One of the simplest rules of personal financial management is “make a budget and stick to it”. A budget is an estimate of income and expenditures for a set period of time (monthly, quarterly, yearly) that will help you achieve higher levels of contributions to meet your longer-term financial goals.
A budget will also help you improve your spending habits and stay ‘on target’ for your future goals. If getting started with your first budget seems complicated, follow these tips and don’t hesitate to reach out to Monument Financial Group and how network of financial professionals.
Positive Cash Flow – Your Current Income
Start with the positive side of your cash flow – the sources of income that support your current lifestyle and potentially will fund your future dreams. This will include all sources like wages, salary, side gigs, business income, investment income, alimony/child support, etc. Pay close attention to the federal and state income tax withholding on these items and use net income after all withholding and deductions like medical, dental, 401(K) and other employer benefits. For contract work or commissions, these may not include the deductions for income tax, social security and medicare so these will need to be accounted for as expenditures.
Negative Cash Flow – Your Current Spending
If you are not aware of your current spending habits, you won’t be able to make a realistic budget. Review your credit card statements and checking accounts to identify all of your expenditures. Many of the recurring expenditures (rent/mortgage, utilities, groceries, child-care, etc…) will vary month-month so calculate averages and remove any major exceptions like large one-time purchases. To plan out your estimated expenditures, you can either use an app like Mint or record it in a spreadsheet.
Understanding Your Irregular Expenditures
Irregular expenses refers to those annual or one-time significant expenses that can make or break your budget planning. Once again, your credit cards, on-line cash accounts (PayPal, Venmo, etc…) and checking history should help you identify these. These typically include annual insurance premiums, home & auto repairs, property & income taxes and other ‘special purchases’. Also, be sure to include planned and un-planned items like repairs (home, auto) or unplanned out-of-pocket medical expenses. On the income taxes, remember to include estimated tax payments throughout the year including the final payments.
Your Future Financial Goal
If you are budgeting for a specific goal like retirement, your children’s college education or an investment property, determine how much you need to have in the future and the periodic contributions required to meet that goal. The more specific you are, the more likely you’ll be able to achieve it. Monument Financial Group can help you determine the monthly contributions, based on various investment options, required to meet the target. However, if you don’t have any such goal in mind and simply want to save, that is OK as well and document this in the budget.
Create Your Budget – Income and Expenditures
Once you have identified and documented all of your income and expenditure items, you can compare them to see if you will have a net deficit (spending more than earning) or surplus (earning more than spending). Assuming you have included a ‘future financial goal’ expenditure in your plan, the objective is to have your income equal or exceed your expenditures.
If there is a deficit, then you have a challenge and it means you either need to earn more or spend less. Look for opportunities to reduce recurring expenses through a process we call ‘refinancing your finances’. Assuming you included a ‘future financial goal’ item in the plan, maybe this needs to be reduced slightly?
If you have a surplus (yay!!!), then increase the amount allocated to your ‘future financial goal’ or add a 2nd, smaller one to the plan.
The Bottom Line
Budgeting is really not that hard once you get the hang of it but it often helps to have a ‘trusted partner’ like Monument Financial Group assist with the process or help get you jump started. At Monument Financial Group, we can help you review what you have and identify options to free up even more money for your future retirement or college savings through our ‘refinance your finances’ process. Reach out to us anytime at 719-453-1853 for a free budget consultation and to begin saving money for your future.