When I got married in 2000, one of the best gifts given to my bride Rachel and me was lunch with my friend Mark Bauer, a real estate broker in Denver. Mark and I became friends at the University of Colorado — he was always my dependable study partner.

A few months before our wedding Mark asked to have lunch with Rachel and me. At lunch Mark explained that many marriages come to ruin over money issues. A tool that has been helpful for me, Mark told us, is a family budget. All you do is project your “revenue” for your family (salaries and other income), subtract your expenses, and the result is your net income. Any money left over is savings.

At that point I was a bit disappointed in Mark’s wisdom. I was a few months away from completing the CFA designation, and that was on top of my Master of Finance degree. The simplicity of his advice was frankly a little insulting to me.

Mark read my unimpressed facial expressions but continued: The problem with a normal budget, he told us, is that though it captures ongoing expenses such as a mortgage, cable bill, groceries, it ignores future expenses. For example, your car is paid for, but in five years this car will need to be replaced and “suddenly” you’ll discover that you have a onetime $20,000 expense. Except the purchase should not be sudden, and is not a onetime occurrence unless you are planning to drive this car for the rest of your life. The car is just the beginning — you’ll take vacations, buy furniture, your kids will go to college, and then there’s retirement.

Mark advised Rachel and I to identify all of our expenses, current and future. Once those future, major expenses are clear, create what’s known as a sinking fund for each of them.

Here’s how Mark explained a sinking fund: Airlines must repaint airplanes every so many years. An airline sets aside a certain amount of money for plane repainting, and when that time comes, the necessary funds are already in a separate account. It doesn’t matter if business is booming or struggling, the planes get repainted.

Just because expenses are going to happen in the future doesn’t make them less real.

Mark said to think of a “sinking fund” as sink(synch)ronizing the future to the present. Let’s take a car as an example. If in five years you need to buy a new car for $20,000, you’ll be probably be able to get $5,000 for your present car, and so you’ll really need $15,000. That means you need to save $3,000 a year, or $250 a month. This $250 a month should become a line item in your budget, and the $250 should go into a separate account. Or you can use one savings account and track sinking funds on a spreadsheet, but some banks will allow you to create separate savings accounts. You could get fancy and start assuming rates of return, but other than for expenses that are more than five years away, I ignore compounding. Take the vaguely right approach rather than the precisely wrong one.

Create your budget

Once you’ve identified your future expenses, create your budget. I guarantee that you’ll discover that your true income is much lower than you thought. Just because expenses are going to happen in the future doesn’t make them less real.

What happens to a lot of families that don’t plan for future expenses is they get surprised by them and are forced to borrow. Borrowing makes everything exponentially more expensive, because compounding interest turns from being your friend to your enemy — you start paying interest on interest and the rat race begins.

Related: The first step in making money: You have to really want it

Also: This is what it really takes to become a 401(k) millionaire

Armed with Mark’s advice, I could not wait to start budgeting. Once Rachel and I figured out how much we’d spend on utilities, groceries, car insurance, clothes, and other recurring items, we started to think about our future big-item expenses. Suddenly a lot of unexpected things showed up on the list: furniture, car insurance deductibles, a new TV — and this was before we had kids.

By bringing all current and eventual expenses into our monthly spending budget, we got rid of unwelcome surprises.

As I think about this almost two decades later, I see that Mark’s counseling transformed our spending from a mindless, often impulsive endeavor into a mindful one. It was a great prioritizing tool. Rachel and I intentionally allocated our limited income to the things that mattered to us the most, at the expense of things that mattered to us less. By bringing all current and eventual expenses into our monthly spending budget, we got rid of unwelcome surprises. Also, when unexpected things happened — a car accident, a significant repair to the house — since money had been saved in the “emergencies” sinking fund and came out of a separate savings account, writing a check was a lot less painful.

I see now what Mark saw then: that our wants are unlimited and will always exceed our income. No matter how much money you make a year, without a system your insatiable wants (if not controlled) will always outpace your income. You think that if your income doubles or triples you’ll be happy; you’ll have enough? Unless you keep your expenses the same, which most us of will not do, then you won’t have enough. As people make more money, they seem to develop a taste for finer clothes, more luxurious cars, and larger houses in pricier neighborhoods.

We’ll always have neighbors and friends with fancier things than we have. If we allow our internal compass to be swayed by them, we’re guaranteed a life of misery, as our income will always lag behind our envy and we’ll be destined for a never-ending rat race. Warren Buffett says that envy is the stupidest of all the deadly sins — at least you get some pleasure from the other ones.

As you can imagine, in the investing industry, where you rub shoulders with multi-multi-millionaires and billionaires (be it your clients or colleagues), it is easy to let your internal compass get out whack. Over the years, when our (mainly my) impulses were triggered, my wife and I would go to the budget and see what we’d have to give up if were to opt for a new car or a bigger house. Was the new house worth a winter without skiing or no Florida vacation?

For us, houses, cars, and other material things were on the lower end of our priority list. Instead, four categories were most important to us: health; experiences; time, and education. We still budget for these categories, but the allowance is larger and much looser.

Let’s start with health. Without health nothing else matters. A personal trainer may look like an unnecessary luxury, but without him every attempt I have made to work out has failed. Nutrition fits into this category as well. We don’t pay attention to the price of tomatoes or meat at the grocery store.

Education: On top of paying for the education of our kids and their after-school activities, we put no limits on how much money they (and we) spend on books. The same applies to our own education, be it for seminars or coaches.

Experiences: My kids are growing up and I am now acutely aware that we have a limited time with them. Family vacations, skiing, and day trips are important to us. Whenever I travel for business I try to take a family member with me.

And then there is time. Time is the most finite asset anyone has. My thinking on this topic has changed. I was always bothered when my investment friends used assistants to schedule calls with me or their assistants replied to my emails. I incorrectly perceived that it was their way of telling me that they were more important than others. Yet I’ve come to understand that money buys time. The time I save by not doing low-value tasks (e.g. going through my inbox, replying to emails that my assistant can respond to, scheduling calls, making doctor’s appointments, or booking airline tickets) I can spend doing research, talking to clients, and yes, being with family and friends.

Happiness is reality less expectations. I am not sure if money can actually bring happiness, but I am sure that the lack of money is tremendous source of unhappiness. (Oxygen doesn’t make you happy, but a lack of oxygen will make you unhappy rather quickly. So it is with money. Although we’ll all disagree on what “a lack” means.) When you control your budget, you control your expectations.

When you constantly spend more money than you earn, after you chew through your savings (if you ever had any), then you’re deeper in debt. Therefore, to maximize health, education, experiences, and time, and still live within our means, Rachel and I give up things that are less important to us, such as a huge house and new cars. My wife drives a 13-year-old car, and I would still be driving the 10-year-old car that I owned for eight years if it hadn’t been stolen. We have owned our not-so-fancy house in a safe but not-fancy neighborhood for 15 years. By living within our budget, Rachel and I have never had to argue about money. After all, we both created the budget, so we’re on the same page.

So, how does one invest in this overvalued stock market? Our strategy is spelled out in this fairly lengthy article.

Vitaliy Katsenelson is chief investment officer at Investment Management Associates in Denver, Colo. He is the author of “Active Value Investing” (Wiley) and “The Little Book of Sideways Markets” (Wiley). Read more on Katsenelson’s Contrarian Edge blog. And get email alerts about new columns by Vitaliy Katsenelson here (Requires sign-in.)

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