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Budgeting Tools and Tips

The purpose of financial planning varies from household to household.  While some see it as a tool to pay down debt, establish a budget or plan for college expenses or medical emergencies, others only find it useful when planning for retirement.  Financial planning has a very broad and deep meaning on which every financial household should stay focused, regardless if you are in the beginning stages of your career or nearing retirement. 

One of the most important exercises of a financial plan that Trilogy advisors teach clients is keeping a written budget and we can provide valuable tools to help you establish one.  There are two kinds of households who budget. First, there are those who keep a written budget because they live paycheck to paycheck and watch every dollar they spend to pay off debt and keep their heads above water. Second, are those who keep a written monthly budget so they can understand how much to save and maximize their wealth accumulation.

The first step to a successful budget is to figure out exactly what your monthly household income is. You then allocate your monthly income to the areas you anticipate spending each month. Examples of budget categories are home expenses, transportation, health, charity, daily living, entertainment, savings, obligations etc. Generally, we encourage clients to break down their monthly expenses into four categories: 

Critical Expenses
      These monthly costs include things like rent, basic groceries, electricity, phone bills, medications and health insurance payments.  These critical expenses have to get paid every month and will need to get paid even if you should get disabled or become unemployed. For this reason, not only do you need to budget for them first, but you also need to budget for a cash emergency fund to pay for them should your income become unstable. 
Lifestyle Expenses
      These costs make up the financial commitments you take on to establish your particular lifestyle. They include things like gym memberships, car payments, cable and internet, club dues, eating out and entertainment. Depending on the item, these can vary greatly with your income. These tend to be the place where you can make the most “budgeting impact” because they are the most discretionary of your monthly commitments. When clients are looking to save more money per month we usually send them here.
Asset Protection
      This is the monthly allotment of funds that you are setting aside to protect your financial security. This generally includes various insurances such as life, disability, and long-term-care. It makes little sense to build up an asset base in various savings vehicles if that asset base is fully exposed to life events that could dramatically diminish or eliminate it all together. 
Savings Rate
    Savings rate is the amount you have left monthly after you have subtracted the first three from your income. Savings rate, once you are clear on it, should then be allocated according to your most important short, intermediate and long-term goals.

Once you allocate your total monthly income, it is time to start tracking your spending. A successful budget usually takes three to four months to get it down to a science. As you begin tracking your budget, remember to update it often and hold on to your proof (receipts, bank statements etc.). The goal for the monthly budget is to keep your spending within the budgeted amount for each category. If you end up spending less in that particular category, that money can be rolled over into the next month, which begins to create a cushion and wealth accumulation in your household. If you end up spending more in a particular category, you should assess your budget and determine if it needs to be adjusted, or perhaps you just simply overspent that month. 

For the areas of your budget that are very likely to change month to month, we recommend using the envelope or cash system. The envelope system is widely used in the areas such as dining out, groceries, clothing/personal supplies, entertainment. The purpose of the envelope system is to fill each envelope with your budgeted amount of cash in the beginning of the month. Once those envelopes are empty, there is no more money to spend within that category for the month. This is powerful because it encourages you not to overspend and make unnecessary purchases. Imagine that you are at the grocery store with your cash envelope.  You are now forced to spend only the amount that is in the envelope.  If at the register you find that the amount you owe exceeds the amount of cash in the envelope, the proper action would be to remove items that are not completely necessary, not make up the difference with a credit or debit card.  That is the secret and power behind the envelope system.  

Our Advisors have first-hand experience with not only budgeting personal households but educating our clients as well. We understand that budgeting isn’t as easy for some people because it is possible they have an irregular income. Maybe that person is a business owner and has a hard time predicting his/her income from month to month because it fluctuates at different times of the year.  A suggested strategy for a volatile income is to use averages based on his/her income for the past twelve months. The budget may be higher or lower in some months but it is a good place to start.  Another strategy used for variable incomes is to budget quarterly rather than monthly.  

 As mentioned earlier, it takes about three to four months to get your budget down to a science. Part of that reason is that irregular expenses will come up annually, semiannually and quarterly. There are going to be times when you forget to pay or receive an unexpected bill which will throw you off budget. It is extremely important to thoroughly understand what irregular expenses you have and break them down monthly. Once broken down monthly, you need to then set money aside in a separate account that you have easy access to.  

 By using these tips and strategies, you will slowly start to understand that budgeting is not difficult when you have a game plan and stay focused on making is work. It will soon become a natural part of your monthly routine and how you handle your finances. 

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