Updated: Feb 15
Through the month of January, we are going to explore the importance and use of the household budget. Perhaps you’ve already selected this as a goal for 2023 on Make Up Your Mind Day. If so, then you are in luck to gain valuable resources to set you on the path of success.
What is a budget?
I like to think of my budget as a roadmap. Where I am today is Chicago while my furthest goal is Key West. If I spend all my money in Chicago, I won’t actually retire in Key West. If I put aside money for the future, I will have that house plus a little income to live comfortably in Key West.
More specifically, a budget allocates income to today’s expenses as well as tomorrow’s needs. The goal is to balance living comfortably today with being secure and happy in the future.
How will a budget help you?
Budgeting isn’t about depriving yourself. It’s about taking control of your money. It tells your money where to go rather than you wondering where it went.
If you are consistent with using a budget, it will keep your spending in check and make sure your savings are on track for your most important goals down the road. If you spend and save without a budget, you may find yourself prioritizing the needs of today over that of your future self. You won’t make it to that little cottage in Key West.
Many folks I speak with do not know the total amount of money they spend each year. Further, they can’t articulate how it was spent. Good financial hygiene, or getting ahead in life financially, requires being able to answer this question. If you do not know the answer, fear not. Many don’t. And that is okay. Today is a new day.
The First Step
How can you begin this journey towards good financial hygiene and a successful budget? It starts with identifying your destination and your current location.
Identify your destination goals.
What is important for you to achieve? Is it family, community, or experiences? What are your priorities and desires? Starting with an important goal in mind will motivate you to tackle your budget. Take a picture that represents your most important goal and paste it near your computer or in your day planner.
You may have already identified these goals –– perhaps buy a vacation home, meet your goal of a $1 million charitable donation, or getting that private jet card. These are examples of destinations. Others might include funding your children’s (or grandchildren’s) college savings plan or purchasing an old car to restore. Most folks include a retirement goal of having a set amount of money per month to spend at a desired age.
Take a moment now to write a list of goals you would like to achieve. Take it a step further by identifying them on a timeline. This is your personal roadmap from A to Z.
Identify your current location.
Next, you need to identify where you are on your journey. Your current location assesses whether you are meeting today’s lifestyle needs as well as progressing toward your future goals by investing each month to meet each one of them.
To do this, you need to categorize your spending into three buckets. The three buckets are essential, discretionary, and future. Essential includes items like keeping a roof over your head and having health insurance. Discretionary includes fun experiences such as dining out, traveling, and going to concerts. Future is what you are putting away for retirement or for a goal such as that major charitable donation. Each of these catagories are explained further in the next blog post – How to Create and Maintain Your Budget. In order to categorize your spending, you will need to do some research.
Are you ready to get started?
Information for your Baseline.
Begin with collecting information on where your money is going. If you use Mint, You Need a Budget, Quicken or another expense tracking tool, you can simply run a report on your last twelve months of spending. Check out this Investopedia article on budget tools if you prefer to use software to track your spending.
The old fashioned method works well too. Gather (perhaps print) your bank, credit card, and other financial statements from the last 4 months. Gather your most recent mortgage and auto loan schedule. Identify the amount you are putting away each year from your retirement savings including 401k, IRAs, and brokerage accounts. You will need to gather enough statements to provide adequate information to write down your actual monthly expenses across a full year.
The Next Step.
I will cover how to review and assess your spending in next week's blog post. This will illuminate your priorities and the progress toward your personal goals or destination. Subscribe today to receive notification on this post as well future blog articles.
Other Useful Resources:
I did not cover getting out of consumer debt in this series. If you have significant amounts of consumer debt, check out this article on Investopedia.
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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.