By Anne Marie E. Ashworth, CFP®
For many, budgeting has a lot of negative connotations. Tracking where money comes from and where it goes leaves some feeling frustrated and guilty. Having a budget puts you in control of your financial life and allows you to choose how your money is spent, not wonder where it went. Creating a personal budget can result in peace of mind and self-confidence. If you are honest and realistic with yourself, this 5-step method will be a successful process for creating and conquering a budget.
Step 1: Separate fact from fiction.
Remind yourself what you spend and how you spend it. If you’re so inspired, a terrific idea is to write down what you spend and where over a week or two. As simple as this exercise sounds, you will be surprised at the “found money” you will discover (the cash you probably don’t even realize you’re spending).
Step 2: Separate fixed expenses and arbitrary expenses.
The fixed category includes things like your mortgage, car payment, school costs, insurance, etc. The second category includes things like your morning coffee, how many groceries you buy, how often you shop for clothes, etc. The goal is a clear picture of the money that flows through your life—how it comes in, and how it goes out.
Step 3: Separate how you live and how you want to live.
Once you have your expenses separated, review and create your guidelines for spending. A budget provides an opportunity to be proactive and intentional by serving as a blueprint to guide you towards your personal goals. The goal is to build a plan that puts you in control and supports the real priorities in your life. This is where you clarify the priorities in your life and settle on a plan that will support the direction you want to take.
Here is a summary of general guidelines when creating a budget. Remember the general rule of thumb is to allocate 50% for needs, 30% for wants, and 20% for your future. No two budgets are alike. If you live in a metropolitan area, chances are your housing budget is going to be much higher than if you were to live in the suburbs, just as if you have a family with three children, your food budget is going to be much higher than a single person’s food budget.
Percentage of budget to allocate towards:
- Housing 25-35%
- Food 10-15%
- Savings 15-20%
- Transportation 10-15%
- Giving 10-15%
- Personal 5-10%
- Recreation 5-10%
- Medical/Health 5-10%
Step 4: Separate wanting to change and acting to change.
Once you establish your goals or spending choices and create a budget where your spending categories add up to 100%, the next step is to put your wishes and plan to action. Continue to track your expenses each month at first. Take 10 minutes to evaluate where you underspend, overspend, and whether your spending matches your goal. After six months, consider adjusting your budget if you have consistent over/under spending.
Step 5: Put it all together and use resources to keep you on track.
Creating a budget requires a lot of work, so don’t let it all go to waste by not maintaining it. An abundance of resources are available to help you create, evaluate, and maintain a budget. The following list includes various resources for creating and maintaining your budget. Explore the resource list to find the best tool for your personal situation and needs.
- Microsoft Excel has a few budgeting tools that may help people who prefer to track expenses in a spreadsheet.
- Many major credit card apps include features to help consumers track expenses and create a budget.
- AARP provides simplified budgeting forms to help you get everything easily organized on paper: www.aarp.org.
The following are budget applications that allow you to track all expenses (mortgage, credit cards, bank accounts) in one place:
- Mint (www.mint.com)
- Simplifi by Quicken (https://www.simplifimoney.com/)
- EveryDollar (www.everydollar.com)
- Clarity Money (https://www.marcus.com/us/en/clarity-money)
Managing your money is an important skill to cultivate. In today’s world, planning is necessary. Your financial health depends upon knowing where your money comes from and where it is going, and everyone should feel empowered to make a budget work for them. Budgeting provides the means of telling your money what to do, instead of wondering where your money went.
Anne Marie E. Ashworth https://www.abacusplanninggroup.com/anne-marie-ihling/ is a 2015 graduate of Virginia Tech with a BS in Business, where she majored in Finance with a financial planning concentration. She joined Abacus in June of 2015 and earned the CFP® designation in May of 2017. As a member of the financial planning team, Anne Marie works closely with clients to understand their objectives in order to develop, implement and monitor a comprehensive financial plan to achieve those goals.
Abacus https://www.abacusplanninggroup.com/ is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.5 billion on behalf of its 240 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.