MoneyMonday: Dollars & Sense: Budgeting for Financial Success

If you’ve attended a session already, you’ve been introduced to the three stages of financial wellness. If this is not familiar, make plans to join an Intro to MoneyNav session offered at the beginning of every month. You can also view our MoneyMilestones workshop which explores the three stages in detail.

Today’s session is focused on balancing saving and spending, in other words, budgeting. This topic is best positioned in the first stage, financial safety.

If you feel like you’re just treading water when it comes to your money? Or feel like money controls you more than you control yourself? Maybe managing debt is something that keeps you up at night or maybe it’s worrying about how to repair your damaged credit score.

If this sounds like you, budgeting is a significant next step to take. Budgeting helps you get your arms around your money resources and spending habits. With this info, you can redirect resources and make decisions that get you headed in the right direction.

While budgeting – or creating a spending plan – is at the top of the list in the financial safety stage, there are other important things to focus on as well. Goals like saving $1000 in an emergency savings account, cutting expenses, and improving your credit score. Our Money Milestones course takes a deeper dive into these steps as well as the other two stages of financial well-being. But today, we will focus on creating a spending plan.

After this session, you should be able to fill out this chart with your own ideal spending targets. This chart, which will be included in your workbook, highlights the main expense categories including… housing, food, utilities, insurance, emergency savings, retirement savings, debt payments, and general spending.

For most folks, housing and utilities will be the biggest slice of your budget and will represent 20-40% of spending. Insurance is another important financial safety component and will range from 5-15% depending on factors like…

Whether your employer provides health insurance coverage, how much life insurance you have, and whether you have full or basic car insurance. Like most things, insurance is something you tackle in stages. Ensure you have basic coverage first then add more coverage as your financial situation improves. Having a spending plan helps you evaluate how much you can afford to spend now and helps you stay on track for adding more later.

Emergency savings is an often overlooked but “mission critical” spending category. Because there is no immediate gratification that comes from having an emergency savings account, it’s an easy item to pass over for more rewarding spending like vacation or entertainment. But, if you remember only one thing from this presentation, I hope it’s this.

The single most important thing you can do for your present and future financial well-being is to maintain an emergency savings account. The stage 1 goal is to set aside $1,000. But eventually, you want to have 3-12 months of your essential monthly living costs set aside. This plan for surviving life’s curve balls – like a medical emergency, an accident, or a job loss, goes a long way toward your peace of mind. But it also helps you make the most of your money by ensuring you won’t have to raid retirement savings or take on credit debt to get by when the unexpected happens.

Building a 12-month savings buffer can take a long time. Most of us should aim to save 10-20% of our monthly income for emergency savings.

Perhaps the only money term worse than budgeting is debt. But, for many folks, debt is a reality. Whether it’s credit card debt, student loans, or just debt required to deal with life, making debt payments typically chews up as much as 25% of monthly income.

Even the most financially disciplined among us need to have fun sometimes! And that’s really the point of budgeting… to manage financial resources in a way that allows you to responsibly plan for the road ahead while enjoying the stops along the way. 15-30% is a typical range for spending money in most budgets.

Speaking of the road ahead, retirement is likely the biggest savings goal you will have. And it’s also probably the one thing you can’t take a loan for.

Picture this… you don’t save as much as you should but don’t want to work forever either. So you retire planning to get a loan from your friendly bank loan officer to help you close the gap. The first thing they will ask for is your income, at which point you’ll explain you’re retired and are no longer receiving income. They will say, “no problem” and ask to see your list of assets. At which point you’ll explain you haven’t accumulated much in the way of assets which is why you’re here for a loan. At this point, the friendly loan officer will likely say, “no income, no assets, no loan.”

This is, of course, tongue and cheek but I think you get the point. Saving for retirement is critical to good financial stewardship and typically requires setting aside 10-20% of your income. The longer you save, the less you have to save so getting started early is the key to making it easy to save for retirement.

And retirement many are not your only money goal. Perhaps you want to save for education for yourself or someone else. Or maybe you’re dreaming of a vacation home or taking up an expensive hobby. Goal-based savings requires discipline, a long-term focus, and about 5-15% of your monthly income.

If you’re following along, you are probably saying… wait a minute. This math doesn’t add up. And that’s the tough reality of the financial safety money stage. We must prioritize to allocate money resources to the most important things. Then we need to revisit our spending plan as our financial situation changes so we can check bigger goals off our list.

This is the hierarchy of financial needs. While not intended to be an exhaustive list of money goals, it gives you an idea of how to prioritize competing and seemingly endless demands for your dollars. Notice how many of the goals repeat but build on one another.

For example, the first time you see emergency savings, the goal is $1000. But higher up, you’ll find emergency savings again with a goal of 3 months of expenses.   Similarly, the first retirement savings goal aims to save enough to be eligible for your employer’s full match. But then we want to save enough to be “on track” and eventually try to reach the maximum savings level set by the IRS annually.

All that to say, you can’t do everything right away. But each thing you do takes you one rung higher on the hierarchy, closer to reaching goals and experiencing financial freedom.

So, how can you tackle the process of building your own prioritized spending plan?

We suggest three simple steps. Keep in mind though, that just because they are simple doesn’t mean they are easy. Budgeting requires discipline and motivation. But keep your eye on the prize… taking control of your money is the road to financial freedom.

The first step is to determine your fixed expenses. List your essential expenses like housing and utility costs, car payments, basic insurance costs, etc.

Step two is to calculate your average variable expenses. These are things like utility bills that vary from month to month, groceries, gas costs, etc. If you do most of your spending on a credit or debit card, you can look back on previous statements and come up with an average number. If you can’t review past spending, simply start a journal of your spending and keep it going for 2-3 months. This is a good exercise to repeat a few times each year to capture seasonal changes or bills that comes less frequently like those app subscriptions that are only billed once per year.

The third step is to track your discretionary spending. This is the hardest of the three and the step most likely to lead to feelings of guilt and shame. But resist the temptation to beat yourself up or cast your budgeting efforts aside. Instead, keep in mind that your goal is to be in control of where your money goes, ensuring your hard-earned dollars are directed to things that matter and bring the most joy and satisfaction to your life.

Here again, if you do most of your spending on a card, you can “look back” by reviewing statements. Otherwise, save receipts and log spending for a month. Again, repeating this a few times each year will help you fine-tune your spending plan targets.

That brings us back to our spending plan. With your three steps completed, you’ll be able to compare your actual spending to the typical ranges we just reviewed. Look for places where you can make cuts and then set a target for yourself.

With your actually spending listed beside those targeted ranges, you can assess whether you are over budget, on track, or under budget.

If you’re over budget, you’ll need to make adjustments. Think creatively. Can you cut down on trips to the gas pump by carpooling to work? And be sure to audit your credit and debit card for auto purchases. Maybe you signed up for Apple TV just so you could watch Ted Lasso but if you haven’t watched anything since it’s time to cancel. Same thing for those apps you might have subscribed to for your kids. By the time they are 10, they probably don’t need the annual Crayola subscription.

In the post-COVID world, lots of convenience fees have crept in as well. Doing your own grocery shopping can save you delivery and convenience fees. Similarly, plan ahead and take lunch to work instead of grabbing take-out.

If you’re right on track, congratulations! Time to consult the financial hierarchy. Do you have your money priorities in order? If your insurance coverage is inadequate, you might need to shift the dollars you’re spending in other areas to ensure you have the insurance coverage you need.

Finally, if you’re lucky enough to be under the budget, check the hierarchy and set a new goal. Keep in mind those progressive goals like emergency savings and retirement. There’s always more we can make our money do for us!

With your spending plan in place, focus on other key areas of the financial safety stage. Things include emergency savings, health savings accounts, and spending disciplines activities like defining self-imposed rules for dipping into your emergency savings and making honest assessments about the difference between a need and a want.

Again, the Money Milestones course covers this in more detail.

Budgeting is about as exciting as visiting the dentist every 6 months. But it is just as critical to your financial well-being as flossing is to your dental health. You can get by without it but you’re probably inviting pain and problems along the way.

But budgeting doesn’t have to be an exercise in limitation either. It’s not about denying yourself things. It’s about making the most of the resources you have so you keep moving toward the things that make you smile. Set small goals and celebrate the milestones reached along the way.

There are lots of resources in MoneyNav for this and many other financial topics.