A complete financial plan has, at a minimum, three components: savings, insurance, and investments. The “savings” component includes three important tasks, which I like to call “The 3 B’s” — budgeting, beating debt, and building savings. These are the most important cash management components of your financial plan due to their short term, immediate nature. In my experience, a family without solid cash management skills will be unable to successfully meet long-term investment goals or survivor goals.
In this 3-part series, we’ll explore each of the 3 B’s in depth, beginning with…
The goal of a budget is to spend less than you make. Though it can be time-consuming at first, using a simple spreadsheet program or pencil and paper to track exactly how much you spend can save you thousands of dollars annually. Keep in mind that your budget is not a historical record of what you’ve spent in the past. It’s a guide for how you intend to spend your money in the future.
Here are a few tips for creating a workable budget:
Put it in writing. Experts agree: goals that are committed to writing are much more likely to be achieved.
Your budget must be complete. No cheating! By “complete,” I mean simply that it must include all of your expenses – all of them. Things that are frequently forgotten are:
- Items deducted from pay – including taxes.
- Non-monthly items such as quarterly, semi-annual, and annual insurance premiums.
- Irregular expenses such as car repairs, children’s activities, and gifts.
- Cash expenditures.
Your budget must be accurate, so don’t hide money from yourself by labeling it “My Monthly Allowance” or “ATM Withdrawal.” You have to be completely honest with the one person to whom it is easiest to lie—yourself.
Check the plan. You need to check the plan periodically to ensure you are following it. At first, you’ll want to check it at least once per month, but as you get more proficient,
you might review it less frequently – but always review it at least once per year. And, only make changes to the budget after thoughtful consideration. If you run into spending problems, for instance, try to adjust your lifestyle first, rather than your carefully constructed budget.
How do I spend my pay raise? Try to use pay raises and debt payoffs to increase your financial position first—particularly your savings and investments—before you increase your
lifestyle. It’s okay to reward yourself for hard work but don’t forget your “future self” either.
A good process for developing a budget is to capture at least one-year of past expenses, including non-monthly and irregular expenses. And, once accounted for, they’ll need to be evaluated qualitatively as “needs” or “wants.” Finally, you need to have a thoughtful discussion with your spouse and/or Financial Advisor to translate this historical document into a forward-looking roadmap for the future.
In part 2 of our 3 part series, “The 3 B’s of saving,” we’ll discuss all things related to debt and give you some tips to beat it.