YES! You Need A Budget!
“Need” is a strong word, but to live a financially fit and balanced lifestyle, it is appropriate.
Keeping a regular budget is similar to counting calories. The key is being aware of how you are spending, whether its spending money or calories you’ve “earned” from exercise. Otherwise, things can take a turn for the worse. Extra awareness and a little work each day can significantly help you live a financially and physically fit lifestyle.
What is the bare minimum I should do for budgeting?
At the very least, you should be able to easily tell someone how much money you have coming in on a regular basis and how much you spend on a regular basis. This is especially true if you are working with a financial advisor. A more accurate budget leads to better financial planning. Below are some quick steps to get started with a minimum budget:
Know your monthly take home income.
If your income is highly variable, use a conservative estimate you are confident you will continue to receive on an ongoing basis. Any excess is a bonus you can allocate at a later time. For example, if you get paid bi-weekly, just assume you get paid twice a month. Then on the occasional month you receive three pay-days, treat it as a bonus. Likewise, if you get paid commission on top of salary, assume the bare minimum you are 95% certain you will receive, then any extra is a bonus. Make sure you break your conservative estimates into monthly amounts.
Before you make a list of all your expenses, estimate your Weekly Spending.
This is a solution to the part of budgeting we all tend to get overwhelmed with. Everyone tells us to make a list of all our expenses, so we start thinking, “how much do I spend on gas, groceries, entertainment, and other smaller expenses.” This can be very frustrating. That’s where “Weekly Spending” comes in. Instead of trying to quantify each of those items, group them all together as one expense. Then you can get a better estimate and goal moving forward.
Make a list of all your other expenses.
The rest of your expenses should fall into one of four categories: Debt Payments, Monthly Expenses, Non-Monthly Expenses, and “Funding.” The first three are self-explanatory. Debt Payments are monthly payments you make to service your current debt, whether it’s your mortgage, student loans, or car payments. Monthly & Non-Monthly Expenses are those you know will happen in a regular basis, with varying frequencies. (Monthly cable subscription, quarterly car insurance payment, annual HOAs or membership fees, etc.) The last “Funding” category includes any kind of fund you regularly want to build up and have a budget for. Some examples include your emergency fund and funds for vacation, car maintenance, home maintenance, clothing, and any other types of goals you regularly want to save towards. This includes “treat yourself” categories such as a monthly massage or other indulgence. List all these expenses, along with their type and frequency, and calculate what a monthly amount would be.
Calculate your monthly cash flow.
Now that you have a good idea of what your monthly income is and your monthly adjustments for all your expenses, you can see whether you are running a positive or negative cash flow. If it’s negative, you need to find ways to cut back and get to a positive cash flow. If or when your cash flow is positive, you can begin to see how empowering a budget can be. It allows you to know where all your money is going and helps you align your spending with the things you care about the most.
What more can I do?
So far we’ve talked about putting together a one time snapshot. To proactively take charge of your budgeting and cash flow, I highly recommend adopting the You Need A Budget software and learning their philosophy around budgeting. Their system helps you give every dollar a job. It also imports transactions from all of your bank and credit card accounts, so you can maintain a high level of awareness around your spending. For more information, visit their website at www.youneedabudget.com.
If you find it difficult to adopt a budgeting system, a financial advisor can help. Not all advisors will assist you with these topics. However, we understand your spending can have the single greatest impact on your financial plan. Please view our process or contact us if you have more interest in working with an advisor on getting your cash flow under control.