About That Budget

Last week I wrote about societal aversion toward living on a budget and the integral role a budget plays in wealth accumulation, regardless of how much money you make. But it occurred to me that I should follow up with a post that provides some guidance on how to create a manageable budget that reflects your lifestyle.

Many people attempt to create a budget, and as soon as they pull out a year’s worth of bank statements and credit card bills, they are overwhelmed with despair, consumed with defeat, and convinced their financial life is too complicated to fall within a traditional budget. But guess what? Regardless of what your mom told you as a child, you’re not that special. Everyone has the capacity to create a meaningful budget that guides financial decisions throughout the year. To that end, here are four things to focus on when creating one:

Identify Fixed Expenses

Fixed expenses will generally comprise a majority of your budget, so they should create significant traction in the budgeting process. This category includes home mortgage, car note, student loans, cable/internet bill, subscriptions, etc. These items should be relatively easy to spot after simply comparing your current month to prior month bank and credit card statements.

Estimate Trends for Variable Expenses

Other bills, even if they recur monthly, may vary each billing cycle. For example, most utilities fluctuate depending on the time of year, but look back to a few different months throughout the year, and come up with an average. As for other expenses that vary year-to-year, such as medical bills, think about the last two years. If you rarely have any medical expenses, then don’t budget for any. However, the caveat for eliminating this type of expense from your budget is the assumption that you have a healthy savings reserve for unexpected expenses.

Use Account Aggregation Software

If you are using an Excel file to track your monthly expenses, unless you’re one of those people who enjoy creating spreadsheets, you will never update it or know if you are staying on track. It is much easier to use an app such as Mint or Expensify that aggregates your bank and credit card accounts, categorizes expenses, and alerts you when you are over budget. There are inherent security risks in providing personal financial information to these sites, but prudent users should be able to enjoy their benefits. As an alternative, some budget apps, such as YouNeedABudget.com, do not require account info. Instead, they allow you to upload statements into a Dropbox file.

Don’t Create a “Perfect” Budget

Perfection is the enemy of completion. A budget is meant to be a guide, not an oracle for predicting a year’s worth of expenses. So don’t approach it with the expectation of absolute precision, and don’t tackle so much detail that each expense becomes its own category. Start with just ten categories and let that guide you for a year. Then the following year, you will have twelve months of history to help you increase accuracy, so each year the process gets easier and more accurate.

Living on a budget isn’t an end to eating out or enjoying your hard earned money. It’s a plan to make sure you are spending money on things that actually make you happy and improve your quality of living. So focus on these four ideas, and create a budget that reflects your lifestyle and keeps you on track with your financial goals.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

On a Budget with a Bugatti

People are so averse to creating a budget that financial advisors across the country have tacitly agreed to change what we call them. Now we create “spending plans” to avoid the stigma. But why are budgets so stigmatized? In part, people don’t want to limit what they spend on themselves. And that aversion seems logical – If you buy something that brings you pleasure, you don’t want to feel bad about it. But there is something even more subtly nefarious at play. People don’t want to be “on a budget” because it seems too pedestrian; it implies that they cannot afford to live a comfortable lifestyle and must limit their spending.

But not all budgets have to be a scorched earth, living-on-rice-and-beans misery. Budgets help you reach a goal, even if that goal is the purchase of a Bugatti or winter home in Miami. The best kind of budget is created with your current lifestyle in mind, harnessing your financial strengths and leveraging them to maximize your wealth. Essentially, the purpose of a budget is to identify and eliminate expenses that add nothing to your lifestyle and prohibit you from building wealth. The best budgets increase savings, lower debt, while also increasing your standard of living.

The point of a good budget is to make you think before you spend money, not to prohibit spending entirely. It allows you to consider whether or not a given purchase falls within your financial plan. Buying and consuming in an impulsive manner isn’t healthy for anyone. If it becomes habit, not only will you become a selfishly entitled and miserable person to be around, it will also have a dramatic effect on maximizing wealth accumulation. The prototypical over spender maxes out multiple credit cards and lives well outside their means. In this case, a budget is necessary to fix a huge financial problem. But the principal still holds true with those who can spend money capriciously but shouldn’t.

For instance, if you absolutely love watches and adding to your collection truly makes you happy, then if it falls within your spending plan, you should absolutely not feel bad about spending whatever amount you and your spouse have determined is reasonable. But if you couldn’t care less about watches and only want one because a golfing buddy just bought one, then save the money for something that you will actually enjoy. Don’t waste money on an impulse; you know you’re going to spend money on your true passions, so savings and investments will always be shortchanged. In the end, you won’t be any happier, but you will be poorer.

So if you don’t have a spending plan in place, no matter how much money you make, you are missing opportunities to maximize your wealth and increase happiness. Talk to a financial advisor about establishing one that will help you fulfill your financial potential.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.