Budgeting is arguably the most important aspect of financial planning. Saving, investing, insurance, retirement planning, and projections are useless if you have no idea how much money you are spending today and how much you would like to spend (or have the ability to spend) in the future. We all have a limited amount of resources to spend. Determining the amount that is right for your particular situation, allocating those funds into buckets based on your priorities, and then tracking to make sure your spending stays on track may seem time consuming, but utilizing technology, the process may not be as difficult as you think.
The reason that developing and tracking a budget is important is it allows your long-term thinking to have an impact on your day to day spending. Making smart decisions about how you want to utilize your resources over a month or year will allow you to ensure that the important things, such as saving for your future, are handled and emotional, short-term overspending stays in check.
Start with your Annual Income
When developing your budget or spending plan, think of things on an annual basis. Determine what your net income is (net income is the actual money that is deposited into your bank account after taxes and withholdings are accounted for) and use this annual number as your starting point.
Determine your Annual Expenses
A common mistake in budgeting is analyzing only your monthly expenses to find that you have left out important irregular expenses that are inevitable such as vacations, holiday gifts, and auto repairs. It is important that every single thing you spend money on over the course of the year is included in your budget. If you are not sure how much you will spend on any one category (i.e. I know I will have to buy gifts this year for birthdays, weddings, etc., but I have no idea how much it will cost) do your best to estimate. Budgeting is a projection into the future and like all projections, it is impossible to be perfect. As time goes on and you get better at budgeting your expenses, your numbers should be very close, but for the first year, do your best to estimate.
Ensure Your Budgeted Expenses are Less than Income
Regardless of how the numbers look, you will need to reduce your expenses if they are higher than your annual income. Essentially, you will fall into debt if your expenses exceed your income each year. Think about your priorities and find one or more places to cut that are low on your priority list.
Track Your Spending
At Zynergy, we highly recommend an aggregator and spending tracker such as Mint.com to track all of your spending. You can start by setting your budget into the Mint.com system and then link your spending accounts to Mint, such as credit cards, bank accounts, and anywhere else you may spend money from. This secure system will then automatically pull your spending data from these accounts and even categorize your transactions for you. It will be important for you to log in from time to time to update your spending categories and make sure the numbers are right and the categories are properly assigned, but otherwise, the platform does most of the work for you.
Review Your Spending Every Month
Take a look at what you spent against what you earned. You will never perfectly follow your budget, but if one category is slightly over budget one month, make sure another is under budget. The important thing is that over time you are spending less than you are earning, so you have the ability to save for your future.
Budgeting is often seen as a chore by most of the people we work with. However, if you follow the steps described above and utilize technology, it doesn’t have to be. Proper budgeting and planning are sure to lead to a comfortable retirement!