A budget is key to successfully managing your finances, and may just be the most important part of any financial plan. However, as we have previous discussed in a recent blog on building a financial plan, saving without a budget is challenging. A recent report by debt.com shows just 50% of Americans that do not budget have been able to avoid going into debt. Further, only 19% of individuals that no longer budget, claim it didn’t help their financial situation.
Budgeting is important regardless if a child is managing a weekly allowance, you’re currently in the accumulation phase, or you are managing your fixed income in retirement. Budgets tie closely to our financial plans, and are essential in the long-term to keep us on track. They ensure our savings accounts grow, while still allowing us to enjoy our favorite hobbies.
Building Your First Budget
At KCA Wealth we strongly advise our clients to attempt to build a framework budget, so that we can ensure you have a proper process and realistic budget. It is essential to start out with both your income and expenses; a great place to start is by reviewing recent months income and spending. Although for many of us incomes are fairly steady monthly, expenses often are not.
That is why it is important to also write down those large expenses and estimate them for the future. KCA can help you integrate these irregular expenses into your budget and plan. For instance, yearly vacations, holiday spending, and anticipated automotive expenses are often overlooked. In fact, the average car costs roughly $5,000 per year in Pennsylvania, however, if you plan to purchase that new car this year, that could set you back even more! These large expenses must be looked at over the long-term, and should be built into budgets.
Sticking to and Tracking Your Budget
Adhering to a budget can be challenging, especially if never done before. It is no secret life can present many surprise expenses. That is why when building a budget it is important to include saving for emergency expenses. KCA can advise you on the best techniques for saving for the unforeseen, and tracking your budget.
Today, with technology, it has become easier than ever to budget and track your expenses. Services, such as PocketGuard, Mint, Goodbudget, or Honeydue can simplify the task. Even a classic excel spreadsheet, or handwritten chart of monthly income(s) and expenses can be just as effective. Regardless of how one decides to move forward, it is essential to stick to the routine, and review it with your financial planner often.
Although there are many techniques and strategies to successfully budget, which depend heavily on your individual income, current age, financial goals, and planned retirement age, a popular strategy is the “50/30/20 Rule”. This strategy, on the surface, advocates you spend 50% of your income on needs and 30% on wants, while allocating 20% directly to savings/debt repayment accounts.
Although some may find themselves spending more than 50% on their needs, oftentimes many of your “needs” may be “wants”. For instance, although housing and transportation are a need, the home with the extra bedrooms and pool, alongside a brand new leased luxury car is not. However, if your spending is out of sync today, budgeting can help you correct your financial situation and get you back on track to achieving your financial goals.
How to Allocate Savings
Many will easily see the first 80% of our paychecks gone, between necessary and discretionary spending, however, the 20% savings of each check could make a huge difference in your financial health depending on how it is saved. For instance, simply saving that money into a cash account, oftentimes, is not the most logical choice.
For instance, every individual should first ensure they have built an emergency fund. KCA Wealth suggests starting with a $1,000 goal for your fund, however, the final targeted individual amount depends on your financial situation and lifestyle. Another often cited rule of thumb is to have enough to cover 3-6 months of expenses.
Although building an emergency fund could seem daunting, budgeting can help make your savings a reality. In fact, saving just $25 per week, for 2 years, can net you $2,600! Setting realistic goals can provide you the freedom from credit cards, and a peace of mind that your next emergency will be covered!
Thereafter, it is important to ensure you are maximizing your employer’s 401k match, if applicable. Many employers will match contributions, which doubles your investment each pay period. This can help catch up, and exceed your retirement account goals if maximized.
Then it is important to pay down “toxic debt”. This is debt weighing down your monthly minimum payments. This includes: credit card debt, title loans, personal/payday loans, and/or rent-to-own payments. This debt, oftentimes, can more than double in principle before being fully paid off, which can wreak havoc on your finances. If you can't repay your unsecured debt, within five years, even with drastic spending cuts, or if it equals half or more of your gross income, it may be time to consider debt relief or bankruptcy.
Regardless if you have been budgeting for decades, or looking to create your first budget, at KCA Wealth Management our mission is to provide our clients with the highest level of service while helping them reach their financial destination. We will help you develop, implement, and monitor a strategy that’s designed to address your individual situation.