Updated: Feb 17
Begin 2023 with the mindset of prioritizing your financial wellness.
In the spirit of National Mentoring Month, I have assembled 4 key exercises to start your year off right by prioritizing your financial wellness.
In the previous post Plug the Leaks in Your Expenses, I challenged you to find $1,000 of savings over the next 12 months by eliminating or reducing some of your subscription costs. For this task, you had downloaded last year’s credit card statements and looked for recurring payments.
With this task successfully completed, you are now ready for the next challenge –– creating your budget for the next 12 months.
A budget is important for a couple of reasons. The most obvious reason to make a budget is so you’re never caught off-guard with more bills than money. However, even if you already do an excellent job of not overspending during the month, keeping a budget provides you with information regarding your spending habits. This brings your priorities into focus. Not only can this help you plan for even long-term goals, but it can inform you of what expenditures truly make you happy and which habits you could leave behind.
Create Your Budget For The Next Twelve Months
Experts believe that once consumers’ shopping habits are ingrained, it’s incredibly difficult to change them. This is why I am now asking you to look for your spending habits. So grab your credit card statements and review your pattern of spending.
How have you been spending your money this past year? And, how do you want to spend it differently? Are you meeting your savings goals? Are you able to enjoy life or are you finding yourself always worrying about making ends meet?
1. Categorize your spending.
As you review your previous 12 months of financial statements, group your spending into categories. The three categories are essential expenses, fun/discretionary spending, and planning for the future.
Essentials: Shelter, Food, Health, Transportation
Essential expenses are ones you cannot do without. The cost of maintaining a roof over your head, food, transportation, insurance to protect your family, and items or services needed to support your professional identity are all essential items.
Make a list of your recurring monthly expenses. From this, you can pinpoint the majority of essential spending. For essential bills that are paid once a year, such as property taxes, simply divide that expense by twelve to lessen the pressure of a large but anticipated expense.
How to decide what is Essential? If you ran out of money tomorrow, you would probably find a way to pay your mortgage, car payment, and cell phone before your country club bill. But to go a layer deeper, think about when you purchased your car. Did you opt for a higher monthly car payment to pay it off quicker? Even if you went with a $1,000 a month payment, you can count it as essential as long as your income still leaves room for Fun and Future spending. But, if that $1,000 a month car payment prevents you from saving for retirement, it may be necessary to reconsider your priorities.
Fun or Discretionary Spending
Discretionary spending are the things you can do without but makes life more enjoyable.
It is a dinner date to the new restaurant downtown and a family movie night at the local iMax theater. It is purchasing apps for your iPhone and an occasional grande frappuccino at Starbucks. It is taking a week-long vacation cruise to the Bahamas and playing a regular round of golf at the country club. It is buying gifts for your loved ones and funding a car restoration hobby.
Making charitable donations that improve your local community would go in the discretionary category too.
These discretionary expenses are not necessary to have a roof over your head, but they add value to your way of living.
Saving and Investing for the Future
During your prime working years, typically age 35 to 55, it is imperative to place money aside to invest for the future. Depending on your goals, allocate 20-30% of your monthly income towards investing for the future.
For each individual, the amount and goals will vary. You may be saving up to purchase an investment property, fund a child’s education, or socking away money for your retirement.
Work with your trusted financial advisor to identify how much you need to save to hit each goal in your desired time frame. For example, fund in-state college tuition in 12 years. Or, take a less stressful job at age 60.
Work with your trusted financial advisor to identify how much you need to save to hit each goal in your desired time frame.
If you are unsure you are on pace to meet your goals based on what you’ve allocated towards each, it will be a good idea to bring the conversation to your financial advisor. After you’ve worked out your monthly budget and documented where your money is going, bring your questions and documents to your next meeting.
2. Formulate Your Budget
The most important piece of advice you need to always remember is your income must be equal to or greater than your expenses.
If your annual income from all sources is $350,000 (post tax) and annual expenses are $400,000. You are negative by $50,000 each year, which means you are taking on debt to meet essential and fun expenses. You may need to revisit spending habits if this is the case. Sometimes difficult choices such as downsizing your home, selling a vacation property, or driving less fancy cars should be considered.
You will be happier in the long run if you have control over your spending and are investing for the future rather than winging it and hoping everything will work out for your family.
For many folks, essentials will range from 40% to 60% of your monthly income. Keep in mind, the higher your essential spending, the less flexibility you have for discretionary spending and less investment for your future. Fun/Discretionary Spending may range from 20% to 30% while your Future Funds may range from 20% to 30%.
There are no hard and fast rules, these are guidelines to consider.
If you are older, perhaps in your late fifties, and have already saved a substantial nest egg, then your Future budget may require only 10-15% of your income and you’ll be able to increase your Fun or Essential spending. If you are in your prime earning years, between age 35 and age 55, I strongly suggest your future expenses should be 30% of your income to make sure you have a substantial amount of savings for kids’ college, retirement, and can maintain sufficient flexibility for the ups and downs of life.
A friend of mine generously shared her monthly budget so I may share it with you. You’ll see how she prioritizes essential, fun, and future spending as well as the percentage distribution of her total monthly income. Her monthly income is right around $11,000 a month, so her spending pretty much matches her income.
As you complete today’s exercise, ask yourself: Does your spending align with your income?
3. Evaluate Your Budget Periodically
Take time each month to evaluate how your essential, fun, and future spending is balanced with your budget. Is your money meeting your current desired lifestyle while providing for your future needs? Does your Essential and Fun spending truly make you happy? Are there items you could be content without? Do you feel good about the money you are investing in your future?
Keep an open dialog with your spouse/partner and family so everyone is on the same page.
Do you have fluctuating income?
Some folks have a fluctuating monthly income if they own a business and take occasional draws or they receive periodic bonuses or commission checks. If this is you, then read How To Budget With a Fluctuating Income.
Are you comfortable with your progress towards retirement? Would a financial couch help you stay accountable to meet your financial goals? If you have more than $2 million saved, the Peak Wealth Planning team can assist.
Peak Wealth Planning specializes in helping high-net worth individuals and families plan for the future.
Other Useful Resources:
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.