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Russ Gaiser

Russ Gaiser

Budgeting: The Foundation of Your Financial Plan

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Ah, the budget. Some people who hear that word get angry, stressed, agitated, and even scared. To some, the term has become somewhat of a curse word. Unfortunately, the term budget has a stigma to it and is often seen as something negative. If the truth of what being on a budget means led the conversation, we would likely have a population more in control of their finances.

What is a budget?

First things first, let’s expose the truth on what a household budget actually is. The budget is a written plan, completed monthly, for what money is coming in and where it is going. That’s it, plain and simple. More specifically, a zero-based budget gives every dollar an assignment, even if there is more money left over at the end of the month (which is hopefully the case). The excess dollars should be applied to other financial goals such as saving for a big purchase, investing, vacations, etc.

Needs versus Wants

In America, companies are doing everything they can to persuade you to use their goods and services, and convince you to spend money on things you don’t need to impress people you don’t even like. They are very successful in doing so, and many times know more about your spending habits than you do (hopefully not after you have read this article, however!). That brings me to the needs versus wants discussion. If you do, in fact, find yourself overspending, the first thing to do is determine what budget items are true needs. There are four that apply to most, which include shelter, utilities, food, and transportation.

What Does the Budgeting Process Look Like?

The household budgeting process is a monthly activity that involves you and your spouse (or an accountability partner for singles). It is a forecast for income and spending for the next month, and begins with listing all sources of household income. From there, make a detailed list of expenses, and project the cost of each. Fixed expenses should be relatively easy to predict (think mortgage, auto insurance, streaming subscription), while variable expenses might be less so (gas, electric, birthday gifts). Then, subtract your expenses from your household income to determine the surplus (or shortfall). Any surplus dollars should be budgeted for other financial goals such as debt elimination, big purchases, vacations, or additional investing.

What if I have an Irregular Income?

Those of you who earn irregular incomes (sales, self-employed) might be wondering how the budgeting process can be accomplished. You will want to start by projecting what you will reasonably expect to earn in the following month. If you don’t know, look at the previous year’s lowest income month and use that number as a baseline. Then, list all the needs in your budget and then prioritize a list of nice-to haves and wants, and assign the excess dollars one by one to each of those categories as they come in.

Category Weighting

So, you’ve completed your budget and you’ve realized that you are very near break-even, with very little surplus. Aside from increasing your pay, there are a couple of things to look at to increase cash flow. First, if you typically received a large tax refund, you might be having too much of your money held back for taxes. Adjusting your W-4 withholdings can help free up hundreds of dollars of your own money every month, and stop you from giving the government an interest free loan! Next, if you have student loans, car loans, or credit card debt, you might be able to refinance and free up some monthly cash as a result.

Final Thoughts

Hopefully by now hearing the word budget isn’t so bad and that you see it as an empowering tool. Instead of feeling guilty about impulse purchases, you can feel free knowing that you budgeted for those sunglasses, those football tickets, or that night on the town! This foundational tool gives you permission and freedom to spend, and if used correctly, will give you total control over your money and how it is spent. So, get out your excel spreadsheet, notepad, or a budgeting app such as Every Dollar or Mint, and give it a try.

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The Financial Guys and Independent Solutions Wealth Management LLC. are not affiliates of Peak Brokerage Services, LLC.”

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