I know we all probably know about budgeting. Even though you may have a budget, do you keep track of your spending? If not you should. I am going to tell you why today.

Let’s get started!

Reason #1: It builds discipline and organizational skills.

When you have and follow a budget, it teaches you these skills. It teaches you discipline with your spending. Also, keeping track of your spending helps you learn organizational skills. These two are key to maintaining your financial health. Keeping track of your spending gives you the data you need to keep your finances on track. With the organizational skills, you’ll be able to keep this up to date. Think of it like balancing your checkbook.

Reason #2: Forces you to think about money.

This is one of the benefits of a budget. You see everywhere your money is going. Seeing where your money goes you can start cutting out unnecessary spending and start focusing more on generating wealth. The more you save the more you can invest.

Reason #3: Prevents crisis.

Checking your finances regularly you will be able to see trends. There are good trends and there are bad trends. The bad trends are the ones you want to stop as soon as you spot them. If you can spot them early, you will be able to prevent a financial crisis before it begins.

Reason #4: It’s a tool for family discussion.

Talking about money can be difficult. A way to make it easier is to get your family involved in budgeting. You can have everyone involved in expense tracking. This makes it to where everyone can talk about money and where it’s going. Laying out the facts about money matters is a great thing.

Reason #5: It’s a perfect way to measure your progress.

The main goal of a budget is to reduce your spending. If you don’t keep track of your spending, it makes this task almost impossible. Tracking your budget is a requirement if you are trying to become more efficient at saving money. 

Reason #6: Knowledge is power.

If you are budgeting correctly, you will be able to see how much money you will need on a monthly basis. This enables you to be able to plan for an emergency fund. Once you feel you have enough money there, you can start planning for investing or creating a retirement fund. 

Reason #7: Stress Relief.

Knowing you’re in a good financial spot is stress relief. You don’t have to worry about being able to pay your bills. You know you have savings if something bad happens. You can be preparing for retirement or even your kid’s first car. As you can see budgeting can save you a bunch of worries.

There you go. My top reasons why you should track a budget. I hope this helps out and saves you money. It should save you some gray hair also. ‘Till next time!

Today, we are going to talk about mental money traps. What is a mental money trap? We are going to talk about these today.

Let’s get started.

#1: Outsmarting the Anchor-Price Comparison Trap

Have you ever bought a used car? Did it have a relatively high price? The purpose of this high price is so that you will remember it. At this point, you will decide whether it’s a good deal or not. The habit of using the first price you see as the basis of your spending is called an anchor price trap. It’s a mental wiring issue we create for ourselves. You can beat it though. This is how to do so.

Beware this trap exists.

The first step to overcome this is to be aware that it exists. We create price points for everything mentally. Knowing how our minds work, makes it easier to be prepared for this. The next time you are tempted to compare prices based on these anchors, you will be ready.

Hesitate before snatching up a “Good Deal”.

I am sure you have fallen for this trap once or twice in your life. If you have, you may have felt buyers remorse. Save yourself some time, money, and guilt. Think about these “good deals”. Giving yourself time to reflect on major purchases.

A good example of this would be buying a home. Before you jump on a $400,000 home, make sure the price is worth it. Maybe 5 miles down the road there may be one as nice and large down the road for $200,000. So before you make that purchase, think, and do some research.

Is it still worth it after you filter out the anchor price?

All too often you will see something advertised for a discount.  Your mentality is that it’s a bargain. It may seem like a deal, but is it really? Filter out the regular price. Then look at the item and ask yourself if it still is a good deal. This will help you more realistically evaluate the value. 

#2: Comparing Dollars to Doughnuts

Dollars to doughnuts was a phrase created to say something is a safe bet. Dollars have value. Doughnuts have none.

Imagine buying a pair of shoes. They normally cost $150 dollars. They are being advertised for 50% off. Would you go out of your way to buy this item? Let’s compare this to going to buy a bedroom suite at $2000. The price of the suite is dropped down to $1925. What would you think the better deal is?

You are saving $75 dollars either way.  Yet, the first is 50% and the second is under 4%. 50% is a better deal in most people’s eyes. That’s why saving smaller amounts on larger purchases sometimes doesn’t seem worth it. Saving money is saving money. That extra money could be invested regardless of the purchase.

A dollar is a dollar!

Saving a dollar is saving a dollar. Regardless of if it is at the grocery store or your mortgage. Keep this in mind. This is an effective view in all areas of your finances. A discount is a discount regardless. 

Picture your savings as cash in your pocket!

When you make a purchase at a lower price, sometimes you view it as a lower set price. Instead of viewing it that way, view it as you are saving money. Next time you make a purchase, take the difference of the full price and set it aside in a savings account.

#3 The Sunk Cost Mentality

Have you ever purchased something and thought about it being a waste of money? What about a vehicle you have that has constant problems yet you refuse to give up on it? This is referred to as “ The Sunk Cost Mentality”.

Why do we refuse to count our losses and move on? There are a couple of reasons for this. Most of us have a feeling of hate towards loss. The thought of losing money sometimes overpowers all thoughts and reasoning. The other reason is the more we invest in something the harder it is for us to understand it as a loss. Like the car for example. You invest your time and money into it. The problems though keep adding up. Instead of taking the money, you may spend on fixing it, you could use it as a downpayment on a new vehicle. But, since you may have a ton of money and time invested in it you are attached. I mean don’t get me wrong. You want to get any return on any investment. You need to figure out when your investment becomes a sinking boat.

There are a couple of ways to fight the sunk cost fallacy. The first is money spent in the past no longer matters when making financial decisions today. Imagine your car and what you paid for it. Now think about the value of it today? Now think about if someone gave you the car for free? Is it still worth it to put money into keeping it running?

The second one is to use the concept of stop-loss to cut emotion out of your decisions.  Most stockbrokers have a set price that they are supposed to sell at if the market takes a dive. This is their stop-loss threshold. This is to prevent losses with minimal management. You can do this with anything. Your car is a good example. You can set a limit on how much you plan to spend on repairs. Sometimes buying a newer car is cheaper in the long run.

#4 Mental Accounting

Have you ever received an unexpected amount of cash? This could be lottery winnings, tax returns, or an inheritance. I don’t know about you, but sometimes it’s easy to view it and treat it differently than your normal income. Instead of viewing it as how it can fit into your budget, you think instead of what you can buy. Financial Psychologists call this behavior mental accounting.

What this means is we attend to assign different values to different money sources. We base these values on how that money is earned. Money that is gifted we view as a different source of income mentally. It doesn’t seem like our money. It’s easier to spend gifted money compared to your paycheck. 

There is nothing wrong with spending a little bit of settlement or bonus. Having this extra money can also have you make poor decisions. Don’t spend this money on something such as a new car that you wouldn’t be able to afford otherwise. This will add more expenses to your monthly budget. 

The other side of the coin is safeguarding this money too much. You may be afraid to use this money for normal budgeting purposes. You may also not invest it or have it sit in your savings account. Doing this you may miss out on making your money grow. You can’t make your money grow if it just sits.

The way to fix this mentality is to change the way you view your income. You need to view all sources of income (gifted or not) as “your money”. It doesn’t matter about the source, all sources are equal. Use all your money as it all comes from the same source. Don’t let this stop you from investing or saving for your retirement. 

#5 Falling for Bundles

Everyone loves a good deal. Bundle deals always seem the best. It can be your cable provider or a combo meal at your favorite restaurant also. Even though you may feel like you are getting a special deal, these can be money pits. You are inadvertently spending extra money on things you do not need or want.

Think about the last time you got cable. You need the internet. Your internet costs $60. They then tie in cable and a telephone to your bill as a bundle. You may get talked into it like it’s a good deal. They use the idea of you saving $50 for the bundle which now costs $100. Some people may actually use everything in a bundle. Some people don’t and this is where the issue lies. You may not need a home phone because you use your cellphone. How much TV do you actually watch? I don’t watch TV period because you can stream the channels you want through the internet or Roku. The cable company is getting an extra $40 dollars from you for something you may not use.

As you can see bundles can save you a little bit of money. The average savings is around 5%. Saving is saving though. This is where companies get you. Most of the time you are paying almost as much for each item that’s bundled. They get you because mentally you think you are saving money and that the value is there. The real value of the bundle system is convenience. 

We are more willing to pay for convenience. Like my cable analogy, it is easier to go ahead and pay for the convenience and get it all then. You may not use the actual cable till it’s football season. Yet it may be easier to go ahead and get it than waiting to get it hooked up at a later time. Same thing with the phone line. You may not need it at that time, but you may be opening a business at some point. No one wants to use their personal cell phone for these calls. It also may be cheaper than getting another line added to your plan. It would be easier to have than spending time at a cell store or waiting for them to come and hook up a landline. 

Next time you are considering a bundle, review each item separately. Ask yourself a couple of questions. Are you buying the bundle for convenience? Would you still buy each of the items individually? Remember you may be paying for full price for something you don’t need. You will save money in doing so. Because the bundle seems like a good deal, it doesn’t mean it is.

There you go. 5 money mental traps that we fall into and how to fight them. I hope this was helpful. Be prepared and mindful of these and you will save time and money. I hope this was helpful. ‘Till next time.

You may be new to the world of finances. Maybe you are already doing well and have a great plan saved up. Regardless of which one of these people you are, there are always ways to optimize your finances. If you are new to setting up a financial plan, these are some good starting points as well. What are they you ask? You are about to find out. 

Let’s get started!

Choose The Most Efficient and Effective Ways to Repay Debt 

If you have debt, you need a plan to repay it. I know the idea is simple. Yet, you will be surprised how many people do not actually put the ideas down on paper. If you don’t have a plan, you can’t formulate a game plan to tackle this.

Once you have a plan, it’s time to organize your debt. You want to organize your debt by interest rates. You want to list it from the highest to the lowest. You want to make sure you are still paying the minimum on all of your debts. At the same time, you are paying more on the highest.

Keep doing the same thing till you knock them off one by one. Once you get to the lowest ones, you will need to form a new plan. You want to leverage these instead of paying them off.

Let’s say your last thing is your student loan. Instead of paying it off quickly, use the money you are saving from your cash flow, and invest it in an asset. This could be a 401k, stocks, bonds, or ETFs. You are saving money and making money all at the same time.

Evaluate How to Save for The Future

Retirement is something that needs to save for. The sooner you start the cheaper it is in the long run. You might be wondering how you do this.

If you work for a company that offers a retirement package, contribute enough money for an employer match. At this point, your company will be matching every dollar you put in. There is such a thing as free money in this case.

If your employer doesn’t have a retirement package to invest in you can go another route. Take it upon yourself to invest in an IRA account. There are multiple types. There are Roth, Traditional, Sep, or Simple. You can also invest in a 401k.

Regardless of which route you go, try and max out the monthly payments. Remember the more you invest, the more you will have to retire!

Focus on Growing Wealth

You have worked on repaying your date. You have set up a retirement plan. Now you need to figure out how to gain additional cash flow you can use for the rest of your life. You do this by investing.

Start off by opening up a brokerage account. You will buy low-cost index funds. You will buy them and hold on to them. These types of accounts allow you the flexibility of how and when you use your money.

The best thing to do is to get a diversified portfolio. These can be risk-adjusted for your needs. Make sure to spread your investments around.

Once you get something set up. You can optimize your portfolio with certain strategies. These few strategies will help you grow your investment. It also lowers the risk involved

Invest in tax-efficient vehicles to optimize after-tax returns. 

You need to rebalance your investments every one in a while. Make sure to consider your taxes when doing this.

Use tax-loss harvesting when appropriate.

Consider how certain style boxes or asset classes could better align your portfolio and your goals.

As you can see the object here is to reduce taxes while keeping most of your money. You do not want to ignore the tax implications of your investments. Hopefully, you will be making some larger and higher-level buys and moves after a bit.

There you have it. You should be able to start formulating a plan. You’ll be able to start getting out of debt, planning your retirement, and making money. Not a bad deal. I hope this has given you some insight and helps you out. ‘Till next time!

Do you have trouble budgeting? Have you tried going back to spending cash? There is a method you may not have heard of. The Cash Envelope System. This method was popularized by the financial guru Dave Ramsey. You rely on spending physical cash that you have saved away in pre-paid envelopes for everything besides your fixed expenses. 

Today I am going to be discussing how to do this. Let’s get started!

How the System Works

Step 1:Determine How to Allocate Your Money

The first thing is you are going to need to create a budget. You need to figure out how much money you have to spend each month. There are a couple of ways to do this.

The 50/30/20 method is a solid one. You designate 50% of your income for essential. This is your bills and groceries. 30%  of your income is going to your personal self. This is for fun. 20% of your income is going to investments.

The 60% method is the next one. This is where you allocate 60% of your income to expenses you are already committed to.  This includes your necessities and everything that is most important to you. The other 40% is for whatever you want.

The final method is called Zero-Based Budgeting. This where you assign a spending limit to all your budget categories. The object here is to account for every dollar. You will subtract your income from your spending and investments, and should end up with $0 at the end of every month.

Step 2: Label Your Envelopes

Now that you have set up your budget plan, it’s time to grab a stack of envelopes. You will label each one with a spending category. These will vary depending on the categories you have set up in your budget. Color code them to make them distinguishable from each other. Here are some examples of the types of categories:

• – Groceries
• – Restaurants/bars
• – Household supplies
• – Toiletries
• – Doctor’s office copays
• – Medication/vitamins
• – Pet care
• – Gas
• – Ride sharing
• – Clothing
• – Hair care
• – Entertainment
• – Gifts

Make sure to have one for miscellaneous spending. This will be your emergency fund. In case something comes up, you will have this one to back you up.

Step 3: Distribute the Cash

Now that you have your envelopes filled out, it’s time to fill them. Every time you get paid, go take out the cash from your bank. If you get paid once a month, go ahead and fill your envelopes for the full amount. If you get paid twice a month, you’ll do half. If you get paid weekly, you’ll do a quarter. 

The big key here is once the envelope is empty, you are done. Do not cheat. Also no grabbing money from other envelopes. That would defeat the purpose. You will need to practice restraint. It’s actually easier than you think.

Pro’s of Envelope Spending

You will start thinking twice about your spending. Since you are physically touching the money and seeing where it is going, you will be more mindful. Swiping your card for everything is easier, but there is no feeling of loss. When you break a hundred dollar bill there is that little sting.

One of my favorites is there are no overdraft fees. If you are like me, you probably keep your money in a bank. You may have overextended your budget, and went negative. On top of that, you get hit with that $35 dollar overdraft fee. With the envelopes that is a thing of the past.

Curves your appetite to order online. If you don’t have the money in your bank account, you can’t buy. This will prohibit all impulse buys. You can make and envelope for something specific you have in mind. Once you have it saved, you can put it in your account. Then you can buy it online.

Cons of Envelope Spending

You may miss out on credit card awards. The way to fix this is by using your credit card on your fixed expenses. You are going to pay these anyways so go ahead and use your card to pay for them. Then pay your bill all at once. You get the rewards and still pay your bills.

Some restaurants and stores are going cash-free. There are a couple of solutions to this. Like I stated above. You can deposit the money in your account and then go to these places.  Or you can find places like farmers’ markets and street vendors that do take cash. You may have to do some research but there are solutions. 

You are budgeting for more than one person. Managing this system with joint expenses may be a little more complicated. Get with your other person and work this out. You can split the costs or organize it where you both have your own envelopes for certain things. It just takes some planning. You can split your purchases into individual purchases.

It can be a safety risk. Carrying around large amounts of cash can put you at risk. I mean if someone sees you with large amounts of cash they might get some funny ideas. To remedy this situation, just take the amount you plan to spend. If you are going to the store no reason to take your restaurant and vacation money with you. Only take what you need.

Envelope System Pro-Tips

Track every purchase on the envelope. This will help you be more mindful of your spending. When you see where you spend your money, you will be able to see things you may decide you don’t need. Extra money means more savings.

Get envelopes that are made for this. There are companies that make them just for this. They are made for keeping track of your purchases and color-coded for personal organization.

There you go. It’s a simple system that can save you from yourself. Grab some envelopes and get started today. ‘Til next time.