There are very few people who love a good budget more than our host Eric Rosenberg. Sydney and Eric talk about how to simplify the idea of a budget to make it less scary, how often we should be thinking about budgeting, and more. Payactiv’s free financial toolkit helps you get smart insights into your spending and flags what’s safe to spend and put away. Payactiv also offers free 1:1 financial counseling sessions in the Payactiv app. 

Without further ado, let’s talk about how to love your budget.  

Eric Rosenberg:

Hi, I’m your host, Eric Rosenberg. I’m a personal finance expert and I have my own blog and podcast at personalprofitability.com. As a quick heads up, I am not a registered financial advisor and this podcast is for informational purposes only.

Eric Rosenberg:

Hello, everyone. Welcome back to the Payactiv podcast. As always, I am your host, Eric Rosenberg. And I am so excited that we have my buddy, Sydney from the Payactiv team back on with us. If you remember, she was with us a few episodes ago where we talked about credit cards and credit scores. And she has a whole bunch of questions today, all about budgeting, which is one of the most important financial skills we could possibly have. I love budgeting, and we’re going to learn exactly why in this chat with Sydney. So without any further ado, let’s dive in.

Eric Rosenberg:

Yeah, I know you had a whole bunch of questions about budgeting, and I love budgeting. Some people think it’s boring and restrictive, but I truly love budgeting. I know I’m kind of a money weirdo, which is why I’m here talking about money on a podcast all the time. Let’s have some non-money weirdo questions, and I’ll turn the host microphone over to you and let you take it away from here. How does that sound?

Sydney:

That sounds awesome. Thanks, Eric. This whole topic is one that personally I’ve found kind of challenging ever since I turned 18 and trying to figure out how to make my finances work for me instead of against me. Budgeting, that term pops up a lot. Try a budget. Do this budget. Here’s a free budget template. And it’s just such an interesting topic to talk about from just a personal finance perspective. How do you think about budgeting on a very simple level? How do you explain budgeting to a kid? Do you even use the word budget? How do you think about it on that very basic level?

Eric Rosenberg:

Yeah. That’s a great way to start. I think about a budget as more of a spending plan, because people sometimes think about budget as a scary word. I actually think back to a girlfriend I had in college. And one time we talked about how much money we spent on different things because I was a finance major, so of course I was thinking about all that kind of stuff. And when I brought up how much she might be spending on books and movies, she actually started crying. And that wasn’t my intent. That wasn’t my goal. But it shows how a lot of people feel about budgets. They’re something that a lot of people think tell them, no, you can’t spend money here. You can’t do something because of your budget. But I like to turn that around and look at budgeting is a positive thing.

Eric Rosenberg:

Like I said, I love budgets. It’s a spending plan because if you say in your budget that you have this much money per month for books and movies, you can spend that guilt free and know you can afford it. That’s what the positive of budgets are to me. Now, if we want to understand what they really are, it is a way to break down your spending plan … as we said, that term’s going to come up a lot … into different categories, so you’ll know how much money you’re going to spend on something, let’s say rent or a mortgage payment, how much for insurance, how much for groceries, how much for entertainment or restaurants if you want treat yourself.

Eric Rosenberg:

So how you break up your spending plan really is up to you. There’s no right or wrong way. It’s your money. You work hard for it, so you can decide where it goes. But the total of all of your spending buckets can’t be higher than your planned income. That’s where some people start to feel the constrained part. But you can work on both sides of the equation. It’s not for life. I like to change my budget and update it every month. I think that’s the best way for most people to do it. People who are really wealthy and doing fine and don’t have any debt, they might be able to get away with not budgeting monthly. But most people, even really wealthy people are better off updating their spending plan once a month, just so they know where their money’s going.

Sydney:

Absolutely. I like that, breaking it down into a spending plan rather than a budget. I think spending plan just feels more real. We’re always spending money. We have to live life. Life costs money. But to know where you want your money to go at different times of the month and being able to predict when certain bills are going to hit and having money in your account, ready to feed those, I think it’s a really positive thing. It shouldn’t be that scary. But it can be a really positive, wonderful thing when you have that sense of security and safety, knowing that your budget’s in place and all the money will be there to cover whatever it is that you need.

Eric Rosenberg:

Yeah. And what’s cool about budgets is while we are going to probably update our budget every month, we can budget for expenses out in the future or annual costs we know are going to come up. Maybe we want to contribute a little bit every month. A lot of people like to give holiday gifts. Again, that’s up to you. I’m not huge on holiday gifts other than to my kids, because I just think it’s silly. I’d rather go out to lunch with somebody than buy them some present. But if you like to give presents, that’s okay. Right? We’re different. If that’s your thing, that’s awesome. But maybe you’re not going to have all that money lying around in November or December to go buy all those gifts. A lot of people go into credit card debt for that. And we talked about that in a past episode. You definitely don’t want to be going into credit card debt for buying holiday gifts. But if you put away 10, 20, $50 a month, whatever you’re able to afford as part of your spending plan or as part of your budget, when it does come time to go buy all those gifts, you have the money ready. So there’s a lot of cool ways you can use a budget or a spending plan to benefit your finances.

Sydney:

Absolutely. Yeah. In my own personal life too, I grew up … Both of my parents were teachers, and so they didn’t work for three months of the year during their summer vacation. So we had a budget that we had to follow throughout the summer, and that’s how we were able to survive. It’s just such an essential tool that I think a lot of people still don’t quite understand, don’t quite know how to get it set up, or they’ve tried and it just hasn’t worked. So I guess I’m just curious, why do you think that in general, people should really try to find a budget that works for them? What are the benefits of a budget?

Eric Rosenberg:

The first benefit of budgeting to me is getting rid of some of that financial stress that a lot of people live with every day. Stress we know is really bad for us. That feeling in our heart when it’s like … It’s horrible, right? So if we can de-stress a little bit, maybe we’ll live a little longer and live a happier life. So benefit one is getting a little weight off our shoulders. But more practical benefits are you know what is going to come financially.

Eric Rosenberg:

You know certain expenses are going to come every month, those recurring expenses, like we mentioned earlier, things like your mortgage and your rent, or whatever other things like that, utilities, cell phone bills. There are certain expenses that are going to happen every month, no matter what. Then there are going to be variable expenses that are needs, things like food, maybe medical costs. If you have prescriptions, insurance, that’s probably in that first bucket with the recurring costs. But there are certain things that go up and down every month. So we’re going to put those in the category as well.

Eric Rosenberg:

And then you can understand, once you’ve done that, if you’re meeting those needs financially by looking at your budget. And then you can plan for other things that will benefit you down the road. Let’s say you want to spend money on entertainment, like concert tickets or designer clothes. Who knows what it is, whatever you’re into. Again, it’s up to you. It’s your money. That’s okay. Because you’ve budgeted and you know that your needs are met, now you start to have the freedom to allocate money to those things that you want to spend money on, the fun things. That’s another big benefit.

Eric Rosenberg:

And finally, if you’re budgeting and thinking very long term, as we talked about, like saving for holiday gifts throughout the year, you can also start saving for really long term goals, the really important big things. Maybe you want to send your kids to college and pay a chunk of their tuition or the whole thing. Your kids would be really lucky to have that gift, but it’s going to probably cost tens of thousands of dollars, so you have to save a little bit over time. Same thing for a down payment on a house. If you want to become a homeowner, if you’re a renter, you might not have to be a renter for life. You can put a little bit of money away every month as part of your budget or your spending plan, eventually get yourself into a house or maybe a better car. You can save a down payment to get a better car. And if you don’t have a great credit score, maybe you’ll even be able to save enough to buy it in cash without a loan, without having to pay interest.

Sydney:

Absolutely.

Eric Rosenberg:

Yeah. And one other big, big benefit is those emergencies that can happen in our life. Maybe your car breaks down, or your kid or yourself fall and break a bone, or someone gets sick with a big surprise illness. COVID was just going around. We do have things that can make us sick, otherwise, flu and who knows what. When those costs come up, they can be very expensive, and coming up with the money for them isn’t always easy. So when you budget, you can also budget to put money away for emergencies, so when those big unexpected costs come, you have cash set aside and it doesn’t totally crash and ruin your budget for months to come.

Eric Rosenberg:

So there’s a good list of reasons to have a budget in place. Those will all help you. And it all comes back to de-stressing your finances, letting you put your money to what you want it to go to, knowing that your needs are met, and having really good information and understanding where you’re spending.

Sydney:

Yeah. You covered so much right there, from covering your basic needs and being able to survive and have a little bit more leftover then to achieve those goals, those things that you would love to do if there was more income floating around. Now that you have it, you can put it toward things like retirement, tuition for kids. Yeah, you just covered so much right there, and I really want to underscore all of those points that you brought up. And on top of that, a budget just in itself, intrinsically, it helps you save money. Right? It helps you just have a little bit more access. Can you explain a little bit how that works?

Eric Rosenberg:

Yeah, sure. There’s a couple ways a budget can help you save money. The first one is awareness. A lot of people spend money on things that they don’t realize they’re spending on, and it adds up really, really quick. The easy one to pick on that we all like to talk about is the daily cup of coffee. A lot of people go to a favorite coffee shop on the way to work. And if they’ve budgeted for that, that’s fine, but they should go spend three, four, $5 a day with their eyes wide open. Another place people spend a lot of money, often blindly is going to lunch. If you have a lunch break from work, inflation’s happened. It’s often $10 or more if you just want to grab a sandwich and a drink and chips, something like that, or a burrito. It adds up fast.

Eric Rosenberg:

If you have a budget in place, you know exactly how much money is going to those things, and that’s okay. But if you don’t budget, you might not realize you’re spending hundreds of dollars every year or every month on certain things like that. You might not know how much money you’re really spending on your cable bill or who knows what. So just having that knowledge and visibility into where you’re spending, that puts you really far ahead of a lot of people. So that’s step one.

Eric Rosenberg:

All right, so then step two. The next big thing you could do to improve your savings with a budget is adding savings to your budget as a budget category or as a spending plan category. So as we talked about in our last question, just a couple minutes ago, things like emergency funds, holiday savings funds, future vacation funds, saving up for a wedding or something like that in the future. There’s a lot of different things you might want to save for that are long term goals. We also want to remember retirement. That is a really important place to put away money for. When you have a budget or a spending plan in place, you know not only where your money is going, but then you can start being really strategic and thoughtful about where you put your money and do what we sometimes call paying yourself first. That means putting money into your savings categories and investment categories before you allocate to your fund categories like entertainment and things like that. So again, it’s strategy and thoughtfulness.

Sydney:

Absolutely. I love that. So you’re not only plugging up the leaky bucket, but then you’re also allocating where you want the water to go. That’s awesome.

Eric Rosenberg:

Yeah. That’s a great analogy. I like that. I like the leaky bucket. Yeah. You don’t want to have a leaky bucket because otherwise you’ll run out of water, and that’s no fun. You want to fill your bucket faster. And if water’s coming out, you want to choose exactly where it goes. You don’t want it to leak. You want to pour it. You don’t want to waste it.

Sydney:

For sure. Yeah. And in our experience, it’s not so much coffee and eating out. It’s subscriptions in our family. I’ll sign up for something and forget that I signed up for it, and then I’m paying for it for a year. Like, what the heck? Where did all that money go? So it’s a really good thing to be proactive on those things and checking every month to see what is coming through and how can we plug the leaky bucket.

Eric Rosenberg:

One really cool thing, if you use the Payactiv account, you can go in the app and see, if you’re using the Payactiv card for your transactions, and look and try to spot those recurring transactions. You could do that with any kind of … if you use a card for your payment. But I know the Payactiv account makes that really easy. That’s why I bring it up here. So you can then spot those recurring transactions and think, oh, do I really need that? Do I really want to spend another $7 a month for some TV series that I’m probably never going to watch? Probably not. It’s okay to have a subscription or two if you can afford them and if they’re part of your spending plan and you really use them, but you definitely don’t want to spend money on something you’re not getting a lot of value out of. So that’s another great place to look. That’s another good one.

Sydney:

We’ve talked about just generally, what is a budget. As a spending plan, what does it consist of? What is it made of? What is the anatomy of a budget? And what are some of the reasons why we should be thinking about budgeting more often than we probably all are? This is something so many people struggle with. It’s something that we could all probably work on. And so I would just like to talk about tangible steps. What could someone do today to just create a very simple budget that could potentially work for them going forward during the rest of the month?

Eric Rosenberg:

Sure. There are several different methods people can use to budget, and there are pros and cons to all of them. The one I’m going to focus on right now, just to keep things easy, is the most traditional budgeting method. I’ll just call it the traditional budget. With a traditional budget, you will break down your spending by specific categories, like we mentioned earlier. Those are probably going to be things like housing, utilities, transportation. If you drive a lot, you may have a separate category for gas or car related expenses. Depending on where your money goes most, you might want to have a specific category someone else might not have at all. Maybe you are into some specific hobby, and you want to create a budget category for that hobby. That’s okay. Again, it’s your budget. It’s personal to you. That’s why we call it personal finance. There’s no right or wrong answer.

Eric Rosenberg:

You want to create those categories. And then you’ll want to start tracking, going forward, where you spend in those categories. And there are several great tools out there, several apps you can use. The Payactiv app has features to help you track your spending by budget category, so you can totally automate that process. The benefit of that is let’s say you use the Payactiv card to do all of your spending. It will help categorize all of those transactions into budget categories for you. It makes that really easy.

Sydney:

That also works for if you have another bank account that is not a Payactiv account, you can link your debit card to your Payactiv account and get that same oversight into all of your spending. I just think that’s really cool. If you don’t use the Payactiv card for everything and you have another bank account, you can still use our tools for free.

Eric Rosenberg:

You’re dropping knowledge bombs left and right. That’s why we put our heads together, Sydney, so we can both share all the good things to know. Yeah. So having that tool right there, even though let’s say if you use a credit card, even not a bank account, you can plug that and track all those transactions too. So no matter how you spend, no matter where you spend, it’ll all come into one place and do all the categorizing, and you don’t have to worry about that. So that’s a great way to go forward.

Eric Rosenberg:

Some people don’t like apps as much. And if you’re listening to a podcast, I imagine you probably feel good with apps on your phone. But a lot of people are not still, and that’s okay. If you don’t trust plugging your bank account information into an app, you can use a paper and pencil. There’s nothing wrong with that. When I was a kid, my grandpa gave me a little accounting notebook that I could have used to track budgets by category. Another way you could do it is using a spreadsheet. Google Docs is free. Or if you have a Mac, there’s a spreadsheet program in there also. There’s a lot of different spreadsheet programs. If you use Excel, a lot of people are familiar with that one. There’s no right or wrong. Again, what matters most is you find something you’ll really use and you will use again and again. So if you like paper and pen and you will keep using it again and again, that’s great. But if you know yourself and you will forget about that after a couple of weeks, maybe the app is the best way to go for you.

Eric Rosenberg:

So again, know yourself and figure out the best way to go forward. But when you have the budget in place and you have those categories, then you have a system to track them. Then you can go forward and use that budget and start tweaking and thinking, oh, I’m spending more here than I realized. I want to cut back on that. Oh, here I thought I was needing to spend this much per month, but I actually need to spend a little more. And that’s where you can start fine tuning month over month until you get your budget really in alignment with your priorities and your goals.

Sydney:

Dropping knowledge bombs over here. Thank you. So part of creating a budget that works for you is also stumbling and maybe failing or having a hard time and reworking it, taking two steps back, three steps forward, that kind of a thing. What would you do in this situation? You’ve created your first budget, and it looks great on paper. But then you go out into the real world and find that your expenses are a little bit more than you thought, and things aren’t quite working. And you’re not able to save, and you’re starting to feel frustrated. What would be some of your advice to someone in that situation? What would you do if your budget wasn’t working?

Eric Rosenberg:

First, I would remain calm. It’s okay. This happens to a lot of people. You are not alone. So rather than throw your budget out or freak out about it, really look and see, is that a place I really needed to spend or I really wanted to spend. And if it is, then you have to raise that category up. When you do that though, you’ll have to look at your other categories and see where can you crank those down. At the end of the day, you have to spend less than you earn. That’s the only way we can live sustainably.

Eric Rosenberg:

If you have a one time emergency and you don’t have the savings, sometimes we can go into debt, or do have savings, we can temporarily spend those to go a little over our earnings, and that’s okay. But in the long run, you can’t spend more than you earn. So you have to figure out either, how do I increase my income to meet the budget that I want to have or the spending plan I want to have, or how do I lower my spending to meet that income limit. And sometimes that’s not always easy. Sometimes it’s a hard conversation with yourself. Or if you’re married or live with someone else, having that discussion with your partner, it’s not always fun. It’s not always easy. There are a lot of divorces that end because of financial incompatibility.

Eric Rosenberg:

So it’s definitely not the easiest thing in the world. And if you’re having trouble, again, that’s okay. Stay calm and just be thoughtful about it, and try to figure out the best way to move forward again with your spending plan. But don’t throw it away. Don’t give up on it. Stick with it, so you know where your money is going. Even if you’re going over, you want to know you’re going over, and you want to know where and you want to know why, because otherwise you can’t make adjustments and make the best decisions. You have to have knowledge. Like they say in those cartoons when you were a kid. I think it was Captain Planet or something. Knowledge is power. I don’t know who said that. Someone said that.

Sydney:

It’s true. It’s true. We need that on a t-shirt over here at Payactiv because it’s so true.

Eric Rosenberg:

Money knowledge is power. That should be a hashtag. We should make that a trending topic on some social media. Money knowledge is power.

Sydney:

Absolutely. Speaking of knowledge and making your budget conform to your life and what happens when you need to rethink it, if month after month after month, your budget is still falling short and you’re not able to cover your expenses, you’re not feeling like you can put away, and maybe you feel like it’s time to start earning more money, sometimes you have to pay money to earn more money, like getting a certification or taking a class or things like that. That’s something that you can even put into your budget too, right? How do you feel about that? Budgeting to then make more income so that the budget itself can be fed a little bit more, it feels a little bit more healthy.

Eric Rosenberg:

There’s a couple of steps I’d take if you’re really having trouble and it’s been a few months, and there’s just no way you can make the adjustments in your mind that you figured out. The first step, I have to plug a Payactiv thing because it’s so good. Payactiv offers free financial counseling sessions with a financial planning professional. So the first thing I would do is take advantage of that and set up a free session because it’s free, and then you will have a real financial pro looking at your money and make sure you’re really understanding things and doing things in your best interest. There are no strings attached to that.

Eric Rosenberg:

So next step. Yeah, let’s look at growing our income. When we talk about income and expenses and budgeting, an analogy I like to use is dieting. With a diet and exercise, let’s say you have a weight loss goal. You can go on the treadmill 18 hours a day, but if all you do is eat pizza and cake and drink sugary drinks, you’ll probably gain weight, no matter how much you exercise. And that’s because your inputs are unlimited and your output potential is limited. So the output, that means how many calories you can burn. You can only burn so many calories, no matter how hard you exercise. The same thing is true with budgeting. No matter how much you tighten the belt, you have to pay for rent or a mortgage. You have to live somewhere. That’s a need. You have to have basic medical care. You have to have health insurance. That’s a need. You have to have food on the table. You need to have groceries. That’s a need.

Eric Rosenberg:

There are certain things that are absolute needs. You’re never going to be able to cut those any lower. But you could always earn more. There’s no limit to that. You have your main income source. For most people, that’s going to be your job where you go every day. And hopefully you do well there. And if you work hard and bust your butt at work, maybe you’ll be able to get a promotion. That’s always a good way to grow your income is to move up at work, because you go to the same place every day and you just get more money for it. That’s one way to go forward.

Eric Rosenberg:

But sometimes working hard isn’t all it takes. Sometimes there are more things you need to do to move up and improve your income. And as you mentioned, a certification is a great way to do that. If you can reach out, maybe go to a local community college, they often have very inexpensive classes where you could maybe get an associate’s degree or a bachelor’s degree over time. Maybe you could get a certificate in something related to your field or maybe a career change, something you’ve always wanted to try. Moving your education up will generally only help your income over time. Anything you can do to show employers and perspective employers the value you bring to them, that will probably help your income potential. And certifications are a great way to do that.

Eric Rosenberg:

One other thing I want to throw out is a side hustle outside of work hours. As a kid, maybe you did a lemonade stand. As an adult, maybe you can sell something else. That lemonade stand could have been your first side hustle. Maybe you have some kind of skill. You could teach a class or a service, maybe do some kind of work online. There are so many different side hustles you can do today to increase your income that absolutely, it’s definitely another thing you can plug into your budget to increase the opportunity to spend a little more on the things that you need or want.

Sydney:

I think that’s a great place to end, Eric. Thank you so much for just speaking more to budgeting and just in general, financial wellness. This is again, something that we all have to deal with and think about. And I think your insights could help a lot of people, so I really appreciate your time.

Eric Rosenberg:

Yeah. Thank you. I hope everyone takes this, and when they walk away, they feel empowered by their budget, and they don’t look at their budget or their spending plan as something that restricts and tells them where they have to spend their money. They feel empowered and say, “This is my spending plan. This is where I choose for my money to go.” And then they can go forward and as we say at Payactiv, live the life you’ve earned. So I hope everyone out there is going to go forward and do that with this advice.

Sydney:

Me too. Awesome. Thanks, Eric. 

Eric Rosenberg:

Well, wasn’t that so much fun? I have a great time chatting with Sydney every time, and I hope she’s able to come back soon. A little cliff hanger for the future, when we hung up and stopped recording, we talked a little bit about different budgeting methods, including envelope budgeting and zero based budgeting and the 50/30/20 budget. If you want to learn what those mean, you’re going to have to hit the subscribe button. Make sure you come back in the future because we will definitely record an episode all about those, as well as inviting on expert guests with all sorts of money tips to help you earn more, spend less, and really take control of your money. Because as we said just a moment ago, at Payactiv, our mission is to help you live the life you’ve earned. And if you are taking control of your budget with good knowledge and budgeting skills, you are more empowered to do just that. Until next time, I hope you have a great rest of your week and good luck managing your finances. Bye bye.