8 Keys to a Workable Budget
Your financial planning revolves around what you control. Here’s how to take charge of your budgeting fundamentals.
We can’t control stock market returns, tax rates or unexpected events. We can plan to mitigate risks through diversification, tax planning and insurance. Of all areas in financial planning, we most control our income, expenses and savings, making it extremely important to create a workable budget.
Below are keys to creating a budget you stick to.
Know your resources. No matter how you are paid (hourly, salary, by commission), project your take-home income each month to compare it with your budgeted expenses. Your budgeted expenses must never exceed your income.
If you are paid less frequently than every month, know how long that income must last and plan to spread your resources accordingly.
Break expenses into needs, wants and savings. No two budgets look the same and probably no online templates contain all categories and level of detail that fit your exact budget needs. Creating these three basic categories gets your budgeting plan off to a great start, though.
Monthly needs. You need to pay these expenses every four weeks: housing, minimum loan payments, utilities, groceries and other basics. Ideally, keep these under 50% of your take-home pay.
Monthly wants. This part of the budget goes for the finer things in your life that you can live without, such as dining in restaurants, new furniture or entertainment. Ideally, keep these expenses under 30% of your take-home.
Savings goals. Reserve this slice of your budget for long-term goals such as setting up an emergency fund, vacations or buying a new car or house. Pick a date by which you want to accomplish each goal and divide that dollar amount by the number of months until that date; this determines a monthly amount.
For example, if I want to buy a car for $18,000 in three years, I need to budget $500 a month ($18,000 divided by 36 months) to achieve my goal.
Because repaying credit card and student loan debt takes time, lump your additional principal payments into long-term savings goals. Paying down loans doesn’t technically save money but you reduce interest you pay over the term of the loan. Set a desired payoff date and use an amortization calculator to determine how much to budget for your goal.
Also set aside a portion of your budget for retirement savings, especially if you don’t contribute to an employer-sponsored retirement plan through payroll deductions. Using a retirement savings tool or seeing a certified financial planner helps you determine how much to save to achieve your retirement goals.
Track expenses. Many people actually do maintain a budget, but not so many are budgeting.
Having a budget is a great start and provides spending goals to measure your expenses. Budgeting includes tracking expenses and updating your budget as your income and expenses change. If you don’t track your expenses, how will you know if you achieve your spending goals?
Doing this with a pen and paper or with an Excel spreadsheet can be cumbersome. Fortunately hundreds of software and online tools help: Mint, Quicken and You Need a Budget, for example, assist you in expense tracking.
Don’t overlook this imperative component of budgeting.
Make your budget flexible. You now project your income, break your expenses into categories and track expenses. What happens when you go over budget?
Make your budget flexible enough to absorb overspending in any category – which will happen more than you think. Let’s say you budgeted $500 for groceries and after your final grocery trip of the month the expenses total $600. Adjust your budget by reducing another spending category or goal – perhaps clothing or vacation funds – by $100.
A flexible budget also helps you understand the consequences of spending decisions. Do you really need $200 shoes? If only $150 remains in your clothing budget you need to sacrifice elsewhere.
Dedicate time to track your progress. Dedicate at least 20 minutes a week to working on your budget. (I take 30 minutes every Sunday night to update my budget.)
Carving out time to track expenses and update your budget keeps you budgeting.
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Adam Glassberg, CFP, is a financial planning associate at D3 Financial Counselors in Downers Grove, Ill.
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