Foundational Financial Planning:

Setting A Budget

A quote by Erika Oppenheimer appropriately points out that "without a solid foundation, you'll have trouble creating anything of value." This is true whether you are starting a career, building a business, trying to achieve financial independence, and countless other ventures in life. The challenge with most people is that they want to focus on the destination without developing a roadmap to get there and an understanding of where the journey begins. When it comes to financial planning, the foundation of any good plan starts with creating a budget.

Budgeting for a Clearer Picture of Retirement

The number one question I get asked is whether someone is saving enough for retirement and how they compare to someone else that’s their age and making a similar income. My answers (rather questions) are roughly the same, but the outcome is always different. How much do you have saved (and are currently saving), when would you like to retire, and what does retirement look like to you? For most people, this is enough to start an engaging conversation where the client sets expectations and goals that they want to achieve. However, most of the time these goals are just a random shot in the dark and clients have a hard time picturing what retirement will look like when they don’t have a clear picture of what their current financial picture looks like. How do they get a clearer picture? By creating a budget! This may seem mundane, and you may even feel like this is beneath you, but a budget is my number one constant when making recommendations across all ages, wealth, and income levels.

Determining If You Need Help Creating a Budget

Now, I don’t want to beat a dead horse and have you reinvent the wheel when you have already spent a significant amount of time creating your own budget. However, I do want you to be able to confidently know what your gross income and net income is. How much you are currently saving, what your fixed and variable expenses are, and what your objectives are for any discretionary income that you may have. If you have trouble providing this information, or balk at the amount of unaccounted for discretionary spending you were unaware of, then it’s time to focus on creating a budget.

How Do I Create a Budget?

I like to keep it simple to start, but once created I would encourage you take your newly created budget and make it your own living breathing document that you update as necessary. I use a spreadsheet that I create and share with every client. I breakdown each budget into 3 main areas: Payroll, Expenses, and Savings. Your payroll consists of gross income, taxes, deductions (before and after-tax), and net income. Expenses will be split between fixed (Debt Payments, Insurance, Housing,) and variable (gas, groceries, utilities, etc). Once you have figured out what your income and expenses are, you can focus on what you are currently saving and have a clearer picture of what your capacity to save more is. The goal here is to have every dollar accounted for but not to constrain your budget so tight that you eventually splurge and put yourself into debt or any other unfavorable financial circumstance. We would do this by determining a sustainable savings rate and a discretionary amount that you can choose to either save or spend on a monthly basis while maintaining or adjusting your current expenses.

What Do I Do If I Mess Up My Budget?

Don’t worry, there’s no reason to panic. It may take a few months to figure out what your budget is, and it may take some time to tweak it. I recommend utilizing your credit cards or a budgeting software to track your expenses for a few months and then using the average expenses to fill in your spreadsheet. Don’t worry, your spending can fluctuate from month to month and is the reason we provide a cushion with discretionary spending and/or an emergency fund. If you find that you are consistently overspending, then continue to make adjustments until you find a budget you can stick to.

I Have My Budget, Now What?

You can continue to track your budget religiously, like counting calories on a restricted diet, or you can use your budget as bumper to keep you on track as you start planning your goal towards financial independence. You can now use your budget to create an emergency fund and calculate ratios (debt-to-income, housing, savings, etc) to see how you compare to industry standards and rules of thumb. If you find that you are overspending, taking on debt, or depleting your assets you should adjust your budget to reflect any significant changes in your budget or lifestyle. The same goes for if you have any increase in salary or see your cash reserve reaching amounts well beyond an adequate amount for an emergency fund.

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