Budgets Don’t Work – Just The Facts Please

The only way people are able to make effective and lasting change in their financial life is by first gaining a clear understanding of their starting point—in other words, where their finances currently stand. The way to do that is to start with the facts.

Once you first get clear about where you spend money—and then determine what is really important in your life—you will be able to find the money to accomplish what you want.

Most of us do not take the first step, taking the time to understand how much money we spend and what we spend it on. In fact, we often are afraid to see where our money really goes. We fear that there is not enough to make ends meet, not enough to ensure our security, and so we are hesitant to look.

I have seen many of my clients experience a dramatic and positive shift in their financial situation simply by going through the structured process of understanding how their money is currently being spent, and then incorporating their goals into a viable plan, a Personal Spending Plan.

You might discover, much to your surprise, that you already have enough money in your life to accomplish many of your goals and live a satisfied life.

Many people have tried their hand at budgeting and have found one thing: Budgets don’t work. Budgets don’t work for the same reason that diets don’t work. They address the wrong problem. Diets focus on deprivation, and for most people, budgets do, too.

There is another reason budgets don’t work. Most people simply don’t write everything down. They write down the expenses they know off the top of their head: their mortgage or rent, their car payment, insurance, and utilities—the well-known recurring bills. Maybe they put in food, but they leave off everything that is more discretionary—their pet bills, haircuts, books, and magazines. They don’t include parking and coffee breaks and eating out.

Typically, a person will say, “Well, I make $4,000 per month and my budget says I spend $2,500. So how come I never get ahead? How come I always end the month with more debt on my credit card?”

Thus begins the recurring monthly mystery: Where does it all go? It doesn’t make sense. The reason it doesn’t make sense is that most people don’t base how much they spend on facts. It’s amazing, however, the change in behavior that occurs automatically when people see the facts before them.

Mike and Roslyn came to see me because they were spending more than they were making. When I asked them where they spent their money, they were unable to tell me. Their home situation was typical—Roslyn stayed home with the kids, planned the meals, and took care of most household matters. Mike worked long hours as the family breadwinner.

We went through the exercise of reviewing and writing down everything they spent on a monthly basis. It became clear during this exercise that there were certain things Mike had been nagging Roslyn about for years that had never changed. When we came to the line item for groceries, I could see him rubbing his palms together in expectation. He couldn’t wait to get into this one.

Before we could get very far, he blurted out, “She spends way too much on groceries. I have been telling her that for years.”

“Well, you don’t understand,” she retorted. “You just don’t know what it takes to feed everybody. You just don’t know what it costs!”

Mike turned to me. “Ask her how often she goes to the grocery store!”

I looked at Roslyn questioningly.

“Oh, I go every day,” she responded, as though everybody did that.

“Ask her where she goes,” Mike continued.

I played along, once more looking over my glasses at Roslyn.

“Well . . . the corner convenience store,” she said.

“You go to the corner convenience store every day to buy your family’s groceries?” I asked.

“Oh, yeah,” she said. “It’s right down the block. It’s so handy.”

“Okay,” I asked her, “How much do you spend on groceries?”

She said, “Oh, I don’t know. It’s expensive for a family of four.”

We went through her checkbook for the last three months and add up the money spent on groceries. It came to $750 per month. For a husband, wife, a three-year-old and a five-year-old, it seemed like a lot of money.

Roslyn stared at the number before her on the desk. Then she looked me in the eye and said, “Okay, that’s it.”

Roslyn committed to meal planning and to go to the grocery store no more than twice a week. “And no more buying groceries at the corner store,” she said.

No one had to say a word to bring about this transformation. Her husband had been nagging her for fourteen years, and it had not done a thing to alter the situation. He had been trying to tell her what to do and how to run the household, but he had not helped her to see the facts clearly. His approach had been based on the premise that she was wrong, and her reaction had always been, “Well, thank you very much, but until you stay home and take care of the children, and make all the meals—get out of my domain. It is none of your business.”

In my office, she changed her attitude on the spot, and it happened for one reason only: she took the facts into account. When she saw how much money she was really spending, she made the decision to change her behavior.

The beauty of financial planning is that the facts will always show you what direction to take. When Roslyn saw the $750 on a piece of paper in front of her—that was it. She decided to spend less money on groceries.

Three months later, Mike and Roslyn came back in for a review. Roslyn had reduced the family’s grocery bill to $450 a month!

Like Roslyn, you might think you are spending $150 a month on something when you are actually spending $300. Clients will swear that they spend a certain amount on something, but when they gather the facts, they are usually spending more. Until you gather the facts, you will be delusional about how much money you are actually spending.


How To Create Your Own Personal Spending Plan

By dispelling the money myths, I hope I’ve helped you see how you can respond to money more consciously. You now see that you have choices; you do not have to react as you have in the past. You have permission to break the rules, to think about money in a way that is different than the norm.

This blog series is for those who want to take this process a step further. It is one thing to conceptually understand the need for change; it’s quite another to follow a plan that guides your financial life. In order to manifest such productive change, you need to develop a structure and implement it.

Each of us has dreams we want to see fulfilled. Using the three-step process provided in the following chapters, you can accomplish some of the things you would like to have happen in your life—things that, perhaps, you didn’t think were possible to achieve.

The first step of the process will show you how to gather facts about your personal spending habits and obligations. The second step will show you how to identify and determine your goals. The last step puts it all together into a Personal Spending Plan enabling you to accomplish your most important goals without deprivation.

Visit RamseyInvesting.com for more information on how to create your Personal Spending Plan.

Myth #21: I Will Be Satisfied Later (part 3)

Marsha is a client of mine. She’s fifty-seven. She has worked for an airline for nearly thirty years as a flight attendant. She is one of the most vital and dynamic women I have ever known. When she came to see me, we talked about her airline’s stock plan and her portfolio. I asked her, “How much longer are you going to work?”

“Well,” she said, “The union is renegotiating and if I stick it out until the next contract is signed, my retirement will probably be better.”

“What do you want to do after you retire?” I asked. “What are you going to do with all your extra time?”

“Oh, no problem!” She jumped out of her chair completely animated. “I am going to be an actor!”

“You are?”

“Yeah, I’m taking acting classes. I’m learning how to put on make-up and how to analyze a script and take on a role. I have a diction coach, and I am learning how to project my voice and to utilize my whole body in the acting process.”

“Marsha, that’s great!” I said.

“I have an agent now. Maybe I can do some modeling too. I think I might do okay with it.”

In addition to her talent, Marsha is a very striking woman with gorgeous gray hair. She looks beautiful, younger than her age. She has found herself as an actress in high demand.

I have seen her from time to time over the years. The last time she came in, she told me that she was getting so many calls to audition for commercials that she had decided she didn’t have time to do her airline job any more. She now does acting and modeling exclusively.

She could have stayed at her old job, but for thirty years she had repeated the same line, “You want decaf or regular?” and she couldn’t say it any more. She found a way to be more satisfied now by making some movement toward a passionate area in her life.

Are there things you can do to be more satisfied now? Step back from your life and reflect on it a bit. Ask yourself where it is taking you and why. Challenge some of the underlying belief systems that have propelled your life to where it is.

How can you be more satisfied in your life now? More money is not the answer. But if you allow yourself to be more satisfied by what you already have and use what you have more consciously, you will find more happiness than money can ever buy.

Myth #21: I Will Be Satisfied Later (part 2)

To find harmony and balance in our lives, we may need to implement changes. That may mean doing what we want, rather than what everyone else expects. Is your career like a high-speed airplane flight, carrying you ever farther from what and who you love? Have you subscribed to the myth that if you work doggedly now, that you will find satisfaction later? That the money you will earn will be the answer to all your problems?

Perhaps it’s time to gaze from your high altitude seat and observe the world passing by far below. Are you missing out on anything important? Are you missing any important stops? Or are you actually heading in the direction you want? If so, relax and enjoy the ride. But if you sense some discord in your speed or direction, perhaps it’s time to ask what you could do to be more satisfied now.

Is it possible you could be more satisfied now by realizing how prosperous you already are?

Is that next promotion, or that extra money that you are going to earn, or that new client you are going to take on, really going to bring you that much more satisfaction? Or is it going to be taking you away from those things or people that are most important to you?

If just for a moment you would be willing to say, “More money won’t bring me happiness,” you could look at that new promotion or that new job with all the travel and say, “Hmm, what’s really important here?”

A friend said once, “There is one thing a company can never give back to you, and that is the time you give them.”

There is a trade-off in any job. You are trading time for money. Is the extra time you’d have to spend if you take that next promotion really worth the extra money that you’d receive? Will more money really solve your problems? Will it really bring you more happiness?

Life is about choices. We don’t have to live on automatic pilot. We can question some of the beliefs that we hold that keep us on the same old path.

I have a client who worked at a large and fast-growing company. She had worked there long enough to amass a large portfolio of stock options. These were available to her when she quit. However, if she worked until January, three months away, she would receive another $50,000. If she stuck it out until July, she would get $115,000.

I did a long-term retirement calculation for her. It showed that if she retired in January, she’d run out of money at age ninety-four. If she worked six more months and retired in July, her money would last to age ninety-seven. She had three choices. She could retire right away; retire in January and be home for her kids when school ended; or wait until July 31 and collect the extra $65,000.

She told me, “Well, that extra $65,000 would be nice. I think I’ll stick around until August for that.” She went home and told her husband and two kids that she was going to stick it out. She told them it would really make a difference.

She went back to work. Within weeks, she was frustrated and upset. She called me and said, “I don’t want to do this anymore. I’m done. I’m ready to move on. I want to be with my family.”

She resolved to quit her job and leave by January 31 and forfeit the extra $65,000. But she didn’t tell her family about it for a few days. One night at dinner, she let it slip out that she had decided to quit.

Her kids dropped their forks and said, “What did you say?”

She said, “Well, I’m going to quit at the end of January because I really want us to spend the summer together.”

The kids leapt up from the table. They ran around to their mother. They grabbed her around the neck and kissed her. They were ecstatic.

She had no idea how much those six months meant to them. She was heartbroken that they hadn’t expressed their disappointment earlier that she was going to work longer, and she was deeply moved that they wanted her home.

Maybe more money is not what we want in life. Maybe it is about those close to us throwing their arms around us and appreciating us for being with them, for sharing our lives with them now.

Maybe we should be investing now in the pursuits and relationships that are dearest to us, rather than putting them off because of concerns over money.

Myth #21: I Will Be Satisfied Later

Fred owns a corporate marketing company in Tucson, Arizona. He travels two or three days a week visiting companies in the Southwest and California, and he earns a six-figure income doing so. His regional approach to business is one of the reasons behind his financial success.

A company in Los Angeles offered Fred a large contract to do some work. While flying to Los Angeles to meet with the firm, Fred had an opportunity to reflect on his successful career—and the hectic and stressful lifestyle that it demanded. He related this story.

“I sat staring out the window of that 737 at 25,000 feet, seeing the surface of the world move slowly past my field of vision. I began to ponder the fact that as every cloud and mountaintop passed by, I was being carried farther from home. As it was, I had hardly seen my kids for the last week, and now this trip would keep me away from them for another three days. And for what? More money?

“I realized that in stepping on that plane, I had made more than a commitment to a business deal and to a career. I had also committed myself to miss out on the opportunity to spend those days, at least part of those days, with my family—and those were days that I would never be able to recover. When the flight attendant went by, I felt like asking her to tell the pilot to turn the airplane around.”

After relating this story he said, “You know, I’m not ready to quit my work. But I am really questioning what is truly important in my life. My daughter is going to graduate from high school next year—and then she’s gone. This is the last year she will be at home. Is this the year I want to be traveling three or four days a week? My son is a thriving fifth grader. Fifth grade boys need their dad around. And my wife? I adore her. I love being with her. And I really miss her when I’m gone.”

A moment over the mountains in a 737 changed Fred’s life. He asked, “Is it really the money that makes me happy? Is that what’s most important in my life?” And the answer led him to a decision.

When Fred returned from his business trip, he announced to his family that he was going to shift his marketing focus to serve only companies located in the Tucson and Phoenix area. It would probably result in less money for awhile, but it would allow him to be where he wanted to be—close to them.

We know that money can’t buy everything—yet many of us spend most of our precious time and energy in pursuit of it, often at the expense of our health, well-being, and family.

What we all want is happiness. But happiness isn’t necessarily earned by working hard or making more money. For many of us, it comes as a result of simply allowing ourselves to be more satisfied with our lives as they are—not someday, but now.

When Fred got that lucrative job offer from his client in Los Angeles, he accepted immediately. He was programmed to do so. He rationalized, “That’s more money in the bank. We’ll be able to do more. We’ll be able to buy more. We’ll have a higher standard of living. Great. Of course I accept.”

He’d been on automatic pilot. In accepting the offer, he wasn’t accounting for the cost to his family, or for his own deeper personal needs. The monetary reward was there, but it wasn’t leading him to more satisfaction with his life; it was it taking him away from what he valued most. Fortunately for him and his family, a moment of mid-flight clarity gave him a new direction, and he made a change as soon as he could.

Few people are able to find total satisfaction and contentment in work alone. We also need relationships with others in our lives— and the time needed to invest in those relationships. We often find ourselves too busy to spend time with those we love, and the rewards of our long hours of dedication and toil are rarely sufficient to fill the resulting void.

Myth #20: I Can’t Charge What I’m Worth (part 4)

Find out what the market charges. Google it. Visit the business section of your library. Call up other businesses that are in your market and ask them for their rates. If someone is charging a lot more or a lot less, find out the difference between his or her service and yours. Talk to associates in your same profession whom you respect. Ask them what they charge.

After you gather the research, sit down and determine what you are going to charge. Make sure it will cover your costs. Remember that if you are self-employed, you don’t receive a benefits package. You have to have money to cover your health care, taxes, overhead, and retirement. Make allowances for your other long-term goals.

Even though we may resist coming to terms with it, we often do know how valuable our work is. We need to acknowledge the value of our own unique attributes and skills and charge appropriately.

I met with a woman who was starting her own business as a computer consultant. She had left her company as a programmer to go out on her own and do computer programming work for small businesses. She had a great deal of trouble coming to terms with what she should charge. It was very difficult for her to charge near what the market was charging for comparable services. We determined that, based on her skill level, goals, and competition, she should charge in the neighborhood of $95 an hour.

I asked her to make a list of the services she provided. Then on a second list I had her write down all the reasons that she should charge $95 an hour. What was special about her? Why should anyone choose her over her competitors? Why should a prospective client hire her?

By the time she was done with her lists she was convinced. She told me, “Well, with this kind of a background, knowledge, expertise, and experience, I am worth it!”

After that point she had no trouble getting her hourly rate out of her mouth without choking. She was able to quote her rate confidently, stand behind it, and feel good about it.

Another client of mine recognizes his ability to synthesize ideas and information faster than anyone he knows.

He saves his clients time and expense by assimilating information upon which to make important business decisions. They count on his ability, and he is able to command a higher hourly rate than others might charge. His clients repeatedly hire him back.

Charge what you are worth. No one else is going to raise your rates. Do the necessary research and determine the appropriate amount. Then revisit and, if necessary, update your rates annually. Your costs will undoubtedly go up because of inflation, so your billing rate may need to go up, as well.

Get this idea off to a good start—take a walk around the block and say out loud, 100 times, what you are really worth.

Myth #20: I Can’t Charge What I’m Worth (part 3)

For some clients, your rates will be too expensive. These clients may need to go somewhere else, and you might even suggest someone to whom they can go.

If you decide to accept a job below your rates, do so for the right reasons. You might want to cover some downtime, really like the client or the project, or see it as an inroad with a promising client that may bring you a lot of work down the line. You might decide to donate some of your services. My business counselor has what he calls a “tithe” client—one person in his client base who otherwise cannot afford him, but to whom he donates his services.

Recently, a copy editor did a job for someone at half his going rate. He did so because of the client’s passion for what they were trying to accomplish. He wanted to help that person succeed.

If you do quality work, people will almost always be happy to pay you what you are worth. If they aren’t, then you don’t want them as a client. But in order to earn the rate you are worth, you must learn to get the message out of your mouth.

When I first went into business, I charged a set amount per hour. I knew it was low, but I was building my business from the bottom up. After getting established, I allowed my rates to rise to the going market rate. But for my clients who came aboard in my early years, I continued to bill them at the lower rate for some time. I figured they had helped me to get started, and it was a way to pay them back.

At long last, I decided to have all my clients pay the same rate. I sent out a letter to my old clients telling them that I had to raise their rates to be in conformity with everyone else. I agonized over the letter. I knew that it was a steep increase for many of them.

I was rewarded with a pleasant surprise. I got back a stack of responses in the mail. Overwhelmingly, they said, “It’s about time. I support your decision completely.”

Two clients told me they were unable to afford the increase. One called me and said, quite emotionally, just how much she appreciated my work. She sincerely thanked me for the help I had given her. She told me she just couldn’t afford the higher rates.

I decided to work out a deal with her. I could find a way to make room for anyone who would call and thank me in such a sincere way.

There is nothing wrong with charging what you are worth. There is nothing wrong with charging what the market will bear. It is what people expect you to do. Usually, the only obstacle is your recognition of your own true worth.