Budgeting with a Purpose
Few topics on our site get the raspberry or a groan more than budgeting. Everyone knows they should, but few do this exercise, and even fewer do it well.
It is critical to understand, monthly, how much is expected as cash inflows and the anticipated outflow. Pulling this detailed information together will quickly give you an understanding of how much you can save and invest.
And that is when the magic starts!
What’s next?
We are going to break the components of a budget down in the next few pages, but take heart, this is only to get you level set as to what your financial picture is. You already have an idea, but this will help you get raw and real with the specifics. We are not here to say you must suddenly stop living, pay off all your debts, and save your way into prosperity…
That is not how we flow.
What we will focus on is:
- What is your current income from all sources:
- Job Earnings (W2/1099)
- Side Hustle
- Interest/Dividends
- Retirement Income
- Alimony/Child Support
- What are your expenses?
- What is fixed (rent, mortgage, car payment)?
- What is Variable (electric bill, groceries, fuel)?
- What is discretionary/destructive (credit cards, entertainment, lunches)?
- What is left over to build your dreams?
These are just examples and your mileage may vary, but it gives you a sense of the categorization required in this exercise.
The goal here is to shed light on where you are employing your money. That’s an important choice of words because if your money isn’t working for you, then you must be working for money, and that reality will not get you to where you want to be.
We have put together a Google sheet to help you with this process. You can access it here. The workbook includes a bonus worksheet to calculate the monthly savings required to hit the goals that you choose, based upon the budget which we think is pretty unique. Make sure you create your own copy. Nobody else needs to know your details.
If you prefer to automate the process a bit and want a glimpse into your monthly subscription spending as well as all other expenses, we highly recommend Rocket Money. This app will link your accounts, give you a great initial look at your budget, and allow you to get into finer detail.
Either way, you will be able to review your cash flow and determine how much is left over to save and invest.
How much should I have in savings?
To have that discussion, we need to first break down the guidelines for income and where it should be allocated.
The rule of thumb most people in the financial advisor space recommend is:
60%
Fixed Expenses
Your income should cover your rent, car payments, insurance, etc.
20%
Pay Yourself First
Fund an emergency savings account
then fund your investments
20%
Variable Expenses
For variable and discretionary expenses (electricity, dining out, gasoline, etc.)
You might ask: “Why does the savings and investment block above come before the variable and discretionary block?”
Because we subscribe to the philosophy ‘Pay Yourself First’! If you allow yourself to spend on frivolous items before you get to the savings allotment, you are more likely to miss your target thereby robbing yourself of future value.
Once those emergency reserves are funded, the remainder should be invested in your future goals.
