Client Question: How do I set (and track) my budget?

June 24, 2022

Let’s talk about budgeting!

I started working with a young couple and we are working together to put a savings approach in place – determining how much of their net earnings each month can/should be allocated to the various savings/investment buckets (cash reserves, IRAs, employer plans, after-tax investments, education funds, etc). The place to start in this discussion is cash flow – which will involve some level of budgeting on their part. They asked how to get started – and I thought it would be a helpful question to address here as well.

There are differing schools of thought on budgeting, as well as variety of tools and technologies that can be of great value in this process. Budgeting has a bad wrap as it seems constrictive – a practice that simply limits what you can spend. Not true! Think of it instead as a roadmap for how you will allocate your money – allowing you to get the most out of every dollar you earn. Just this simple shift can help you feel empowered vs. threatened by this process!

In my view, budgeting is very beneficial regardless of your financial circumstances. If you are struggling with overspending/bad habits, a budget may be able to help you identify areas of improvement. If you are earning more than you’re spending, a budget can help you devise a savings/investing waterfall. If you have a one-off financial goal (a trip, a home project, a car, etc), a budget can help you set aside funds for that item and turn it into reality!

All that sounds good, but how do you actually go about it? I’ve always said that the best approach to budgeting is the one you are actually going to implement. A simple google search will produce 10,000+ articles and tips and rules of thumb. You may find value in any one of those. I thought I’d outline four very high level categories of budgets herein that may help you get started on your way. Note – these are in my terminology and are not “official” terms, but I think you’ll get a good idea of some ways you can approach this

1.) High Level Budgeting – I view this approach as more of a ‘back of the envelope’ calculation than a formal budgeting process. Admittedly, this is the process I personally use (and have used for 20+ years). Under this approach, you look at things from a high level, assigning dollars to big buckets such as net earnings after tax withholding, defined savings (like a 401k), insurance, and housing costs. These amounts are pretty easy to identify (either as recurring amounts or annual payments). For all other spending, I tend to use credit cards for almost all my spending, so I can easily determine average other spending from those monthly balances. This allows me to determine what my monthly “left over” should be – and I use that to monitor versus actual, as well as drive my savings plan (or my allocation to a specific goal (see #4)). This approach is ideal for those with consistent/predictable spending, an established approach to savings, a routine surplus (ie: earnings > spending), and an ability to control spending without needing to see all the underlying details.

2.) Line item budgeting – this is a very powerful practice – provided you will stick to it and will use it to drive your behavior. In this approach, you track your spending by very detailed categories (housing, car, gas, food, clothing, personal care, phone, etc) and compare that against earnings/income. You also set goals (or a budget) for each item and track the variances. There are many apps that pull in credit/debit card transactions to make this a much simpler process (Mint is a great choice), or you can do this yourself in a spreadsheet and export data from your financial institutions and sort into categories. The real benefit from this budgeting approach in my view comes not from the tracking alone – but from the analysis of the data and the resulting changes. For example, it doesn’t do you any good to see you are routinely spending more than budget on eating out, unless you use that information to make a change (either cut back on actual spending or pull from another budget category). This line item approach is ideal for those that want to increase their savings, are looking to put a savings plan in place, and/or are struggling with their spending. It does take time but again, the available apps can help simplify and streamline it considerably

3.) Left over approach – this may be the approach you are using now, whether you know it or not. For many, your income and spending all go thru the same bank accounts. You earn what you earn, spend away, and then you have some amount leftover (hopefully!) which you then use for savings or some other spending goal (see #4). This approach clearly lacks precision and could benefit from some added discipline in my view. Even having a high level sense of what your monthly “net” (earnings less spending) should be will make you accountable (as that can be compared to what’s actually left) and allow you to see when you’re veering off track, as well as to be more intentional with savings.

4.) Goal based budget – We all have some higher dollar items we are hoping to obtain- whether it is a home renovation, a new car, a vacation, or many other things. Your goal could also be financial (ie: fund an IRA, save $x in a brokerage account, reach $x in cash reserve account). I always think it’s helpful to set a budget (here’s where line item can be helpful!) for each goal item separately Once you know what it will cost, you can then start allocating dollars to it each month (put it as a line item if using #2, or add a bucket for it if using approach #1). The key is to only move forward once the funds are available

Again, the key message with budgeting is that you should pick an approach you will actually put into practice (and stay consistent with). Hopefully these give you a few ideas on how to get started!

Leave a note

  1. Mom says:

    I am starting my budget in July.

  2. This topic is near and dear to my heart. Thank you for reaffirming the concepts and thier importance!

  3. Alexa Frenn says:

    Very helpful breakdown! Ben and I have done a deep dive into our budget since my income recently changed. Brought back many positive… yet sometimes anxiety-provoking… memories of our meetings with you!

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