What if I told you that you didn’t have to “stick” to a budget? What if I told you that a budget is just another way to track your spending? Would it matter?
Whether it’s retiring at a certain age, paying for college, buying a new car, or purchasing a vacation home, we all have financial goals. We have dreams, thoughts, and ideas of how we’d like our financial life to play out. A budget is merely a tool, one that helps you turn those dreams into a reality, typically in the form of a document that tracks where your money is going. A budget doesn’t care where your money goes; it merely relays information about where your money is allocated to help you make informed spending decisions. Here are a few tips to get your budget working towards your goals, so you take control of your financial future.
Let’s be honest; most of us don’t use cash regularly. Credit card companies and banks track our spending (ever notice the ads that pop up in your Facebook feed?), and they even categorize our expenses for us. Look back at your most recent statements and pull your purchase information to compile how much you spent in each of your categories. You can use a spreadsheet, a scrap piece of paper, or the back of a napkin. There are also some online tools to help get you organized. Go ahead and do this for the past 3-6 months (recognizing that the COVID restrictions may cause you to underspend in some categories) of expenses. ¹ This breakdown should give you an average of your spending habits by category. Now pull out your paystubs and record your income for each of those months. Hopefully, your income was more significant than your expenses. Either way, now we can move on to the next step.
Now is the time to look at the difference between your income and your expenses. If your expenses are greater than your income, look at your categories and determine your wants and needs. The needs have to be paid (mortgage/rent, groceries, power, and water bill) while your wants can be adjusted. If you have to adjust your expenses, don’t go too crazy on your reductions in any one category, but make realistic changes that you can stick to. The goal here is to create a zero-sum budget where your income equals your expenses. However, if you have “left-over” money, don’t be in a hurry to increase your spending categories. Go ahead and put that “extra” money into a miscellaneous savings category, which will come in handy for the next step.
What do you want to do? Do you wish to be debt-free, have a fully-funded emergency savings account, save for college, or invest money for retirement? Whatever your goals are, place them in a priority order that is important to you. You may not be able to fund all of your dreams at once, so you’ll need to take it little by little, much like Shel Silverstein’s poem, “Melinda Mae.” Once you have your priorities listed, take money from your miscellaneous savings category and put it toward your chosen goal or goals. The amount of time it takes for you to meet your goal will depend on how much income you can put towards it. One additional word of caution, if you’re married or have combined income and expenses with a significant other, make sure you set goals together!
Beta Test and Refine
Now that you have a spending plan that puts a name to every incoming dollar, go ahead and test out your categories. Did you put too much money towards one and not enough into the other? Don’t be afraid to adjust until you find something that works for you. The key here is to make sure you’re not spending more than you make so that you can begin to make meaningful progress toward your goals. You’re not stuck in your spending plan; remember this is a living document and can change as your needs, desires, and life circumstances change.
Strangely enough, this is merely an introduction to budgeting for your household.² The intent is to give you the tools, ideas, and action steps needed to guide you towards your financial goals. Many obstacles can keep you from reaching your financial dreams; if you have more questions about budgeting or other financial matters, please reach out to a Bridgeworth Advisor.
Andrew D’Amico recently passed the CERTIFIED FINANCIAL PLANNER™ exam and is a Planning Coordinator with Bridgeworth Wealth Management in their Huntsville office. He’s completing his experience credit now and should earn his CFP® designation in the next couple of years.
¹If you run a cash system in your household; then you’ll need to save receipts and categorize them by hand or by scanning software
²Dave Ramsey’s book “Total Money Makeover” is an excellent resource for a more in-depth discussion on budgeting and money management.