Budgeting – Cornerstone of Success

5 Budget Tips You Need to Know

We’ve all heard the phrase “live within your means”. That’s much easier said than done. I’ve spent some time over the last year helping a few clients “live within their means” to achieve their version of financial success. Here are some helpful tips that you can put to work.

1. Budget – Not a Dirty Word

Try to think about budgeting as a means to an end rather than the annoyance we feel when the word is uttered. Don’t overthink it – take 30 minutes and create a budget today. Once constructed, you’ll have guardrails to keep you on the path to better spending patterns. However, before putting pen to paper, think about your overall family/business goals. These might be retirement, vacation home, new business capital, and so on. Also, consider this:

• Be reasonable in goal setting with easily identifiable and measureable milestones
  • i.e. down payment in 2 yrs.
• Are there other stakeholders should weigh-in to get their tacit approval?
  • You may be asking them to rein in spending too.
• How much you need to set aside monthly to achieve your goals?
• What specific expenses can you trim or cut altogether?
  • Divide into Needs, Wants & Wishes
  • Doing so will help you understand necessities versus “other”.

2. Know the Numbers

The biggest hurdle for most people is trying to understand exactly how they spend their money every month. Small purchases add up quickly over time. Here are two strategies in calculating your monthly spend.

Income Approach: The first approach is to add up your monthly income sources – these include W-2 wages, investment income (CD’s, bonds, etc.), rental property, K-1 distributions, etc. Then, add up how much you actively save in a month. Savings include how much you contribute to your 401k or other retirement account, how much you have remaining in your savings account at the end of the month or simply, how much you’ve set aside in a separate account. Subtract your “monthly savings” from your “monthly income” – the difference is how much you spend.

• For example, if your income is $5,000/mo and you save $300/mo, you’re spending $4700 per month.

Transactional Approach: The second approach is to meticulously track your expenses. There are excellent online resources to help you. My favorite is www.Mint.com and it’s free for the basic edition. You simply create an account, link your bank and credit cards, and the software does the rest! You can drill down into how much you’re spending on restaurants vs clothing vs car maintenance and so on.

I would recommend the Income Approach to establish your baseline. You can then set up the Transactional Approach to better understand the details behind your monthly spend.

3. Honesty is the Best Policy

Your parents have instilled the value of honesty. You need to be honest with yourself too. Common reactions I hear from folks after walking through the Income Approach:

• “I don’t spend that much”
• “this was an unusually expensive month”
• “I used to save X and was planning to start again next month”

Once you fully come to terms with your actual monthly spend, you can take the next step in budgeting. Honest reflection is an important step and one in which many do not achieve.

4. Monitor

Now that you’ve identified your actual spend, you’ll want to compare with your budgeted pro-forma spend. In other words, set a target amount that you would like to save on a regular basis. The target spend should take into consideration what you need to save regularly to achieve your goals. Your budget may need some tweaking to reach the target amount.

Financial tracking software will keep you on pace by monitoring your daily/weekly spend and communicating to you if you’re on the right track. There are many resources for monitoring your spend; some of which are detailed in the next section.

5. Automate, Automate, Automate

I can’t stress enough that whatever system you use, it must be automated. If not, you’ll have great intentions but quickly revert back to your old habits – its human nature. Some easy automation techniques are as follows.

1. Be certain your budget is online with built-in alerts (Mint.com, etc.). The casual prompts when you exceed your budget will start to retrain your otherwise stubborn habits.
2. Set up more savings accounts with automated drafts from your primary checking account. Banks have made setting up multiple accounts easy, low cost and even free in some cases. For example, setting up a “kid’s tuition”, “vacation fund” or “new business venture” and funding this on a regular basis, allows you to plan for these otherwise large one-time expenses. Not having this in place often results in loans and credit card debt that cost you handsomely in interest payments. In addition, if the money isn’t in your “primary account”, it’s spared the risk of being spent.
3. Leverage your employer’s retirement plan. Too often, we see folks not taking full advantage of the “company match” which is basically free money. As well, this money is payroll deducted for maximum convenience. Company retirement plans are a triple threat:

• Give yourself a raise
• Save for retirement
• Avoid over-spending/blowing your budget

“Retirement” is the biggest purchase you’ll ever make throughout your life. It’s one that most Americans spend very little time considering relative to other much smaller purchases such as homes and cars. Carve out some time, build a budget and start planning for the largest purchase of your life.

By: Mark A. Fissel, CFP®