Financial Fundamentals — Budgeting
When we sit down with new clients, one of the first questions we usually ask is “Do you have a budget?” This single question can lead down many different paths to help us better understand your thought process when dealing with money. Hearing about your budget also offers a surprising amount of insight into your values, priorities, and goals.
Now, I’m not going to sit here and tell you that everyone has a budget. The fact of the matter is, some people do not, and in some cases, that’s OK. Also, there is no one right way to keep a budget. Some are more detailed while others offer more flexibility. Some concentrate on tracking past expenses while others attempt to direct future spending. But however you go about it, most people can benefit from having a sound budget. There are a number of different facets to being successful in creating your budget. Here, I will share some tips and hints as to how you can incorporate a budget into your lifestyle.
First off, it is helpful to review your previous year’s spending. If that task is too daunting, looking at the previous month is a good place to start. You can also seek help from technology, like we discussed here. The idea is to understand what money is coming in, and what money is going out. A lot of times people are surprised at what they find in the details, such as that gym membership you never use, or that random subscription service you forgot to cancel.
Next, as in most cases when creating change, you have to understand your goal. Why are you budgeting? Is it to make sure you can afford certain amenities or experiences? Or is it to help you maximize your savings so that you can retire early and not have to work for a paycheck anymore? Understanding your priorities and what is important to you can help you set appropriate goals.
Now, get out your crystal ball and try and predict the future. Make sure your budget isn’t too lenient, or it won’t help you reach your goals. But also make sure it isn’t too strict, where it does not allow for wiggle room. It’s important to prepare yourself for when life happens. Examples would be when you need new tires or brakes on the car, or if all of a sudden your oven stops working. Studies show that many households in America cannot withstand even a $1,000 emergency. Rules of thumb, which are helpful as guardrails, suggest having three to six months of expenses saved in an easily accessible cash account. This will help in preparing yourself for the certainty of uncertainty.
One last parting thought, don’t be too hard on yourself. A lot of times keeping a disciplined budget is difficult. Most will fall off the proverbial horse. But, it is important to get back on and adjust your personal budget as necessary to help you stay on track to achieving your goals.The views represented are not meant to be construed as advice. Moreover, no client or prospective client should assume that this content serves as the receipt of, or a substitute for, personalized advice from Affiance Financial, or from any other professional.