I’m talking about creating a budget.
Only one in three Americans create a detailed budget.
This means tallying up all your income sources and all of your expenses. Yes, every last cent you spend. Without doing this, how would you know whether you are living beneath your means?
And if you are living above your means, how could you ever climb out of debt or save money?
And if you stay in bad debt forever you will never build wealth. And if you never built wealth you will be working paycheck to paycheck for your entire life until you die.
There is a tendency to sweep our financial truth under the rug. I’ve been there. When you are scared to open your mobile banking app on account of what you’ll find.
When you feel anxiety about your credit card balance but you never check what it is because you know it’ll just compound your anxiety. You try to ignore it. But it eats away at you. It affects your sleep quality.
There is always a small sense that something isn’t quite right, even when you’re trying to enjoy yourself. This feeling comes from not having a complete picture of your financial health.
I am of the opinion that the truth will set you free. Even if your financial situation is dire, ignorance is not bliss. Staring the cold, hard, mathematical facts in the face will always be less anxiety-provoking than having only a vague idea of how screwed you really are.
This is because with knowledge comes the possibility of action.
When you tally up your income and expenses, as well as your debts and assets, you can do one of two things if you aren’t happy with the situation. You can earn more money or you can spend less money. Arguably, both are usually good options.
Now, after creating a budget there is plenty of debate in the personal finance world about just how “frugal” one needs to be when you find yourself in these kind of come-to-Jesus moments.
If you are the Dave Ramsey kind of financial guru, your advice will be to be “gazelle intense” and live on “beans and rice” until you dig yourself out of your hole.
The idea is to, as he says, “Live Like No One Else So You Can Live Like No One Else.” In other words, be extremely aggressive in tackling your debt and you will eventually be in a position to succeed financially.
Depending on your income levels and how much debt you’re in, this could amount to very spartan lifestyles. And let’s face it, few people have the bodybuilder-like discipline to be able to truly eat just a beans and rice-style diet for years at a time without occasional splurges.
Indeed, many financial gurus opposite of Dave Ramsey on the personal finance spectrum argue that getting out of debt doesn’t have to come at the expense of any and all personal luxury and happiness.
They will argue that it’s OK to splurge on that Starbucks latte or Nintendo Switch if it brings you happiness and that happiness gives you the mental boost needed to continue working your shitty job and tackling debt. It’s all about moderation.
However, it is my opinion that sometimes moderation needs to be moderated. In other words, if you have the stomach for it, being “gazelle intense” about cleaning up your financial mess can be extremely worth it. And it doesn’t even have to be at the expense of happiness.
There are some folks such as myself that are happy to be “gazelle intense.”
It makes me extremely happy to make financial sacrifices for the sake of improving my financial situation. This is because I would make a distinction between short-term happiness and long-term satisfaction. While it might not always be fun in the moment to be extremely frugal, it is indeed very satisfying to me.
Your mileage may vary of course. And ultimately this is why personal finance is called personal finance. It’s because the rationality of our choices depends on our values.
If your highest value is getting out of debt as fast as possible, then the best way to maximise your happiness it to live on the beans and rice diet and budget intensely.
However, if your highest set of values include the occasional splurge on Starbucks, then the rational happiness-maximising thing to do is make that splurge. It’s all relative to values, which are relative to individuals.
I am a value nihilist insofar as I do not believe values are objective and relative to an absolute universal rule book. There is no way to “prove” that my values are less true or less rational than your values.
Many people associated budgets with the opposite of freedom. They think of the word “budget” and imagine it means the opposite of “fun.”
But that’s not true at all. Creating a budget is really just a systematic way to put your dollars towards your values. If you value fun more than anything else, then your budget can reflect that. If you value saving for retirement more than anything else, your budget can reflect that.
That’s why the whole debate about Dave Ramsey strikes me as pointless. There are some people who share Dave’s values. I share many of his financial values (but not all – I disagree with him on a lot of points, but that’s another post), and thus being “gazelle intense” is the best way maximise my happiness.
But If your entire financial value system is opposite of Dave, then lesser forms of intensity are perfectly rational for you.
However, I still maintain that performing the exercise of laying out all your income and expenses is useful regardless of your financial values. That is, unless for some strange reason you value being ignorant of your financial well-being. But I suspect those folks are few and a far between and that for almost everyone, their anxiety would be lessened by getting a clear sense of things by creating a budget.
Now, there are many different approaches to budgeting. Personally, I am a long-time fan of zero based budgeting, otherwise known as the “envelope system.”
The hands down best software for creating a budget is YNAB(You Need a Budget). Yes, you need a budget. Everyone does. I’ll be talking about how I use YNAB in great detail, but that’s for another post.