Financial Planning 101 – Budgeting

It is an age-old question — How to budget money? And it is one that I wish I knew the answer to back when I first started earning an income. I would spend many late nights staring at the ceiling wondering where my income was going and why I struggled to afford some of the basic necessities in life. Once I learned how to use a budget as a useful tool, I gained control over my finances and sleep came easy.

The next step in our FP101 series considers how to manage your cash flow. In other words, how and why to create a budget.

Think of a budget as a financial plan for how to spend and save your money, usually over the course of a month. It is an evolving picture of your projected income and expenses that ensures you are meeting stated financial goals and priorities. Creating a budget will help you track your income over time and identify those expenses that you may not have known were taking a big chunk from your take home pay. Many people will develop bad financial habits over the course of their life, but a budget can aid in keeping you on track to meet your financial goals.

The first step in budgeting is to determine your short- and long-term goals, whether it be paying off debt, saving for a vacation, building up an emergency fund, or saving for retirement. Setting clear goals will make it easier to budget with a purpose.

Second, calculate your total after-tax monthly income from all sources. Start by looking at your paystub to find your salaried/hourly earnings, then review your bank and other financial statements to identify any interest or dividend income you may have.

The third step is tracking your expenses. Take a deep dive into your bank statements to determine the source of each expense, and categorize them into groups such as entertainment, groceries, travel, etc. Recording your expenses for a few months will give you a more accurate representation of your spending necessities and habits before making any major adjustments.

Once your income and expense have been quantified (collectively your cash flow), alter your spending habits and potentially cut out unnecessary expenses that are hindering you from reaching your financial goals. Of course, that is assuming you aren't on track to achieving those goals. Perhaps you may discover that you can shorten the timeline for achieving your goal with a few adjustments! Or you can allocate a certain amount to spend on specific categories and make some targeted budgeting decisions. One category you may want to prioritize is savings, which can also be automated (see the previous newsletter article "Financial Planning 101 - Excess Cash and Emergency Funds").

Lastly, continue to monitor your budget to assess its effectiveness and revise as your financial situation changes. Prioritize your needs first, and your wants second, but don't make sacrifices that will affect your overall happiness. The purpose of a budget is not to restrict you from buying the things you want, but to help you develop a more disciplined view of your finances and to create better spending habits over time.

Meet Matt D. Armendaris »

Read the August 2023 Financial Planning Focus:

• "Demographics are Important" By Glenn M. Guard, CFA^® »
• "Maximizing Financial Benefits and Protecting Assets Using a SLAT" By Laura Nash, CFP^® »
• "Investing in the AI Boom" By Rodrigo Huerta, CIMA^® »

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