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Personal Finance: you can learn to build your financial security

This Personal Finance learning page has 3 resources. 1. A Budget Planner to create a suggested monthly budget based on your income. 2. A Budget Basics section to learn how to use your budget to build your financial security over time. 3. A Recommended Reading section for further learning.

Budget Planner Tool

Budget Basics

First let's deal with some misconceptions about why we want to live on a budget.

Have you ever heard someone say "I can't go out this weekend, I'm on a budget"? The vibe is "we have to live on a budget when we're broke" as if budgets are a sign of poverty or a sign that we're "bad with money" and doomed to be financially insecure for life. Another similar notion: "If I had money I wouldn't need to worry about a budget." These notions are absolutely false.

The purpose of having a budget: Living on a budget helps you grow and preserve your wealth and financial security. What do we mean when we say "wealth and financial security"? This:

  • Having money sufficient for the increasing expenses of your life, while also
  • Having increasing amounts of savings and investments which give you financial security and options.

Why you need options

  • Options for jumping on the opportunities that come your way: opportunities to start a family, adopt a pet, start a business, invest in a project or startup, take time off and travel the world etc.
  • Options for dealing with foreseeable future needs: saving up for a downpayment to buy a house, saving up for kids college, saving for retirement. These are needs that most people will need to save up for.
  • Options for dealing with unexpected needs and emergencies of life (which will come in all sorts of shapes and sizes, big and small).
  • Options for avoiding or reducing debt.
  • Options for responding to the needs of others with generosity, and for supporting the causes that matter to you.

If you don't live on a budget you won't have good options (or any options) for any of these...for example having the option to retire vs not. Budgets allow you to save up systematically over time and have options for how you address the opportunities and needs of life.

So we live on a budget not because it's a punishment or 'because we're poor' but rather because we are building and preserving our wealth.

We want to live on a budget because it improves our financial position and options day after day, month after month. Over time this makes a huge difference for you and those you care for.

How much $$ you have right now doesn't matter

You may be thinking "What's all this talk about wealth and financial security??? I don't have either and probably never will."

There is a future version of you that does and another future version of you that does not. Every day, including right now, is a chance to decide which version you'll create. A budget is a simple plan for getting to the future version of you that has wealth and knows how to keep growing it.

Where you start financially is not an indicator of where you have to end up. What matters is learning how to use a budget to build and preserve your wealth.

The good news is, there are clear ways to do this, and you can find the approach that works best for your situation.

Formulas you can use to plan out your own budget

Many financial advisors like the 50/30/20 rule, a simple formula introduced by Sen. Elizabeth Warren back in 2006:

  • 50% of your income goes to needs: rent or house payment, transportation, groceries...bills you must pay every month.
  • 20% goes to savings and investments.
  • 30% goes to wants: discretionary expenses...entertainment, eating out, clothes, streaming subscriptions etc. Discretionary just means purchases you could decide to go without or delay if you needed to.

The 50/30/20 rule is a good general target, but each individual situation is different. Other options might work better for some situations:

  • The 80/20 rule: put 20% of your incoming into savings, then use the remaining 80% for bills and living expenses, entertainment etc. This is sometimes referred to as the "pay yourself first rule" - before paying bills or buying discretionary items, put 20% (or whatever portion you can) aside into savings and investments.
  • The 60/30/10 rule: This might be a more practical option for young adults earning entry level wages, or for anyone living in an expensive city. This modified approach allocates 60% to needs, 30% for wants and 10% for savings. You could also try 60/20/20 if you wanted to have more going to savings BUT, keep in mind that the 20% or 30% allocation for "discretionary" also likely includes the costs of your social life and key relationships which is important too. Going to a movie or concert with friends, taking a significant other to dinner, buying a gift for someone - these activities all cost money, but they are a very important part of your connectedness and well being.

The bottom line is to find a method that helps you be intentional about what you are spending and what you are saving. What you save up and invest over time makes a very big difference in your future options and financial security.

Suggested assignment: read these and look at the common themes in the advice they share.

Opinions expressed are those of the individuals and do not reflect the official positions of companies or organizations those individuals may be affiliated with. Not financial, investment or legal advice, and no offers for securities or investment opportunities are intended. Mentions should not be construed as endorsements. Authors or guests may hold assets discussed or may have interests in companies mentioned.