According to a 2023 study, 48% of households spend less than their income, yet those who kept their spending in line with their income were more likely to feel in control of their finances and achieve their financial goals (Federal Reserve Board, 2022). This underscores the immense power of budgeting, it is not just about numbers; it is about giving yourself clarity, confidence, and control.
April is Financial Literacy Month, and this month we are going to focus on ways you can work toward a healthy financial life. In my post today, we are going to review something that is fundamental to achieving financial success but is often overlooked… budgeting. While the word "budget" might not sound exciting, it is one of the most powerful tools you can use to take control of your finances. Let’s break it down together. By the end of this blog, you should have the confidence to start building a budget that works for you and your goals.
Also, go to my website or you YouTube channel to view my video on Budgeting 101: 4 Simple Steps.
"What is a Budget?”
At its core, a budget is just a plan for your money. It is about knowing how much money is coming in, where it is going, and making intentional choices about how to use it. A good budget is not restrictive, it is empowering.
So, how do you get started? I will walk you through four simple steps:
- Track Your Income and Expenses First, you need to understand your financial picture. Write down all your sources of income: your paycheck, side gigs, or any other money coming in.
Then, take a good look at your expenses. Start with the basics: housing, utilities, groceries, transportation. Do not forget the smaller things like subscriptions, coffee runs, or dining out. Those can add up faster than you think!
This is usually where people get stuck. It can be overwhelming trying to decide what you spent and how you spent it. Start by collecting 3-6 months of statements. This means any account you use to pay for anything. Use a list of categories and assign each expense in each statement to a category. There is a great calculator on my website (what is my cashflow). If you use the categories for income and the categories of expenses, you can determine if your cash flow is negative and use this for your budgeting.
Remember that the longer the period you use to calculate your cash flow will result in more accurate figures. You may have substantial annual payments that would get left out of your average. These should be memorable expenses, so if you are using less than twelve months of expenses and income, think about each month to recall anything that might not fall within your snapshot. Divide those expenses by twelve to arrive at a monthly average, if using monthly averages for your budget.
Once you have your expenses totaled, you can compare your spending with national averages listed by the Bureau of Labor Statistics in this summary on my website: “The Average American Budget”.
- Set Your Financial Goals Once you know where you stand, think about where you want to go. Are you saving for a down payment? Paying off debt? Building an emergency fund?
Your goals will guide your budgeting decisions. For example, if you want to save $5,000 in a year, break it down into smaller, achievable chunks—say, $417 a month or about $14 a day.
The 50/30/20 Rule: One popular method for budgeting is the 50/30/20 rule:
· Fifty percent of your income goes to needs, like rent, utilities, and groceries.
· Thirty percent goes to wants, like dining out or hobbies.
· Twenty percent goes to savings and debt repayment.
This formula can help you balance your priorities without feeling too restricted.
- Make Adjustments Now that you have tracked your spending and set your goals, you might notice areas where you’re overspending. That is okay! Adjustments are part of the process.
For example, if eating out is taking a big bite out of your budget, consider meal prepping a few times a week. Minor changes can lead to substantial savings over time. Go back and check how your spending follows the national averages “The Average American Budget”. If your lifestyle includes spending that is significantly above the national average, reconsider those expenses and think about ways you can reduce them.
- Review and Refine A budget is not static. Life happens, and your financial situation might change. Make it a habit to review your budget monthly and adjust as needed.
"Quick Tips to Stay on Track”
Here are a few quick tips:
- Automate your savings to make it effortless. Set up accounts for your financial goals, such as your emergency fund, retirement savings, vacation, etc. Then, allocate an automatic transfer to those accounts so they align with your financial goals. If you haven’t set goals, that is an important step, so check out my article on budgeting “Five Steps to Simplify Budgeting” for ways you can do this.
Make sure you pay yourself first. Automate your direct deposit to go to your savings account. Then, from that account, allocate transfers to the accounts for savings and spending that you have budgeted. This will help you keep your spending within budget and ensure your financial goals are financed.
- Use cash or a prepaid card for discretionary spending to avoid overspending. If you allocate your spending budget to your debit card as an automatic transfer, as mentioned in the previous tip, your debit card can serve this function. Just be sure to carefully monitor your spending so you avoid overdraft charges.
Also, keep in mind any service charges for prepaid cards or additional debit cards. Include that in your budget and consider whether it is worth it.
- Celebrate your wins! Even small progress toward your goals is worth acknowledging. Budget a reward for achieving milestones. One that is meaningful to you but not so expensive that it has a negative impact on your budget. In fact, it does not have to cost anything. You may allow yourself more time to read a book, practice a hobby, cheat on a diet, etc.
Budgeting is a journey, and it is okay to start small. What is important is taking that first step. With consistency and focus, you will build healthy financial habits that set you up for long-term success. By following the four simple steps listed above, you can create a budget and work toward the goals that are important to you. Do not forget the quick tips listed above. Those will help you keep on track and motivate you to maintain your focus.
If you are ready to dive deeper into your financial goals, I would love to help! Reach out to schedule a consultation. I can help you work through your goals and budget and create a personalized plan just for you. As a CFP® professional and financial advisor with Milligan Wealth Management, I help my clients examine budgets and more, so actions align with financial goals.
Find out more about how you can manage your personal financial life by visiting my website at milliganwealth.com, where you can check out my blogs on topics like this, along with tools, calculators, articles, and other helpful videos. Also, subscribe to my YouTube channel for my weekly videos on topics like this and economic updates.
Remember: your budget is not just about numbers. It is about creating a life you love while staying financially secure.
This video contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice.
No strategy assures success or protects against loss.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
Sources:
Federal Reserve Board. (2022). Economic Well-Being of U.S. Households in 2022. https://www.federalreserve.gov/newsevents/pressreleases/files/other20230522a1.pdf