It can be your best friend or your worst enemy. Something you look forward to making or something you can’t stand to even think about. Regardless of your feelings about it, it’s something that’s necessary for the vast majority of people. Yes, we’re talking about budgeting, and we’d like to give you a few pointers to upping your game. The process of making a budget can be a little overwhelming/embarrassing, but it’s one of your most important financial tools to take advantage of. Let’s break this down from a fundamental standpoint!
You might be wondering how making a budget can be embarrassing. Well, let me tell you, putting a spotlight on each and every one of your monthly expenses is a very sobering experience. Incidentally, that’s the first step in making a budget; seeing where the money comes in from (your job), and where it goes to (monthly expenses). For your expenses, it’s easy to break them down into two categories; fixed and discretionary. Fixed expenses are things like rent/mortgage, car payment, insurance, food, etc. Discretionary are things like entertainment, vacations, miscellaneous fun things… You know, things that you could always spend less on if you really needed to. Those discretionary expenses are where things really come to light. You can easily go from being blissfully unaware of how much your Starbucks habit is costing you, to being thrust into the cold, dark realm of reality. Take my word for it. Additionally, be sure to plan for seasonal expenses, like Christmas gifts, and contributing to an emergency fund. Once you have all your monthly expenses lined up, deduct them from your income, and voila! Your monthly surplus or shortfall has been revealed! If, Heaven forbid, you do have a shortfall, simply decrease your discretionary expenditures. This may be easier said than done, but it is absolutely essential.
Now then, ideally you’ll be having a monthly surplus after everything is said and done. Naturally, the question asked after seeing your monthly surplus is well, what do I do with it? It is entirely up to you. This is where having financial goals comes in handy. Would you like to save for a child’s college? Contribute it to your retirement fund? Go on another vacation? Whatever your heart desires.
Right, so you’ve got your goals, you’ve got your budget, now what? Now it’s time to execute. It’s time to have self-discipline, and follow the plan you’ve made for yourself. A few times during the month you should evaluate your expenses to make sure you’re sticking to the plan. Ultimately, here’s the bad news: Life happens. Cars not starting, home AC systems going out, hospital visits… Inevitably, SOMETHING will happen and throw a wrench in your big beautiful budget. Remember earlier when we mentioned contributing to an emergency fund? Use it. Be flexible with it. If you’ve got savings built up, taking a shortfall one month because of an unforeseen expense won’t sink you. This highlights the paramount importance of having an emergency fund in the first place.
Lastly, we’d like to give you a few pointers to stay true to your budget:
Get an accountability partner. Your spouse (if you have one) should be involved in creating a budget. He or she can help stay on track. If you’re single, having a friend involved can go a long way.
Self-Discipline. Have some. Those little impulse decisions at the market, at the bar, wherever you are, those add up. Be disciplined and consciously think about the decisions you are making.
Determine the difference between “wants” and “needs”. You may want that super luxury recliner, but you NEED the food in your fridge. Act appropriately.
Reward yourself! Following a successful month of budgeting, take a small amount of your surplus and treat yourself. Go out for dinner. Buy those shoes. Positive reinforcement never hurt anybody.
And there you are. Budgeting 101 from Strategic Advisory Services. Now, we know some peoples’ incomes and expenses are sometimes much more complicated than most. If you are one of those people, or know someone like that, give us a call! We’d love to be able to help you with a cash flow analysis and determine a path to achieving your financial goals. For everyone else, get after it!