Episode 8: Create A Budget Today, Change Your Life!

In the eighth episode of the Melby Money Show, host Shaun Melby underscores the critical role of budgeting in achieving financial freedom and stability. Shaun explains that budgeting is not about restriction but empowerment, providing a solid foundation for meeting financial goals such as home buying and retirement. He also discusses the concept of a 'soft landing' in the economy, referencing significant events of 2022 and examining current economic conditions and investment opportunities.

00:00 Welcome to the Melby Money Show

00:45 The Importance of Budgeting

01:51 Current Events: Economic Soft Landing

02:26 Understanding the Yield Curve

04:52 Implications of a Soft Landing

07:12 Financial Homework and Strategies

07:38 Sponsor Message: Asset Allocation

08:24 Adapting Your Asset Allocation

08:58 The Foundation of Your Finances: Budgeting

09:42 Transforming Day-to-Day Life with a Budget

10:43 Overcoming Budgeting Roadblocks

12:21 Creating a Budget That Works for You

14:55 The Impact of Budgeting on Investments

15:46 Adjusting Your Budget Over Time

16:20 Conclusion and Farewell

This podcast is for informational and educational purposes only.  This podcast is not financial advice.

Transcript

Episode 8: Create A Budget Today, Change Your Life!

[00:00:00] Welcome to the eighth episode of the Melby Money Show. I'm your host, Shaun Melby. Did you know that 65% of Americans have no idea how much they spent last month? That's right. Two thirds of us are basically financial free spirits. Letting our money flow, wherever the wind takes it. But here's the million dollar question. Is that really the best way to build wealth and achieve our dreams. I think you know the answer. In today's episode, we're exploring a topic that might make some of you groan. Budgeting. I know. I know. It's not exactly as thrilling as planning your next vacation or shopping for a new car. But stick with me because I'm about to show you why creating a budget can change your [00:01:00] financial trajectory. I can almost hear what you're saying to yourself right now. Budgeting has a reputation for being about as fun as watching paint dry. It conjures up images of spreadsheets, receipts, and saying, "no" to things that you want. But what if I told you that budgeting is actually the key to saying "yes," more often. That's right. A well-crafted budget isn't about restriction. It's about freedom and empowerment. It's the foundation that supports all of your other financial goals from buying that dream home to retiring on a beach somewhere tropical. 

In the next few minutes, we're going to break down why budgeting is so important, how it fits into your overall financial plan. 

And most importantly, how to create one that actually works for you.

We'll tackle the reasons why so many of us avoid budgeting. And here's a spoiler alert. It's not just because it's boring. And I'll share some practical tips to make the process a little less painless, maybe even a little exciting. But first let's talk about what's in the news with current events.

Remember when everyone is screaming "recession".

It was back in 2022 when [00:02:00] inflation was high and the yield curve has inverted. The financial world was on edge. But here's the twist. We might've just pulled off an economic miracle called a soft landing. Let's break down how we got here and what it means for your wallet. 

First let's go back to 2022. Inflation was skyrocketing. The fed was hiking interest rates faster than any time in the last 40 years. And everyone was freaking out about an impending recession. Why? Well, partly because of something called the yield curve. The yield curve is what's called a leading economic indicator. Meaning, it can be used to forecast where the economy is headed. 

It shows the relationship between interest rates and the time to maturity for bonds. Typically US treasury bonds. I'm going to use the term yield here, but if you don't know what that means, think the interest rate. 

So back to the yield curve, usually it slopes upward, meaning longer term bonds have higher yields than shorter term ones. And this makes sense, right? You'd [00:03:00] expect more interest for locking up your money for longer, because the longer you lock it up, the higher the risk to you, the investor. You're going to earn a higher yield for the risk, a natural trade-off. 

But here is where it gets interesting. Sometimes this curve inverts, meaning short term rates are higher than long-term rates. This inversion has historically been a reliable predictor of recessions. In fact, every us recession since 1955 has been proceeded by an inverted yield curve. And guess what? 

The yield curve inverted in late 2022. Cue the panic buttons. 

But here's the plot twist. It looks like we might have thread the needle and achieved a soft landing. What does that mean? For some, it means avoiding a recession altogether. Others say we might get a mild recession, but should power through it swiftly. 

So while yield curve inversion has preceded every recession since 1955, there've been instances where a recession didn't happen. In [00:04:00] 1966, the yield curve inverted and there was no recession. There are a couple instances where the yield curve temporarily inverted. Went back to normal, then inverted again, a short time later, and then a recession happened. So if we are indeed in a soft landing, it's possible, we are in one of these scenarios. Recent data is painting a pretty nice picture. The US economy grew at a solid 3% annual rate in the second quarter of 2024. That's even better than initially thought. At the same time, inflation seems to be cooling off without tanking the job market, the consumer price index also known as CPI. Rose 2.4, 1% year over year in September, 2024 down from its peak of 9.1% in June of 2022. Meanwhile unemployment is low rate of 4.1% as of September is reading. 

Now let's talk about what the soft landing means for you. If you've been putting off major financial decisions because of economic uncertainty. You [00:05:00] might be able to breathe a little easier. The job market is still strong. And while unemployment is slightly up from its lowest point. Sidebar, listen to my Sahm Rule explanation from episode 6's Current Events. Sidebar over. It could be from generational workforce changes as boomers retire and gen Z enters the workforce. Not because of mass layoffs. Boomers and gen Z are very close to the same size. 

However, while the youngest boomers are 60 and about to enter retirement age, the youngest gen Z are just 12. They have a long way to go before they're in the workforce. Now for those of you eyeing the housing market. This could be good news too. If inflation continues to cool. We might see mortgage rates start to come down from the recent highs. It's not going to happen overnight. But it could make home ownership even more accessible in the coming years. Of course, the flip side to lower interest rates might lead to higher home prices. But you might see some relief on a monthly mortgage payment a year from now compared to today. 

Also this [00:06:00] soft landing scenario could create some interesting investing opportunities, bonds, which have an ugly duckling of investments lately might be ready for their Swan moment. As the fed potentially cuts rates further bonds could become more attractive to lock in today. As a financial planner who caters to millennials, I tend to avoid bonds unless it's a specific situation that calls for them. And for those of you in the stock market, a soft landing with relaxed interest rates from the federal reserve could mean continued growth for a period of time. So what's the game plan in this soft landing economy. First don't let your guard down completely. 

As the yield curve history has indicated we are not necessarily out of the woods from avoiding a recession. Keep building that emergency fund and diversifying your investments, but also don't be afraid to make some moves. If you've been sitting on the sidelines, waiting for the perfect moment to invest or make a career change, this might be your cue to do something. If it's been a while since you've asked for a raise, now could be an opportune time to be paid what you're worth, or maybe see what you're worth on the open market.

[00:07:00] As I often say personal finance is just that personal. What works for your Instagram influencer friend might not work for you. That's why it's important to have a tailored financial strategy that can adapt to changing economic conditions. As we wrap up current events. Here's your financial homework. 

Take a look at your current financial setup. Are you positioned to take advantage of this potential soft landing? Maybe it's time to revisit your investment mix, or finally start that side hustle you've been dreaming about. A soft landing doesn't mean you should be complacent with your money. Take a hard look at the economic environment in your area and how you can best take advantage of that with your personal situation to make the most of your money. Now a word from today's sponsor. 

 Today's episode is brought to you by asset allocation, your money, secret sauce for success. You know the saying don't put all your eggs in one basket. It's talking about asset allocation without even knowing it. It's like planning the perfect potluck dinner. You don't just bring five dishes of Mac and cheese, right? 

You mix it up. Some salads, main courses. [00:08:00] Don't forget dessert! Asset allocation works the same way with your money. It's about spreading your hard earned cash across different investments. Maybe someone stocks for growth, someone bonds for stability and a little cash for those just in case moments. Why is this a big deal? 

Well, it's like having shock absorbers for your financial journey. When the road gets bumpy and trust me, it will. You're not putting all your hopes on one type of investment. If one area takes a hit, the others can help keep you moving forward. As life throws a curve balls your perfect mix might change getting married, having kids eyeing retirement. Your asset allocation can shift to match where you're at in life. It's not a set it and forget it deal, but more like adjusting your wardrobe as you go through different seasons. So next time you're thinking about your money. Remember asset allocation. It's not just financial jargon. It's your ticket to feeling more confident about your financial future no matter what twists and turns come along the way. 

 Picture your finances as a [00:09:00] pyramid, you know, like those ancient wonders have stood the test of time. Your budget. That's the base. It's the solid foundation that everything else rests on without it, the whole structure becomes shaky and unstable. Think about it this way. You wouldn't build a house without a blueprint, right? Your budget is that blueprint for your financial future? It shows you exactly what's coming in and going out, giving you the power to make informed decisions about every other aspect of your money life. Want to start investing? Your budget tells you how much you can afford to put aside. Dreaming of buying a home, your budget helps you figure out how much you can save for down payment. Planning for retirement? 

You guessed it. Your budget is the key to knowing how much you can stash away for those golden years. But here's where it gets really interesting. A solid budget. Doesn't just impact your big financial goals, it transforms your day-to-day life to. When you know exactly where your money is going, you can make smarter choices about your spending. Maybe you realize you're dropping a small fortune on takeout every month. With that knowledge you might decide to cook [00:10:00] at home more often freeing up cash for that vacation you've been dreaming about. Or perhaps you discover you're paying for subscriptions you never use. Cutting those out could mean extra money to boost your emergency fund or pay down debt faster. 

Without this foundational knowledge, it's like trying to navigate a ship without a compass. You might be making all the right moves on the surface, contributing to your 401k, paying your bills on time, but without a budget you could be missing out on opportunities to grow your wealth even faster. Or worse, you might be slowly drifting off course without realizing it. A budget acts as your financial GPS, keeping you on track and alerting you when you need to make adjustments. It's the difference between hoping for the best and actively steering your financial ship towards your desired destination. Now let's talk about the elephant in the room. Why so many of us avoid budgeting like it's a root canal. The idea of sitting down and facing the cold, hard numbers of your financial life can be about as appealing as a pop quiz on your least favorite subject. But here's the thing, that discomfort is exactly why budgeting is so [00:11:00] powerful. 

Many of us put off budgeting because we're afraid of what we might find. Maybe you're worried, you're spending more than you thought. Or that your savings aren't quite as robust as you hoped. It's like avoiding the scale after a holiday season of indulgence, ignorance is bliss, right? But just like with your health, ignoring your financial reality doesn't make it go away. In fact, it often makes it worse. The good news is that once you rip off the bandaid and take an honest look at your finances, you're already halfway there to improving them.

Another common roadblock is the perception that budgeting is just too time consuming. In our fast paced world who has the time to track every penny? But here's a secret. Modern budgeting doesn't have to be a full-time job. With the right tools and approach, you can get a handle on your finances in less time than it takes to binge watch your favorite show. And the time you invest pays off big time giving you more freedom and less stress in the long run. So let's flip the script on budgeting. Instead of seeing it as a restrictive chore. Think of it as your financial [00:12:00] superpower. It's not about limiting yourself, it's about empowering yourself to make informed choices. When you budget, you're not just crunching numbers, you're taking control of your future. You're saying yes to your dreams and no to the things that don't actually matter to you. Let me tell you. There's nothing more liberating than knowing exactly where you stand and where you're headed financially. 

All right now, let's roll up our sleeves and create a budget that works for you. First things first start by tracking your expenses for a month. Every coffee, every streaming subscription, every impulse buy, jot it all down. Don't judge just observe. This gives you a real picture of where your money's going. Next categorize your spending. Group similar expenses together, housing, food, transportation, entertainment, and so on. This bird's-eye view helps you spot patterns in areas where you might be overspending. Now set some realistic goals. 

Maybe you want to boost your savings by 10%. Pay off a credit card, whatever it is, [00:13:00] make sure it's specific and achievable. Your budget should reflect these goals. Allocating funds accordingly. Here's where technology lends a hand. There are tons of budgeting apps out there that can do the heavy lifting for you. They can link to your bank accounts, categorize expenses automatically. And even send you alerts when you're close to over spending. 

Find one that fits your style, whether you're a spreadsheet junkie or prefer a more visual approach. 

And this is how I approach budgeting with my clients. I first start with how much income you're making and to simplify things, you could just look at your take-home pay, assuming that your, your W2 employee. Then I look at how much I want to set aside for savings. 

I want my clients to pay themselves first. This can be for an emergency fund, IRA contributions, taxable investment contributions, 529 plans. Even travel savings can go here. Then I look at fixed expenses, starting with debts. What is the mortgage payment or rent if you're a renter. Are there auto loans, student loans, personal loans, lines of credit credit cards. You get the idea.

[00:14:00] Then I look for other fixed expenses. What's out there that, you know, you're going to pay on a monthly, quarterly semi-annual or annual basis. So there is a consistency in the frequency that you make a payment, but also the amount. So things like insurances, utility bills, gym memberships, subscriptions, phone bills, all fall under here. So then when you subtract all that from your take home pay. This is your discretionary money you can live off of and allocate how you want. If you want to save more or pay down debts faster, this reduces your discretionary money. And this is where it's important to know your numbers on what your lifestyle takes to live. Do you need to adjust your spending downwards to make sure everything works as it should and avoid growing credit card debt? Are you living well within your budget and can allocate more towards travel, investments or paying down debt? So that's broadly how I start my budgeting approach with clients, knowing the numbers is your starting point. 

Here's where budgeting can really make an impact. Let's say through this process, you determined you have an extra $500 a month to [00:15:00] invest. If your timeline is 30 years. And you get a 10% average annual return. That's $6,000 per year turns into nearly $987,000. I'll repeat that again. At a 10% average annual return. That's $6,000 per year turns into nearly $987,000. Of course that doesn't take into account inflation, but at 3% inflation per year, that $987,000 is about the equivalent to $546,000 in today's dollars. So over half a million in today's dollars. So when you hear about that example, that is where budgeting can get pretty exciting. Here's a key thing to remember. A budget isn't set in stone. Life happens. You might get a raise, have a baby or face unexpected expenses. The key is to review and adjust your budget regularly. Maybe every quarter, sit down and see what's [00:16:00] working and what's not. Be flexible and kind to yourself. If you slip up one month, don't throw in the towel, just recalibrate and move forward. Your budget should work for you. Not the other way around. With a little patience and persistence, you'll find a budgeting rhythm that feels less like a chore and more like a path to financial freedom. 

Thank you for joining me on this episode of the Melby Money Show. 

And I'm looking forward to continuing the conversation in future episodes. If you have any questions, you'd like me to answer on the show. You can email them to Shaun@melbymoney.com. It would be an honor. If he subscribed to the podcast so future episode show up in your feed. If you feel compelled to leave a reviewer rating, I'd appreciate that as well, as getting feedback will only make this podcast the best it can be. If you've enjoyed the episodes so far, feel free to tell a friend about the show. Farewell and I'll see you on the next episode of the Melby Money Show. [00:17:00] [00:18:00]