Budgeting 101

Simple to understand, but extremely difficult to implement.

But why is that?

1. Consistency is very tough to achieve but is the most important aspect of following a well built budget.

2. It is not always a priority if a person's main focus is trying to make ends meets. And let's be serious, we've all been there.

3. Comfortability is a dangerous game to play.

(a) "I've always done it this way."

(b) "I pay my bills and always have money left over, why should I budget?"

A budget isn't always necessary, nor is should it viewed as a saving grace. BUT, it is a great way to build a foundation for personal finances. It is also a great way to keep yourself accountable, give yourself a guide, and set boundaries so you don't fall off the rails.

But enough about the "why", let's show you the "how".

Before we begin, we acknowledge that there are plenty of budgeting apps out there. We don't specifically advise on any one of them, but we're positive that they probably have great advantages to them. In our financial plans, we use the good ole application known as Excel. I know, we're old school but hey, it works. So, we are going to walk through how to create a budget in Excel.

Steps to Follow:

Aggregate all the sources of income you have and calculate what you're monthly income is after-taxes and deductions.
- This seems very trivial, why do we need my income?
  - In order to know what you can afford, save, invest, etc., we must know what you "bring home". It's very easy to say you make $100,000, but that isn't the amount that is going to hit your bank account on payday.
- Why do we look at my income on a monthly basis?
  - This is our preference because expenses are typically monthly and we want to align your income to that.
- What if I don't know my monthly net income?
  - That's okay! We have a video that demonstrates the necessary calculations you need to find this number.
- Have other questions?
  - Please send us a message if you have any specific questions!
Write down all of your expenses. Yes, ALL of them. We need to know every dollar that leaves your pocket.
- Having trouble?
  - Go get your bank and credit card statements and write down every item you spend money on.
  - And yes, we want you to include those one-off Amazon purchases and that one time you went to corner deli.
Once you feel confident all of your expenses are tracked, we must then organize expenses by Fixed and Variable.
- Fixed: These are necessary life expenses you must pay.
  - Some examples are mortgage/rent, utilities, subscriptions (Netflix, HBO, OnlyFans), groceries, gas, car bill, insurance, student loans, credit card payments, etc.
- Variable: These are expenses that fluctuate on a monthly basis or are one-off expenses. Essentially, everything else that isn't recurring
  - Some examples include shopping, going out to a bar/restaurant, weddings, travel, hobbies, etc.
- What about items that aren't recurring, but I buy very consistently (Starbucks, lunch, golf, etc.)?
  - Let's say you are an avid golfer or you always buy lunch during work and this is a recurring expense for you.
  - There is an argument that this could be a Fixed expense because, let's be serious, you aren't missing a tee time any soon and you sure as hell need to eat.
  - Although it feels like a fixed expense, we suggest still putting it in the Variable bucket because there is room to alter this amount as needed.
  - Let's start by putting those expenses with recurring to be safe, but we can circle back a little later.
- In this exercise, it's very important to understand the difference between wants and needs.
  - Needs: items you need to survive on a monthly basis - food, shelter, transportation.
  - Wants: dinners with friends/spouse, Starbucks/Dunkin, etc.
Next, we must calculate your Net Profit.
- Take your income, minus all of your expenses, and that will give you Net Profit.
- Is Net Profit positive or negative?
  - If positive, great! Move on to #6.
  - If negative, no worries! We'll work on that together.
Now that we have everything on paper, here is where we need to decide "wants" versus "needs". This is going to be a tough exercise, but you need to determine what you actually need and what "wants" we can live without.
- We want to first reduce expenses from the Variable expense section as those are typically not needs.
- Fixed expenses should be made up of mostly (if not entirely) items that are needs.
- If you find that you are still negative after you remove all of the Variable items, then we must dig a little deeper.
  - Can you decrease any of the Fixed items?
  - Is there a way to increase your income with a side hustle?
  - Can you eliminate some subscriptions?
  - This may seem like an impossible task, but we are here to help. Please reach out if you are having trouble getting into a positive position after vetting out all your other options.
- Hopefully the above suggestions worked and you are now in a positive position!
If you are net positive in your monthly budget, we need to analyze how much is left over. This is where personal finance can get "fun"! With that excess income, you need to figure out what your goals are. Some suggestions are:
- Increase your savings
  - We suggest having 3-6 months of expenses in savings for emergency purposes.
  - Maybe you want to save for a major purchase or go on vacation - Live Your Life!
- Invest the excess amount
  - Maybe it's time to invest in an index fund or work with an advisor (Investing)
- Save for retirement
  - IRAs are a great way to save for retirement
  - Life Insurance (yes, Life Insurance) is an amazing resource to help protect your loved ones and assets in a time of tragedy and also can be positioned to help achieve your retirement goals.
  - Go to our Retirement section to learn more!
- Regardless of what your goals are, we suggest that you create a Financial Plan!

Let's walk through a budget example!