072 | Rewind: Budgeting for Lifestyle Freedom and Financial Independence

Achieving your money goals requires being intentional with your money, which starts with your budget. Your budget is simply your plan for how you’ll use your money each month. In this episode, learn why lawyers need a budget, different budgeting styles, and tips for getting started with your budget.

This episode is the first in a series of replays of my best episodes on budgeting and spending in preparation for my live budgeting workshop, Foundation of Wealth, happening on November 27, 2021. Get all the details at https://www.rhothomas.com/foundation.

Lightly edited transcript appears after the show notes.

Topics Discussed

• what a budget is
• why lawyers need a budget
• tips for getting started with your budget
• different budgeting styles

Listen to the Episode

Resources mentioned

Foundation of Wealth Live Workshop

Episode 1: How $670,000 of Debt Changed Everything

Episode 6: How to Keep Work from Taking Over Your Life as a Lawyer

Work With Me

If you’re ready to learn the mindset and strategies to master your money, let’s schedule a call.

Connect with me

Social media: @iamrhothomas on Instagram, Facebook, Twitter, LinkedIn

Email: hello@rhothomas.com

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Lightly Edited Transcript

Hey friend. During the month of November, I’m sharing replays of my best episodes on budgeting and managing your money in preparation for my live budgeting workshop, Foundation of Wealth. It’s happening on November 27. These episodes will help you reframe the way you think about budgeting and spending and prepare you to create a budget for 2022 that will serve as a strong foundation for your future wealth-building activities. Even if you’ve heard these episodes before, I encourage you to listen again. You’ll pick up on different information or something I said in the episode will hit differently because you’re in a different space to receive it. And if you haven’t done so already head to rhothomas.com/foundation to get all the details on Foundation of Wealth and to sign up so you don’t miss it. Let’s dive in.

Hey friend! Welcome back to another episode of Wealthyesque. I really appreciate you taking time to be here with me. I know that we’re all super busy and so the fact that you take time out of your day to spend with me really means a lot.

Today I want to talk about the dreaded “b” word in the personal finance space. That’s right, budgeting.

A lot of times, lawyers and other high-income earners feel like they don’t need budgets, but I don’t think that could be further from the truth. When you have a higher income, sure you have more wiggle room in your spending, but you also have a much greater chance of getting into some big messes.

There are so many issues that can come up when we are not paying attention to our money and being intentional with our money, and if we’re talking about wanting to reach lifestyle freedom then we need to be taking steps to do that right.

We need to be mindful of the way that we are utilizing money which is really just a resource to get us to the ultimate goal of having control of our time. I think budgeting is super important and I want to help you get on track with your budget, so let’s talk about it today.

We will talk about

what a budget is
why lawyers and other high-income earners absolutely need a budget
tips for getting started with your budget
different budgeting styles and
if you really need a budget
So let’s get into it.

What is a budget?
A budget is really nothing more than a plan for how you will spend your money for the month.

Many of us don’t make a plan for our money at the beginning of the month. We just spend and look back at what we’ve already done, right? We do this backward-looking review, like, “Oh I shouldn’t have spent this much on food or at Amazon or whatever.” But when you make a budget, you make a plan at the outset.

I think a common misconception with budgeting is that it’s rigid and restrictive, but really we make the budget. The budget is in our control and so it doesn’t have to be rigid or restrictive.

You are prioritizing the things in your life that you want to spend your money on. Yes, some of that will be your needs, but you can also include things you want in there.

I just want you to be intentional about it, and if you are intentional, you can make sure that you are including things that bring you joy but not at the expense of the ultimate goals you have.

And you can change your budget during the month, and that’s okay.

So if in the middle of the month, you decide that you want to spend on something that wasn’t in the budget originally, you can reallocate some of the money that you were planning to spend in another category and put it to this new thing or maybe you take a little bit from each category so that you feel less of an impact in the other categories, but whatever it is you’re changing and putting more on this other thing that’s now a priority.

But the point is to make sure that we know where we’re spending our money so that we can direct it to the things that are truly important to us.

Why lawyers and other high-income professionals need a budget
We know that a budget is absolutely crucial when you have lower income. It’s one of those things where not paying attention to how you’re managing your money and where your money is going can mean the difference between making rent and not making rent or having enough to eat and not having enough to eat.

When you get into higher income levels, it’s not that you are at risk of not having necessities because you don’t budget. It’s that you end up spending all of your money and having nothing to show for this great income you’ve made if you’re not careful.

It’s really easy for your expenses to grow to fill your income when you’re not being intentional about how you’re spending.

I’ve talked about how the financial independence community ties itself to a 50% or more savings rate. A lot of people feel like that’s not possible, but I know for a fact that at some point in your life you were making and living on 50% or less of what you’re making now, so it’s absolutely possible, right?

Like when I was in law school I might have spent $2,000 a month or something like that, and it was only that high because I had my super fancy apartment that was $800 a month. I was big ballin.

I make way more than $2,000 a month now, so it’s definitely possible for me to save half of my income because I used to live on such a low amount.

And although I’m not aggressively saving right now, I am aggressively paying off debt, which also helps to build my net worth. My husband and I put more than half our income toward debt payments each month, and once that’s done, we can reallocate that money to saving and investing.

Of course, life is a lot different now than when I was in law school. I was living by myself then, whereas now, I have a husband and two kids, so we necessarily spend more, right?

But life events aren’t what account for most people’s increased spending. What typically happens is we get these pay increases, and as we earn more, rather than sitting down and making a plan for what we’re going to do with that additional money, we spend it.

Your lease is up, and you decide to upgrade your apartment because you’ve outgrown this place. Your family is growing and so you upgrade to a bigger and nicer house. You pay off your car and decide you need a new one and you decide to upgrade because you deserve a fancier car. Your family takes nicer and nicer vacations each year. You eat out more or at more expensive restaurants. Whatever it is.

And so as we get these increases in income, rather than saving more, we justify spending it, and then you look up, and you’re in the same place you were in before the pay raise.

I posted on Instagram this past weekend—and if you’re not following me, I’m @iamrhothomas—but I posted that we often prioritize things that we don’t really care about over the things that we say we truly want.

And what I was talking about is the fact that many of us say we want more time with our family or we want to work less or whatever, but we’re mindlessly spending the one resource that would allow us to reach those goals on Amazon or on eating out or the bigger house or the nicer car or whatever other stuff we think will make us happy.

Let’s look at it this way for a second: At the end of your life, would you wish you had more stuff or more time?

I know which I would choose. If this year has shown me nothing else, it’s shown me just how short and unpredictable life is. I don’t have time to waste.

And that’s not to say don’t ever buy anything you want and eat Ramen noodles and hoard all your money so you can reach financial independence and lifestyle freedom sooner. You know that’s not how I roll.

I’m just saying when we spend mindlessly on things that we don’t even care about then in essence we are prioritizing these things we don’t care about over things that we truly value and truly want.

That’s part of why budgeting is so important. It helps you to set your priorities right. Where you spend the most money is where your true priorities are. Show me your bank account statements, your credit card statements, your calendar even, right? The things we spend the most time and money on are the things that we truly prioritize and value.

And it’s all good to say, “I value my free time. I prioritize my family. I prioritize whatever your thing is.”

But do you really, though?

Because if the way you spend your time and the way you spend your money don’t line up with that, then maybe that’s something you’re telling yourself because it sounds good.

We all do this in some form, so it’s not like you’re bad if you do this or something. But we need to be intentional about setting our priorities and making first things first.

That means that we are setting aside money for these things that we say are priorities from jump. And we’re blocking our schedule and setting aside time for the things that we say are priorities. Go back and listen to Episode 6, How to Keep Work from Taking Over Your Life as a Lawyer for more tips on setting priorities with your time. Once we have our priorities set, then everything else can fit around them.

Tips for starting your budget
Before we started trying to get on top of our money, we didn’t have a budget. We knew how much we brought home, but we didn’t really know where it was going, as shown by our $670,000 of debt and negative $342,000 net worth. If you haven’t heard that story, head over to Episode 1, How $670,000 of Debt Changed Everything.

But anyway, we didn’t have a budget and didn’t really know where we were spending our money, so we did a 3-month look back. We looked at a sample budget and categorized our spending based on the categories there and added categories where we needed to.

Then, we looked at how much we spent in each category for each of those 3 months and took the average. So that was the starting point for our budget, and then we adjusted as necessary.

I think it’s important to do it this way because your budget will be more realistic, and you’ll be more likely to stick with it. If you arbitrarily set $100 as your grocery budget, but you typically spend $400, you’re more likely to go over budget and get discouraged and quit.

It’s also helpful to do it this way because you see where your money is actually going already, and you can make changes if you don’t like what you’re seeing. If you see that you’re spending $2000 a month on average at Amazon, you can curb that.

I would recommend that you have a miscellaneous category for unexpected expenses. We also use this category for things that we know are coming up for that particular month but there’s no set category for from month-to-month. So things like a birthday, or holiday or some sort of celebration that’s coming up that month.

The other thing is for annual or semi-annual expenses or expenses that are otherwise not monthly, we allocate a percentage of that each month in the budget. So for example, we include 1/12 the typical cost of our dog’s annual exam in our monthly budget so that come annual exam time we’ve already got that money ready to go.

And remember, your budget can change, both during the course of any given month and over the years. We’ve had to readjust periodically because our spending will go up in particular categories, like when our kids got older and started eating the same food that we’re eating then our grocery budget increased and so we had to change that around.

It’s all good. That’s all part of the process.

Budgeting styles
If you’ve never really paid attention to how you’re spending your money before, I think it’s good to start off with a structured budget, like a traditional or zero-based budget, breaking out your expenses in each category and all, so that you know exactly where your money is going and you can see the specific categories that you want to work on.

The traditional budget
The traditional budget is the most common or maybe most well-known type of budget. That’s where you list out all of your income from any source and then you list your expenses in all of the categories, so you’ve got your housing and your transportation and groceries and gas and whatever other expenses set out in an itemized list. Then, you can decide from there where you may want to cut back on some expenses or reallocate money from one category to another, etc.

The zero-based budget
Another structured budget is the zero-based budget. In this type of budget, you give every dollar a job, so you have no cash left over at the end of the month. Every single dollar you bring in that month is allocated to something, whether it’s expenses, savings, debt payments, whatever.

And this is how my husband and I budget our money. We put all of our income at the top and then we have categories for each of our expenses similar to the traditional budget. And we put in at the beginning of the month how much we expect to spend in each category, including how much extra we plan to pay on our loans.

At the end of the month, we look at how much we have leftover in each of the categories, and we add every extra dollar to the amount we originally allocated to the extra payment category and make a large payment on our loans. Sometimes, let’s be honest, we go over in some of the categories, and we end up having to pay a little less than the amount we were originally planning to pay extra on the loans.

I will say we also keep a buffer of a couple thousand dollars in our checking account so it’s not that our checking account is getting down to $0 every month. It’s that we allocate every dollar that we have brought in for that month.

The zero-based budget has helped us make huge progress on paying off our debt because every single dollar that isn’t spent goes to paying off our loans.

Anyway, so that was the zero-based budget, which is a structured budget like the traditional.

Now, as some people get more comfortable with their money and know more about their spending habits, they opt for a less structured budget. When you’ve already done the groundwork and you know how much you spend on groceries and how much you spend at Amazon and how much you spend on clothes and all of that kind of thing, you can probably afford to relax a bit on the budgeting.

I have to admit, though, I’m super Type A, and even though we have a good handle on how much we spend in each category each month, I’m still rocking with my zero-based budget.

But many of us are not doing a budget at all and so we don’t know where our money is going in the first place. If that’s you, I would not recommend the budgeting styles I’m about to tell you about.

Proportional budgets (50-30-20 and 80/20)
Okay, first up are proportional budgets. One of the most popular is the 50-30-20 budget where you allocate 50% of your income to your needs and then another 30% to your wants and 20% to your savings.

There’s an even simpler version of this: the 80/20 budget where you just say 80% of your money is going to expenses and 20% to savings.

That’s what I mean when we’re talking about budgets that are less detailed as you get a handle on where your money is going. This might be more helpful for somebody who doesn’t want as much structure, but I do think that there’s value in doing something like a traditional budget to begin with so that you know how much you’re spending.

If I just say 80% of my money is going to expenses and 20% to savings, but I don’t address the fact that I’m spending $2,000 on Amazon every month then that’s not going to help me. Breaking out all of your expenses and seeing where the money is going helps you to restructure your spending patterns so they’re more in line with what you want for your life.

The “anti” budget
Another of these loose budgets is the anti budget. Basically you pull out whatever amount you want to save and then you spend the rest however you want.

Just like with the proportional budgets, it’s one of those things where you need to have a handle on how much you’re spending and where your money is going already before you do something like an anti budget because again if you don’t know that you’re spending $2,000 every month on Amazon then you’re not going to make as much progress on your goals as you could because that’s probably an expense that you want to correct right?

If you don’t know that you’re spending that much because you just spend however you want to then it’s hard to correct that going forward and to redirect that money into the things that you care about like putting that money toward paying down your debt which helps you to get back control of your time or putting that money into investments or into savings for your kids or whatever your priorities are.

Do I really need a budget?
Now I’ve gone through all this, and there are probably some people who still don’t believe in the value of the budget.

They’ll just continue freestyling and pray for the best and hopefully they don’t go over here and spend more money than they actually bring in.

But honestly not having a budget is probably why 78% of Americans are living paycheck-to-paycheck, including 25% of Americans who make $150,000 or more.

When we don’t have a plan for how we’re spending our money, when we don’t know where it’s going, it’s very easy to overspend, and when you have a lot of money coming in you might not realize that you’re living paycheck-to-paycheck.

But if you’re spending next month’s money to pay for this month’s expenses, you would be in a world of hurt if you lost your job and didn’t have that money coming in next month right?

So I want you to be mindful of where you’re spending, what you’re spending on, making sure that you’re not spending more than you’re actually bringing in, so you’re not going into debt or living paycheck-to-paycheck, and making sure that the money that you’re spending is aligned with what you really want in life.

Again that all comes with planning. It’s hard to reach a goal like financial independence if we’re not being intentional with our money.

Wealth is built in the gap between our income and our expenses, but for many of us the gap is tiny or non-existent. For some people, the gap is negative because their expenses outpace their income.

And it’s no secret that in fields like law, we are prone to conspicuous consumption and keeping up with the Joneses and all that. When you see all of your friends and colleagues buying these things or doing those things, you feel like you should be buying these things and doing those things, as well.

People say all the time, “I work hard. I deserve it.” And that might be true, but I feel like I deserve to have something to show for all the time that I put into my career besides a bunch of stuff that I might not even use or care about anymore.

There’s this quote I love that says, “Don’t sacrifice what you want most for what you want now.” And it’s so powerful because I think that’s exactly how many of us live our lives. We’re going for what we want right now and not thinking about what we want in the future.

If we’re talking about achieving lifestyle freedom and regaining control of our time, it means that we have to make consistent intentional decisions about how we’re going to spend our money and the lifestyle that we’re going to live and changing the way that we think about our money and what success looks like.

If we want things that most people only dream of, we have to be willing to do things that most people aren’t willing to do and make sacrifices that most people aren’t willing to make.

I want to build wealth, not just look wealthy. I think that a high level of income supports a high level of spending, and it can lull us into this false sense that we are wealthy or that we are well-off, but then when you take a good look at your finances the way that my husband and I did you realize, “Oh actually I’m broke. I have a negative net worth. Literally no money.”

For me, ultimately it’s not about the money or being able to say I’m wealthy. It’s about the goals that I have and the freedom that managing money well can provide.

So anyway, I went off on a bit of a tangent there, but I really want to emphasize how important I think the budget is.

Let’s recap:
1. A budget is a plan for how you will spend your money each month. It’s not restrictive because you control it. You can put wants in along with your needs.
2. Lawyers and other high-income earners absolutely need a budget because although a high income gives you a lot of wiggle room in your spending, it also opens the door for some really big messes. Plus, you don’t want to look up and have nothing to show for all the money you’ve made.
3. When starting a budget for the first time, it’s helpful to do a 3-month lookback to get a good baseline for your spending in each category. Don’t forget miscellaneous expenses and annual, semi-annual, or otherwise not monthly expenses.
4. Structured budgets, like the traditional and zero-based budget, are best for people who are just starting out and don’t know where their money is going. Looser budgets, like proportional budgets and the so-called “anti” budget are better once you’ve already gotten a handle on where you’re spending your money.
5. Seventy-eight percent of Americans are living paycheck-to-paycheck, including 25% of Americans making $150,000 or more. It’s easy to overspend when we’re not being intentional. “Don’t sacrifice what you want most for what you want now.”

Okay that’s it for this episode. Join me over in our private Facebook community, The Wealthyesque Community. I’d love to talk further about how we can use our budgets to get us closer to the control we want. Head to rhothomas.com/community.

If you got value from today’s episode, please share with a friend or two you think would also benefit from it. If you share on social media, make sure you tag me @iamrhothomas on Instagram, Facebook, and Twitter.

Also, go ahead and subscribe to the show on whatever platform you’re listening on so you’ll be notified when new episodes are released, and if you’re so inclined, please leave me a written review.

As we close out friend, I pray that you get clarity on what you’re truly prioritizing in life.

I pray that you will review your spending, weed out the things that you don’t want there, and begin to align your spending with your values to reach your ultimate goals.

And as always, I pray that you will continue to take steps to regain control of your time, build wealth, and live the life of freedom and choice you deserve.

Talk to you later.