One of the biggest barriers to creating and following a household budget is the hurdle of looking at the numbers in the first place. It\u2019s stressful, and it often comes with unspoken guilt and shame about how you handle money.<\/p>\n
Let\u2019s start by getting to a more neutral place about your financial literacy. None of us receive a standardized \u201chow to use money\u201d lesson<\/strong>, and the things we learn about personal finance are always delivered and received through a lens of lived experience. Someone who fought hard to get out of credit card debt may advise you to never open a line of credit in the first place, but someone who leveraged a card\u2019s promotional period to pay off a large balance may recommend a strategic use of credit.<\/p>\n Neither one is \u201cright.\u201d They are both valid options, and the advice you take will depend on your own situation, needs, and goals.<\/p>\n The purpose of a financial review is to evaluate your spending and make sure it lines up with your priorities. If you aren\u2019t intentionally spending, saving, and investing, then you\u2019re likely to end up wondering where all your money went in the first place!<\/p>\n Start by gathering up your bank and credit card statements for a certain period of time \u2013 we recommend starting with at least three months, but going through a year of your records will give you the best baseline numbers. Your bank may offer a spending review each month, breaking down your transactions into categories like utilities, entertainment, dining, travel, etc., and this is the same approach you\u2019ll take with your review.<\/p>\n Once you have your numbers laid out in their respective categories, examine them. What percentage of your income do you spend on housing, transportation, food, and fun? Are you saving for retirement or a college fund for your kids? Does anything look out of place?<\/p>\n Finally, go over the numbers again, this time noting which of your expenses are essential (necessities), strategic (savings, investments, debt repayment), and discretionary (vacations, gifts, entertainment, etc.).<\/p>\n Ideally, you\u2019ll be able to cover all of your expenses with your income, without needing to borrow or use credit to make ends meet. We\u2019ll use the 50\/30\/20 budgeting approach<\/strong> for nice round numbers: roughly 50% of your after-tax income should be spent on essentials, 30% for discretionary spending, and 20% for savings and debt payoff.<\/p>\n This breakdown isn\u2019t a strict rule. Adjust as needed to fit your financial situation.<\/p>\n Essentials may differ from person to person, or family to family. A family with great health insurance from an employer won\u2019t need to plan for medical expenses as much as a self-employed person with insurance from the marketplace with a high deductible. Consider the following expenses when determining your list of essentials:<\/p>\n Housing: <\/strong>Rent or mortgage payments, insurance, utilities, HOA fees<\/p>\n Transportation: <\/strong>Car payments, insurance, gas, tolls, parking fees, public transportation fare, ride-share costs, vehicle maintenance and repairs<\/p>\n Healthcare: <\/strong>Health insurance, medications, copays, supplements, consumable medical equipment like blood testing strips or CPAP components, etc.<\/p>\n Childcare: <\/strong>Daycare expenses, school fees, costs for extracurricular activities, club dues, babysitting costs, diapers, clothing, etc.<\/p>\n Groceries: <\/strong>Food, drinks, household items, a portion of restaurant spending (some is discretionary, but it\u2019s also okay to include a budget line item for takeout as a necessity\u2014we\u2019re overworked).<\/p>\n If these costs come out to more than 50% of your take-home pay, look for wiggle room where you might be able to decrease spending. There may not be room to reduce costs, in which case you might need to adjust your percentages to accommodate the need for more than 50% of your income in this category.<\/p>\n Roughly 20% of your after-tax income should be dedicated to strategic financial moves, such as saving an emergency fund, investing in your retirement, saving for large purchases, and paying off debt.<\/p>\n For an emergency fund, you\u2019ll want to set aside enough money to cover three to six months of your essential spending.<\/strong> That number will vary based on your situation, family size, etc., so it\u2019s okay to break it down and save a little each month instead of making huge deposits to get it done ASAP.<\/p>\n You can also set up sinking funds<\/strong> for larger expenditures like a down payment, car or home repairs\/upgrades, or lump sum insurance premiums. For instance, if you have a life insurance policy that renews in April for $360, setting aside $30 per month means you don\u2019t have to adjust your monthly budget that month to accommodate the large payment. Changing payment plans (such as car insurance, cell phone service, or subscription services) to be annual or semi-annual can often trim costs and offer savings, and then you can set aside the monthly amount in a sinking fund to pull from when the bill comes due.<\/p>\n If you aren\u2019t already saving for retirement<\/strong> and your workplace offers a matching contribution as a benefit, start there. If you\u2019re already investing and getting it matched, you could open a Roth IRA, which has a max contribution of $7500 per year (this number may change in the future). If you can dedicate $7,500 of your annual budget to retirement, this is a great choice to allocate funds strategically.<\/p>\n Paying off debt<\/strong> can be done in a couple different ways \u2013 namely, the debt snowball vs. the debt avalanche. First, list your debts including their balance, minimum payment, and interest rate. Before beginning either approach, make sure you\u2019re only paying the minimum payment on all of your debts except the one you\u2019re focusing on first.<\/p>\n For the snowball method, you\u2019ll start by paying off the smallest balance first, then adding that payment onto the minimum payment for the next debt. Your payments will grow as you continue to pay off balances, like a snowball that starts small and continues to pick up snow as you roll it. The debt avalanche starts with whatever debt has the highest interest rate, with the goal being to reduce the amount of interest paid overall.<\/p>\n If you have trouble sticking to long-term financial plans and budgets, the snowball method may be better for you, because it offers easier wins to start, which psychologically reinforces your new debt payoff habits. Brains love dopamine, and paying off a balance in full is an excellent way to give yourself a little dopamine boost.<\/p>\n The remaining 30% of your after-tax income can be used on discretionary spending like entertainment, restaurants, gifts, vacation, etc. This is the most flexible area of the budget, because it\u2019s truly subjective. Some may consider clothing and haircuts to be discretionary, while others may consider a monthly trip to the salon part of their essentials. You may hire a cleaner or use a meal subscription service to accommodate your needs, while others consider those services a luxury.<\/p>\n At the end of the day, discretionary spending is anything that you could cut out if an emergency happened and you needed to reduce your budget to just the essentials. You\u2019re the best judge of what counts for each category.<\/p>\n Great, you\u2019ve got a budget, and you know roughly how much of your income you can spend on essentials, strategic plans, and discretionary funds. But why bother doing this at all? Simple: so you can intentionally plan your financial future.<\/p>\n What financial goals do you have? Some common goals include:<\/p>\n Get as specific as you can. Instead of \u201csave for retirement,\u201d really think about how much you want to save. How much money do you want in your retirement fund when you reach retirement age? How early do you want to retire?<\/p>\n You can get help answering these questions and strategizing your financial future by working with a Financial Advisor or Financial Planner \u2013 we recommend Morgan Financial Associates!<\/a><\/p>\n Once you\u2019ve reviewed your finances, made a budget, and created a long-term financial plan, all that\u2019s left is to keep up with the process. Check in with your budget regularly to make sure your spending is in line with your 50\/30\/20 target.<\/p>\n Teach others around you how to manage their finances this way too \u2013 if you have children, it\u2019s never too early to start teaching them how to spend and save wisely.<\/p>\nStep One: The Financial Review<\/h2>\n
Step Two: Creating Your Budget<\/h2>\n
Essential Spending<\/h3>\n
Strategic Spending<\/h3>\n
Discretionary Spending<\/h3>\n
Step 3: Create a Plan<\/h2>\n
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Step 4: Keep It Up<\/h2>\n