Ep 226: Budgetting is a bad word, money psychology, and the worst kinds of financial advice

In this week's episode of the Weekly wealth podcast, we are going to talk about why most budgeting advice is wrong and it is not normally very effective.

We are going to talk about some of the psychological aspects of spending.

So why do you spend what you spend?

And then we are also going to talk about some of the horrible financial advice that I've heard given to some people who would end up being my clients and that I've seen on social media and that I've heard in general.

So I hope that you enjoy this episode.

And here we go.

Welcome to the Weekly Wealth Podcast.

I am certified financial planner David Chudick.

This podcast and my wealth management practice are both designed to help the mass affluent to live better lives by how they handle their money.

We talk about financial strategies, prosperous mindsets, and simply how to build true wealth.

Can you believe how many episodes we're at with the weekly wealth podcast?

This thing has been going on for a few years now.

I've loved every minute of it.

And this is episode number 226 of the weekly Wealth Podcast.

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All right, let's talk about a word that almost everybody hates that involves money.

Most people know that they need to do something with it.

They need to do something with it.

They are not sure how.

They dread it.

They hate it.

And that is the word budget.

Okay, so budgets are like diets.

People almost never stick with them.

People almost always know that they maybe need to change their spending habits, but they don't know how to do it.

So the first thing that I'd like you to think about with regard to budgeting is let's change the name.

Let's call it something different because budget just sounds so restrictive.

It sounds like it's for poor people.

It sounds like when you say budget, Dave Ramsey is going to yell at you and tell you to eat beans and rice and you can't see the inside of a restaurant unless you're working your second job there in budget.

I think it just has a negative connotation Now I don't think it's a negative thing, I just think that it has a negative connotation.

So let's call it a spending plan.

Let's call it anything other than a budget.

So that's step one and step two.

Let's talk about when budgeting or spending planning as we might call it, when it becomes more important.

And that's when we have very little margin.

So let's say that your monthly expenses are $100.

So those are the things that you need to pay for.

That's your rent, that's your insurances, that's your food.

The things that are definitely needs and not wants.

But let's say that you're bringing in a thousand dollars.

That gives you $900 of margin every month.

And it wouldn't be awesome if things cost that little only $100 a month to live.

But you get my point.

So in that case, there's a lot of financial margin and it's not a million percent critical that you get every penny right, because you have extra money.

In that case, you might be able to go out to eat and splurge a little bit.

You might be able to buy something nice, you might be able to experience something nice.

Now let's go to the other end of the spectrum.

Let's say that your monthly expenses are $900 and your income is $1,000.

So now there that much margin.

And if anything happens, maybe you get a late fee, maybe your car breaks down, maybe you just forgot that there is going to be some back to school expenses with your kids.

Now all of a sudden all of that margin is eaten up and you might have some financial stress.

So before we even think about budgeting, maybe we should try to ensure that our monthly expenses are significantly less than our month income.

Yes, I know that sounds pie in the sky ideal, but just work with me here.

If we can decrease our expenses a little bit and if we can increase our income a little bit, and remember I talk about it all the time, the formula has to be income minus expenses has to be greater than zero.

We can argue how much greater than zero.

But income minus expenses has to equal greater than zero.

And that gives you margin.

So if you sit down, you look at your expenses, you look at your recurring expenses, you look at your credit card statements from last month, you look at your debit card statements from last month.

What is it that you can just eliminate that will decrease your expenses?

And then let's go to the other side.

In what ways can you increase Your income.

Now, there's a misconception that budgeting and spending plan is just for poor people that don't make a lot of money.

And it couldn't be further from the truth.

I have quite a few high earning clients and they bring in a lot of money, but boy do they spend a lot of money.

So it's not just for poor people, but we do need to figure out a spending plan.

And the first thing that I think that you should do is that you should look at your recurring expenses and then you should also look at, hey, last month, how much money did I spend on wants versus needs?

And then decide, is that appropriate for my current financial reality?

And with this being the weekly wealth podcast and with most of our listeners being high net worth and the mass affluent, let's talk about some of the spending and budgeting mistakes that the high net worth and the mass affluent make.

So oftentimes they don't have any kind of a spending plan at all.

They say make six figures, I make high six figures, I make seven figures.

I don't really need to have a spending plan.

But if you have seven figures coming in and seven figures going out, it doesn't work.

A lot of times there's leverage addiction where they just, they finance everything.

They're just buying the expensive vehicles and financing them because the monthly payments seem like they are affordable.

And they are until they're not.

Oftentimes they try to keep up with other high earners.

That's a big one.

When that million dollar house is not good enough for you because you know that one of your friends has a $2 million house, sometimes that's a battle you just can't win.

Oftentimes, the high net worth and the mass affluent, they gift and support their adult children excessively.

So there are times when maybe you need to cut your kids loose or cut them more loose than they let them stand on their own two legs.

You've given them a good foundation and good support.

But there does come a time where if they want to live the lifestyle that they've been accustomed to, they might have to support that on their own.

If you're successful on paper but still feel unsure about your financial future, you're not alone.

David chudic created the 10 minute wealth vision call for high earners and business owners who are busy but know they need a plan.

In just 10 minutes, we'll talk through one key issue and we will help you see the next smart move.

Welcome back to the show Spending the Psychology of Spending.

Why do we spend what we spend.

Why do we tend to overspend?

In a lot of ways, your brain is wired to overspend.

We're going to talk about some ways to outsmart it.

So the first thing that we need to understand is that spending triggers dopamine.

Spending gives us a short term high.

It releases dopamine.

That's the same chemical that lights up when we eat sugar.

We scroll social media or we win something.

And just like those other habits, the more we do it, the more our brain craves a hit.

So if you're like me, sometimes when you're stressed, you might be tempted to spend money, or when you're bored, you might spend money, or you're tired or emotionally worn down.

Sometimes clicking add to cart or swiping that card gives us a way to feel control of something, if only for a moment.

So if you ever wonder why you feel better when you buy something at Target, even if you just went in for paper towels and now you're like 3 or 4 or $500 poorer, it's not poor discipline, it's really neuroscience.

Another reason that we might tend to overspend is we live in a comparison culture, don't we?

Social media, you see everybody's highlight reels, you see the best parts of their day.

You see your neighbors that have the nice boat, you see your neighbor that's always on vacation.

And you don't know how much of that is being paid for with cash by your neighbor or how much just really ridiculous, unsensible debt that they are racking up.

And I can tell you, because I know some of these people that have these social media lives, they are spending a lot of their credit on it.

They're going in debt to have these lifestyles.

But what do we do?

A lot of times we're trying to compare ourselves to that and we're trying to compete.

So when you see somebody with a really nice boat and you go out and buy a nicer boat, just so you compare yourself to them, that's probably not serving the purpose that we want.

When you see your friends vacationing in Tuscany and maybe you went just to a local beach, you might feel inferior.

But we have to fight those feelings.

So fight the feelings of comparison.

Don't compare yourself to other people because quite frankly, you really don't know how much debt that they are incurring.

And I know a lot of times the people that don't look like they have a lot of money, sometimes they have a good little chunk and they have a higher net worth because they don't have that debt sucking down their net worth.

Now, oftentimes we do have emotional spending and we will soothe ourselves with spending.

I had a tough week, we deserve a night out.

Or I don't feel secure around a certain group of people, so I'm going to buy something expensive because that'll signal success.

Or I'm overwhelmed, so I'm going to scroll and buy something because it makes me feel productive.

Spending oftentimes is not really about the money.

It's about the emotion and control and identity that spending gives us.

So unless we build awareness of that, no amount of spreadsheets or budgets or spending apps will fix it.

So let's talk about some ways to outsmart your brain and maybe give yourself a chance to to have smarter spending strategies and more purposeful spending strategies.

So the first One is the 48 hour rule.

So let's think about things that are non essential and let's say make a rule in your family.

If it's $100 or $500 or $1,000, let's say that you will always wait 48 hours before making that decision.

That'll create space between you and your impulse decision.

Think about that.

If you still need it or want it in 48 hours and it's within your financial reality, maybe then you move ahead with it.

But remember, these are non essential purchases.

So if it's non essential, you don't need it right now.

Maybe you can buy it in 48 hours, but that takes away some of the impulse.

What about asking yourself, would I buy this twice?

So would I be willing to buy this again tomorrow at the same price?

And if not, it's probably not worth it today.

Another thing that you can do is start tracking the feeling, not just the purchase.

So start noticing why you're spending again.

Was it boredom?

Was it anxiety?

Was it fomo?

Fear of missing out.

You can even try journaling, even just for a week or so.

But it can be eye opening.

Oftentimes we don't eat because we're hungry.

We eat because we're soothing.

We're eating because we're bored.

We may not spend money because we need the things, but we're spending it for another underlying reason.

So try to figure out what your underlying reasons are and that can help you to squash the monster.

If you have problems with Amazon or Doordash or things like that just seem to rack up, maybe go to good old cash.

Give yourself a certain amount of cash that you're going to have on hand and that way you don't run up expenses that that can get really high.

And when that credit card bill comes in, you may not have kept track of all of it.

And now you just dug yourself a hole.

So remember, money isn't just math.

It is psychology.

So if you've ever overspent and asked yourself, why did I do that?

You're not alone.

Your brain is wired to seek pleasure and avoid pain.

Financial discipline isn't just about willpower.

It's about creating a system that works with your brain instead of against it.

So when you can pause, reflect, and redirect your money intentionally, that's when you stop the feeling of out of control and start to feel wealthy.

Are you a longtime listener of the weekly wealth podcast?

If you've learned anything and if you've enjoyed the podcast, will you do me a favor?

Will you tell a few of your friends, your families, your colleagues, or your co workers about the show?

As I always say, I believe that how we handle our money should positively impact, impact our lives and the lives of those around us.

And I hope that this podcast can be a small piece of that puzzle for all of our listeners.

Okay, so let's have the last segment of this episode and let's talk about some real time costly financial mistakes that were probably as a result of not the greatest financial advice ever.

Now, I think there are two types of bad financial advice.

There are people in the industry that maybe are unethical and maybe pushing products and not acting in a fiduciary capacity.

And then there are just getting advice from your friends and they just don't know any better.

So here's one that one of my clients asked me about and we talked about it and decided it was not a good idea.

And this is the Roth conversion.

Now, my client had something like $100,000 IRA.

And my client said, hey, somebody was telling me about this Roth conversion thing.

And they said, if I convert my IRA to a Roth ira, I'll be able to take it out tax free and it'll be awesome.

And then when tax rates are so much higher, when I retire, I'll be getting tax free money.

So I want to do a Roth conversion.

And I said, great, let's talk about the current tax consequence that will create.

And this $100,000 Roth conversion will create $100,000 of taxable income today.

And if you're in a 20% or 25% or 30% tax bracket, that'll create a 20 or $25,000 or $30,000 tax liability this year.

Now, my Client said some version of holy crap.

I didn't realize that I was about to pull the trigger on this.

I did not know that this was going to create that much of a tax burden this year.

So we talked about some things and we're doing the Roth conversion over time and that will even out the tax burden over several years.

But this person had gotten some just bad advice or incomplete advice by one of their friends who probably didn't know any better.

And the friend may end up having a large tax bill this year that they don't expect.

But that's the first kind of bad financial mistake is when your friends, your family, who they think they know what they're doing, but they don't, they give you advice and it may not be exactly accurate.

Now the other type of person to not really take financial advice from is your broke friends.

So the people in your life that are always struggling financially and they tell you, oh, don't budget, don't watch your spending.

You only live once.

You can't take it with you.

That's true, you can't take it with you.

But you also need it now at points.

So there are a lot of problems in our life that if we add money to them, the problems either get much smaller or go away.

And that is why we need to maintain financial margin.

That's why we need to maintain liquidity.

So when you have that broke friend that's always struggling for cash and they're telling you not to save money because you can't take it with you, and nobody's ever taken a U haul to a funeral.

Yes, that's true, but there's nothing wrong with, and there's nothing even unbiblical about having sound financial principles.

Now in our industry, there are people that really push products.

They push products and not holistic solutions.

So whole life insurance, Iuls, things like that.

I think these are great tools as part of a well established financial plan.

And here's a disclaimer.

I personally own an index universal life policy on myself, so I think it's a great tool.

But when it is portrayed as like the only solution and then there's nothing, that's the only solution.

I heard a podcast the other day and this person who is an annuity salesperson, she never actually said the word annuity.

She kept saying, we have a product that can't lose money and it is indexed to the stock market market, but it's not as risky as a stock market and things like that.

And I was like, why don't we just Call it an annuity.

Annuities are great things when they fit, when they fit into your picture.

So just look out for professionals that have one thing to sell.

If they have one thing to sell, then they have to make all of your needs look like they can be solved by that one thing, that one product that's really important.

Now what am I selling in my private wealth management practice?

I'm selling like a holistic plan.

I'm selling that we're going to find the right solutions for you, regardless of what they are, and we're going to help you to make your financial dreams come true and we're going to do the right things that are specific for you.

We are not cookie cutter.

I am not cookie cutter.

So how do you evaluate financial advice?

First of all, you have to ask who's giving the advice?

Are they licensed?

Do they know you?

Are you selling?

Are they selling something?

If they're on TikTok?

Just because there's a 30 second TikTok video selling you to borrow money against your house and buy crypto.

Not sure that sound advice.

Just because it's a famous influencer with a lot of followers, that does not necessarily mean that it's solid advice.

So look at who's giving the advice and look at what their motivations are.

What is their incentive?

So are they benefiting financially from your decision?

Then do your research, make sure that you know what you're getting and ask a lot of questions.

Now, for the people that are close to you in your life, sometimes their bad financial advice is almost meant to undermine your success.

So just know who's giving you advice, know why they're giving it to you, and know what their incentives are.

And then ask, does this advice fit my specific goals and my specific needs and my timeline?

Because my goals and your goals are probably different.

My timeline and your timeline are probably different.

So again, this one size fits all cookie cutter stuff is almost never a good idea.

Working with a comprehensive fiduciary advisor typically is the way to go.

Now, when it comes down to it, good advice is almost always fairly boring.

So things like save consistently, invest in a diversified portfolio, avoid the high interest debt, have an emergency fund, not trying to time the market, those kind of things, they may not be that fun, they may not be that exciting, but they oftentimes are the best way to go.

Now I'm not saying that you shouldn't have some more aggressive parts of your portfolio.

I mean I do, but a lot of times slow and steady and simple gets you to the finish.

Line over time.

So remember that bad advice is everywhere and you don't have to fall for it.

You can slow down, you can ask good questions, and you can make sure that the person that's giving you the advice understands more than just a headline or a sales script.

They need to understand you.

Just because they're on TikTok or on Instagram or have millions of followers or make interesting funny videos, that does not mean that the advice that they are giving is appropriate for you.

But the good news is that with a little education, a healthy dose of skepticism, you can avoid a lot of the costly mistakes that people make now.

Little self plug here, a fiduciary advisor, a Certified Financial Planner certificate like I am.

We're bound to pretty some pretty high ethical standards.

So little food for thought there.

You may want to consider working with a certified Financial Planner all right everybody, so that will about wrap up this episode.

I hope that you learned a little bit about how to take financial advice, maybe who to take it from, how to recognize some financial advice that may not be the best.

And I hope that you've also also learned a little bit about the psychology of spending and of budgeting.

And don't forget, budgeting is not only for the people with low incomes.

Honestly, the people with high income sometimes get themselves in a little bit more trouble because they think they have unlimited funds to spend.

So until next episode, I wish everybody a blessed week.

Thanks everybody.

The information contained herein included but not limited to research, market valuations, calculations, estimates, and other materials obtained from Parallel Financial and other sources are believed to be reliable.

However, Parallel Financial does not warrant its accuracy or completeness.

These materials are provided for informational purposes only and should not be used for or construed as an offer to sell or a solicitation of an offer to buy any security.

Past performance is not indicative of any future future results.

And here is your bonus hack for this episode.

Make sure that your spending plan or budget or whatever you want to call it includes some money for fun.

If you are not in serious financial trouble.

Enjoying our money is important.