5 Simple Steps to Creating Your Budget
By Mark Yatros
Most Americans’ view on budgets seems to go along the lines of, “Budget… fudge it… we don’t do that.” In fact, 75% of Americans don’t have a written financial plan.
This isn’t surprising, considering fewer than half of the states require students to take a financial management class to graduate. In June 2022, Michigan Governor Gretchen Whitmer signed a law requiring students to take a personal finance course before graduation. But it doesn’t even go into effect until 2024. So, odds are, you weren’t formally taught how to budget.
It isn’t your fault if you don’t understand the basics of budgeting or its importance. My team and I are happy to assist you in a one-on-one consultation or at least give you a start with this information.
Let’s begin with these basics:
What is a budget?
Your budget, the cornerstone on which your financial house is built, is the process by which you track, plan, and control your income and expenses. Committing your budget to paper or computer spreadsheet is vital because analyzing your current situation, determining your goals, and measuring your progress will hold you accountable and keep you on track to achieve your short and long-term goals.
How does the budgeting process work?
First, you’ll do a cash flow analysis which is a fancy way of saying you’ll figure out how much money you have and where you spend it. Next, you’ll determine your net worth. (See below for how to complete these two steps.)
Analyzing your cash flow and figuring out your net worth will give you a snapshot of your current financial state. From here, you’ll set goals and create a spending and saving plan to accomplish them. The last step in the budgeting process is reviewing your progress occasionally and adjusting when needed.
Now let’s look at the 5 steps to creating your budget:
1. Do a cash flow analysis
In this process, you’ll determine your net cash flow, which tells you if your money is going out faster than it’s coming in. Obviously, you want more coming in than going out.
First, you’ll add up your income, and then from that number, subtract all your expenses. The result is your cash flow. If the result shows more money going out than coming in, you need a budget! Creating and following a budget will allow you to control your spending, start paying off your debts, and save to achieve your financial goals.
2. Figuring your net worth
Your net worth shouldn’t be a mystery. You can determine your net worth by adding up the value of everything you own (your assets) and subtracting everything you currently owe others (your liabilities). The final sum is your net worth.
Knowing and monitoring your net worth is important because you want it to grow yearly. If it isn’t growing, you’ll need to adjust your budget.
3. Setting realistic financial goals
Now that you have a handle on your cash flow and net worth, it’s time to set your financial goals. I suggest you look at all your expected financial needs, along with the amount of cash you have saved, and then determine realistic goals.
It’s essential to be realistic because you want to set goals you can achieve so you don’t become discouraged. Some of your goals should be short-term (say within two years), while others can be longer-term (hello, retirement!). But overall, having a written budget will tell you how long it will take to achieve your goals, and you can watch your progress along the way.
4. Creating your budget
Once you know where you stand financially and have set goals, you’re ready to create your budget. You’ll discover how aggressive you need to be to achieve your goals, so you can design a budget that fits your income and intentions.
Just as you were realistic in setting your goals, you’ll also want to set a realistic budget. You want your budget to keep your spending in check without leaving you feeling deprived of things that are important to you. This is when it becomes vital to know the difference between your needs and wants. Only you can determine this, however. Just be sure to be honest with yourself, so things budgeted as needs are actual needs (hint: coffee out every day probably isn't a need!).
One final note to consider when setting your budget is remembering to include expenses that only happen once or twice a year. For example, the holiday season can get expensive, so estimate what you’ll spend on gifts, new clothing, travel, entertainment, etc., and divide by 12. If you put away that amount of money each month, you’ll be prepared to pay cash for holiday expenses next December (think about it: no holiday bill hangover in January!).
5. Reviewing and revising your budget
It’s important to review your plan each month to be sure you’re on track. While I want you to create a realistic budget and stick to it, if you get off a bit – it happens because, well, life happens – be ready to adjust. Your adjustments may be temporary, or you may discover they are more long-term. But whatever changes you make, be sure you’re still on track to meet your goals, even if it is at a slower pace.
If you’d like guidance on creating your budget, we’d be happy to help. You can schedule a free consultation with Allegiant Wealth Strategies’ team of experienced financial advisors here.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.