Budgeting - Everyone’s Favorite Thing to Do
Okay, so it’s not exactly everyone’s favorite thing to do – or really even close. We don’t work hard all day only to get home at night and say “Hey, forget binge-watching the latest season of Ted Lasso tonight, I have an idea that’ll be way more fun – let’s set up a budget!”
Budgeting can seem tedious and time-consuming. It can lead to heated debates and the mere thought of it can bring on yet even more financial stress. And that might not even be what keeps most people from setting one up in the first place. They often avoid budgeting because they feel they will constantly be in the business of pinching pennies and watching every dollar spent. While some folks might find themselves in such dire circumstances that they probably could stand to pinch pennies and count every dollar, for many, that simply isn’t the case. In fact, budgeting can relieve stress in a big way. Yes, it takes some time and effort, and there might be some heated (but healthy and productive) debates that need to take place. In the end, though, you’ll be much better off.
Setting up a budget is actually pretty easy; however, doing so in a successful manner – one that allows you to be realistic while also working towards accomplishing your financial goals – well, that’s a different story altogether.
I believe that successful budgeting is effectively directing your income/money in such a way that you are able to accomplish all of your financial Priorities. Of course, doing so doesn’t mean it will happen overnight. But it will immediately provide a path and the framework you need to look at where you are today and where you are trying to go in the future. That sense of accomplishment alone will undoubtedly relieve stress. The hardest part is just getting started.
Before you can set up a budget, you need to understand how much you’re currently spending to live. So start by understanding your cash flow. What are your sources of income? This will be the easy part, most people will have income from a job, self-employment income and/or investment income. Second, how much are you spending to live? What are you basic living expenses (housing, utilities, food, transportation, insurance)? What are your discretionary expenses – like vacations, new clothes or eating out? What might be unplanned expenses – car repairs, home repairs, or medical costs? Finally, how much are you planning to save – include retirement plan, emergency savings and retirement savings?
Ok, we’re not going to lie, we know trying to figure out how much you spend is hard, but the easiest way to set up a budget is to go through and understand how much you’re spending today. It’s overwhelming, we know but here are some suggested approaches:
Manual: Set up an excel workbook. Download transactions from your bank accounts and credit cards and categorize your costs.
Online software: Mint is an online tool that electronically links to your accounts and categorizes with limited work from you. It’s free!
Hire a Professional: You might find what the professional can save you pays the fee!
Once you’ve summarized the cash coming in and the cash going out it will be a lot easier to see if you’re in balance. Don’t forget that savings needs to be a part of your cash flow plan. We tell clients to pay yourself first –then live on what’s left! We generally think of savings in three categories:
Emergency savings – things like loss of a job, repairing your furnace, paying for the deductible from a car accident, or hospitalization co-pays. An emergency fund is a separate savings or bank account used to cover or offset the expense of an unforeseen situation. It shouldn’t be considered a nest egg or calculated as part of a long-term savings plan for college tuition, a new car, or a vacation. Instead, this fund serves as a safety net, only to be tapped when financial crises occur. We would generally advise you to have 3-6 months of living expenses in emergency savings.
Short-term savings – semi-annual car insurance premium, vacation, wedding, college, etc.
Long-term savings – retirement
If you aren’t able to be successful in adhering to your budget, perhaps you are setting up financial goals that are simply too ambitious. Or maybe you’re trying to stick to a budget that isn’t realistic. It’s one thing to establish goals that are a bit of a stretch, but if you constantly fall short, you might end up giving up completely and then you’ll be even worse off.
If you don’t find that you’re able to develop and stick to a budget successfully, you wouldn’t be the first person to do either of these. The mere fact that you set a budget in the first place puts you in the minority. Most people don’t even bother with that step. As with most things though, if something is worth doing, then it is worth doing right. Budgeting is no different. Is it fun? Not necessarily (I happen to think it’s kind of fun, but maybe I’m demented). There can be some heated conversations, but those conversations can often be the most productive in defining one’s goals and priorities. There might also be a little trial and error in the process, but in time you will figure it out.
What I’ve found in working with people in creating their budget and financial plan is that they often find that their actions simply aren’t consistent with their stated goals and priorities. They want to save more for college, they intend to do more saving for retirement, and they hope to eventually pay off the mortgage. However, wanting/intending/hoping aren’t the same thing as developing a plan, working on that plan, then evaluating and revising as needed. One is a plan, the other isn’t.
Which category do you fall into?