Budgeting

Budgeting is tedious for most people. However, having a good understanding of your budget can help you mitigate stress by knowing where your money is going, and making sure that each dollar has a job.

What is it?

Budgeting, simply put, is keeping track of your money going in and out. It’s like being a traffic cop who directs cars to the proper places to avoid crashes or backups.

Having a robust budget allows you to be intentional in where your money is going so that you can meet your needs, save for your goals, and enjoy the journey along the way.

A helpful tip to get a framework of what your current spending looks like is to look at your expenses over the past month and categorize them as needs, wants, and savings.

Why it matters to you?

Budgeting is the 1st step in having a strong financial plan. Before you consider implementing a financial plan, you should have a solid budget in place. A budget simply aligns what you care most about to the dollars that you have. If you look at someone’s monthly spending, it’s often a great way to see what they care most about, whether that is a nice home or giving or eating out with friends.

What you want to do is decide what is important to you before you spend money so that you are in control of where your money is going and not wondering where it all went at the end of the month.

To calculate a basic budget, subtract your monthly expenses from your monthly income. If your expenses are greater than your income, then you will need to either increase your income or decrease your expenses to avoid running out of money. If your income is greater than your expenses, then you have a surplus, which you can save or use for your wants. Knowing what your cash flow looks like will help you make smart decisions with your money.

The 60-20-20 rule is a helpful guide to follow when you are first creating a budget.

1. Needs: 60% of your income should cover needs (groceries, housing, utilities, insurance, essential transportation, debt payments, education, medical bills, etc.).
2. Wants: 20% should cover your wants (vacations, Netflix, sporting events, spa days, etc.)
3. Future: 20% should be saved for the future (emergency fund, retirement accounts, kid’s savings or investment accounts).

Tips to Know:

• Have a clear understanding of what your needs are vs. your wants. It might feel like a need to watch Netflix every night, but if it’s preventing you from hitting your savings goals, your future self will thank you for saving that money instead.
• Only borrow what you can repay. Having a budget will help you know what you can afford and what you can’t. By living within your means, you will be able to save money for both your short-term and long-term goals.
• Be aware of “lifestyle inflation”. As you make more money, there is a natural tendency to spend more money, but having a solid budget in place will help ensure that you are able to enjoy the present while still being wise with your money.
• When you have a surplus of money, you should start saving money in an emergency fund. You should have at least 3 months of living expenses in your emergency fund. This will help you protect you from unexpected expenses like ER bills and replacing the tires on your car.

Key Takeaways

Budgeting may seem like a hassle, but it can help you be confident and intentional with your money. Life should be enjoyed, and most people would prefer not to live like a Spartan. Having a budget and sticking to it allows you to have the peace of mind that your expenses are covered, you are saving for the future, and you can enjoy the journey along the way.

Disclaimer: This post is for informational purposes only and is never to be taken as advice or a recommendation. Talk to a tax or legal professional to determine how this information best applies to your personal situation.