Broker Check

Your New Budget

September 28, 2021

Knowing your basic expenses is a critical component to financial planning. To a certain extent, a budget helps to keep expenses down; however, at certain levels of income, depending on monthly overhead, a budget can become somewhat nebulous and seem unimportant. Creating and maintaining a monthly budget, at any income, is wonderful piece of information to understand and utilize.

As income levels rise, monthly overhead obligations lower, or both occur, the purpose of a budget changes. Traditionally, a budget outlines expenditures and focuses primarily on expenses to make independent decisions on the remaining amount of income. A traditional budget seeks to reduce spending, not necessarily promote saving. While reducing spending can promote saving, it is not usually the case. Reducing spending often promotes more spending. The focal point of the exercise is generally the activity that is advanced; a traditional budget focuses on spending.

Conversely, if a budget is focused on saving, then savings rate is nurtured instead of spending rate reduced. If your income is well above your monthly overhead, it’s time to transition and update your budget. Instead of focusing on expenses, focus on saving.

Most people have not calculated how much money they need to save each month or year to achieve their goals. If you have not calculated this, simply use a basic percentage of your income, and work up to 20% of income.

Focusing on savings is much simpler than focusing on expenses. Here’s how your new budget might work at first: when your paycheck arrives, set aside money for taxes first. Then save a fixed amount by moving that amount of money away from the checking account into the account designated for your future savings. Pay your fixed expenses (mortgage, utilities, etc.), and then spend the rest. If saving for your future is already accounted for, then all your objectives are complete.

Instead of creating a budget to spend less, you’re creating a budget to save more.

You don't have to spend all the remaining amount of money (you can save more!), but you can! Go celebrate for a moment. Saving for your future should be rewarding, and because the financial future is being actively funded, celebrating these efforts should feel different.

In every aspect of life, there is a balance that needs to be had. Too much or too little of anything can be detrimental. Emotionally speaking, if saving for your future is already a completed task, then there’s an internal peace of spending. Spending feels different, and it might even be encouraged to an extent to maintain financial balance. Vacationing, shopping, dining all feel different. There’s no tug-of-war of saving vs. spending; instead, you save an appropriate amount first, then you enjoy life.