April 3rd, 2024

Gain control of your finances with one simple tool: a budget

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A major financial newsletter recently reported that “a majority of American workers can’t afford a $500 emergency expense and 76% of employees don’t have enough savings to cover one month of their expenses.”

Even higher income households may be struggling with their finances. “Over one-third of employees earning $100,000 or more live paycheck to paycheck,” according to the Ascent newsletter published by The Motley Fool.

It always happens just when you least expect it: The car breaks down, the water heater fails, or your daughter wants to go on the class trip.  Although there are positive indications that the economy is rebounding (NerdWallet reports unemployment at a low 3.9 %, inflation is moderating, and real wages are beginning to rise), many American families are feeling financially insecure. 

In order to take control of your finances, gain financial security, prepare for life’s emergencies, and save for a secure retirement you need a budget. Mark Ingram, Senior Wealth Manager at B. Riley Wealth Management, said “creating a budget and building an emergency fund of at least three months’ living expenses are the backbone of a sound financial plan.”

A budget is a written plan for how you will spend and save your income each month. Without one, you might run out of money before your next paycheck. In building a budget, first identify your priorities and goals. Short-term goals may include building an emergency fund, paying down credit card debt, saving for a vacation. Long-term goals may include saving for a home, saving for college, or investing for retirement. 

Once your priorities are identified you can create a budget.  Consumer.gov provides a useful budget tool but there are many available. The first step in creating a budget is to estimate total monthly income. How much do you expect to earn from your paycheck, gig work, social security, child support or other sources.  If you pay changes from one period to the next, it is best to estimate conservatively so you are better prepared for any shortfalls.

Then estimate your monthly expenses. These can be fixed like a mortgage, rent or car loan, while other expenses such as groceries, dining out, entertainment, clothes and gas change each month and are variable.

If income is greater than expenses there is a surplus that can be used to reduce debt, build savings, or invest. If expenses are greater than income there is a deficit. You will have to cut expenses or increase income to bring the budget into balance.

Tracking actual versus budgeted spending is how you begin to gain control over your finances.  Are you meeting your priorities and goals? Do you have wasteful spending that can be redirected to priorities like saving for what you really want or paying down debt.  Being able to manage your cash flow improves your ability to meet your bills when they come due, build a good credit rating, and achieve a sense of financial security.

Now that you have built a budget you need to set yourself up for success.  Set realistic and achievable goals.  Make your budget tracking system easy to follow. Take advantage of your company’s matching programs for your 401(k). And, automate savings and investing by setting up recurring transfers.

Building a consistent habit of saving and investing is particularly important for meeting long-term goals. Saving for retirement is one of those goals. If you start early in life and set aside a portion of your monthly earnings in your 401(k) or other retirement accounts over time you will build a valuable nest egg.  It may be a short-term sacrifice but in the long run it you will be happy you did.

As you use a budget you will have to adjust it based on actual events. You may also consider adding a contingency for those one-time expenses that always seem to pop up. However, before long, you will start seeing results that empower you to reach your goals, gain financial security and maybe your daughter can go on that class trip.

budget, business, personal finance