If you remember in our last blog – Where’s the money? – we discussed that people with financial wealth spend time on their personal financial life planning. They make financial plans and set financial goals – they know how much they will save and spend and for what purpose.
A budget is a plan, and you should plan for your money in just the same way you would plan for a vacation or a day with friends. When you plan a vacation or a day with friends, you know where you want to go, and you make a plan to work out the specifics. The same care should be given to your budget and your financial life.
I like to plan out a monthly budget and then work toward an outline of the year’s budget. First on the list are the “have to, absolutely necessary expenses.” Those would include groceries, rent or mortgage, medical insurance, travel expense to getting to and from work (including auto insurance), and utility expenses such as heat and basic phone services. You might also consider internet access to be a necessary expense. These essential expenses should not take up more than 50-6% of your monthly income.
Once you have planned out the cost of your bottom line monthly living expenses, you should set the savings plan amount. You should aim for 20% of your monthly income. If you can make the savings automatic and/or have it come directly from your paycheck, that would be ideal. The mantra should be Pay Yourself First. If you are saving for something specific, you should add another 5-10% into the savings bucket.
The next budget items should be the credit card and other debt. I know some will disagree with me, but if you put the debt before the savings, there never seems to be enough to put away to save.
The remaining money is the discretionary spending – clothing, dining out, personal care, entertainment, and the like.
Once you have figured out the numbers, you need to find a way to track your spending, a way that works best for you. I prefer to look at a month at a time and I prefer to do it on a computer, but that may not work for everyone. As an example, let’s say I have $600 a month for discretionary spending. For some of you, it might be easier to have a daily amount – in this case $20/day. Some people will find that having a weekly amount will work best for them. Other people would prefer to account for very specific activities – In my month I go out to dinner ($50), I can go to the movies ($20), I can get a haircut ($35), and so on. The trick it to find a way which is easy to use and comfortable for you. Have a weekly check in with yourself to look at your spending and savings.
There will be some budget items which are not recurring, so you will have to adjust for them. Look, let’s face it, we all have birthday or holiday shopping that needs to be done, and you have to adjust your monthly budget to fit those special items in. You will need to be adaptable and flexible.
Once you have established your budget, you can start to set goals. What’s important to you? What do you want to strive to achieve. What do you need to live the financial life you aspire?
Thanks for reading this edition of Financially Fit in Five.