Financial planning revolves around what we can control. For example, we can’t control stock market returns, tax rates, or unexpected events, but we can plan to mitigate these risks through diversification, tax planning, and insurance. Of all the areas in financial planning, we probably have the highest degree of control over our income, expenses, and savings, making it extremely important to create a workable budget. Let’s review the five keys to creating a budget you can stick to.

Know Your Expenses

No matter how you are compensated (hourly, salary, commission), it is important to make a projection of your take-home income each month to compare to your budgeted expenses, which shouldn’t exceed your income. If you are paid less frequently than monthly, it’s important to know how long that income is expected to last and have a plan to spread out your resources accordingly.

Break Your Expenses into Needs, Wants, and Savings Goals

No two budgets look alike. You can find budget templates online, but none will contain the categories and level of detail that fit your needs. However, creating these three basic categories will get your workable budget off to a great start.

Monthly Needs

These are expenses that you need to survive every month and should include housing costs, minimum loan payments, utilities, groceries, and other basic needs. Everyone’s definition of needs is different (e.g. I wouldn’t consider my gym membership a need, but some would). It’s ideal to keep these expenses under 50% of your take-home pay.

Monthly Wants

This is the part of the budget reserved for the finer things in life that you could live without such as dining out, new furniture, entertainment, sports, etc. It’s ideal to keep these expenses under 30% of your take-home pay.

Savings Goals

This is the part of the budget reserved for long-term goals such as setting up an emergency fund, vacations, a new car, or a house. For each goal you have, pick a date you would like to accomplish that goal. Then divide the dollar amount by the number of months until that date to determine a monthly amount. For example, if I wanted to buy a car for $18,000 in three years, I would need to budget $500/month ($18,000/36 months) to achieve my goal.

Because repaying credit card and student loan debt does not happen overnight, making additional principal payments can also be lumped into the long-term savings goals category. By paying down loans, you are not technically saving funds, but you are reducing the amount of interest paid over the term of the loan. For debt repayment goals, it helps to set a desired payoff date and use an amortization calculator to determine how much to budget for your goal.

You should also set aside part of your budget for retirement savings. This is especially important if you aren’t making contributions to an employer sponsored retirement plan through payroll deductions. Using a retirement savings tool or working with a CERTIFIED FINANCIAL PLANNER™ professional can help you determine how much you need to save to help you work toward your retirement goals.

Track Your Expenses

I find that many people actually do have a budget, but not so many are budgeting. What’s the difference? Having a budget is a great start and provides spending goals to measure your expenses against. Budgeting includes tracking your expenses and updating your budget as your income and expenses change.

If you aren’t tracking your expenses, how will you know if you’re achieving your spending goals?  Doing this with pen and paper or an Excel spreadsheet can be extremely cumbersome. Fortunately, there are hundreds of software tools available to help track your budget and expenses. MintQuicken, and YNAB are a few examples of tools that can assist you in expense tracking. Although tracking expenses can be cumbersome, it is an imperative component of budgeting that cannot be overlooked.

Make Your Budget Flexible

You’ve projected your income, broken your expenses into categories, and are tracking expenses. What happens when you’ve gone over budget? One very important part of budgeting is making sure your budget is flexible enough to absorb the impact of overspending in a category (which will happen more than you think). Let’s say you had budgeted $500 for groceries, and you check your grocery expenses after your final grocery trip of the month, and the total expenses are $600. It’s important to adjust your budget by taking the $100 you had gone over budget and reducing another spending category or goal (i.e. reduce the amount you will spend on clothing or save for your vacation). Making your budget flexible will also help you understand the consequence of each spending decision. Do you really need those $200 shoes? If you only have $150 left in your clothing budget, you will need to make sacrifices elsewhere.

Dedicate Time to Track Your Progress

Creating a workable budget includes “time budgeting.” Plan to dedicate at least 20 minutes a week to work on your budget. That’s roughly three minutes a day. I take a half hour every Sunday night to update our budget. Carving out the time to track and update your budget will keep you “budgeting” and not just “having a budget.”

Having a workable budget is an important component of financial planning. Download our fillable budget worksheet to get the ball rolling.

Author Adam J. Glassberg Financial Advisor

Adam specializes in helping successful professionals and doctors create their unique path to financial independence. In 2019 he was selected as one of the top 40 financial advisors under age 40 in the country by InvestmentNews.

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