"You cannot reach your financial goals without a budget."
Most people think having a strict budget that is rigorously followed is the only way to accumulate wealth. Unfortunately, most budgets are like diets. They are aspirational and are abandoned shortly after they are adopted. Even worse, those failed budgets make people think they are “bad with money” which only distances them from achieving their financial goals.
While the act of budgeting is not strictly necessary, you do need to be organized. What do you spend on fixed expenses like the mortgage, auto loans, utilities, etc.? What do you spend on discretionary items like eating out or traveling? This involves creating a spending audit, which we talk about here. Ultimately, you need to know your living expenses so you do not spend more than you make.
Where to Start
Short circuit the inevitable tension
Presuming you have a handle on general expenses, the question “Can we afford it?” permeates any number of financial decisions and can cause internal anxiety or strong disagreements between couples. Unfortunately, what is affordable is squishy and applies to any number of spending decisions, which results in wasted time and energy. Is it reasonable to go out to dinner with friends if you just attended your cousin’s wedding which depleted your “fun” budget for the month? That is a pointless argument with no winners.
Determine savings goals
Are we saving enough? Whether or not something is affordable is often subjective, which can lead to disagreements about priorities and values. Hitting a target savings rate is an objective measure. Instead of beginning with arbitrary targets for what you spend at the grocery store or whether you can afford to attend that concert, sit down and determine how much you should be saving to hit your long-term goals.
Having savings goals allows you to bypass questions of affordability. Pay yourself first by allocating money to savings, earmark what you need to cover your bills (be organized) and spend the rest. Then increase your savings goal every year so you continually build your asset base. It will also keep spending in check because as you make more, your increased savings will put a natural cap on spending.
Capital allocation rules
It also helps to have basic rules for “found money” or funds that are unexpected. What to do with a tax return, a large bonus, or a gift from a parent can quickly turn something positive into something negative. Consider something basic and easy to apply like “Save half, spend half”. Whatever the rule is, it will ensure you do not waste opportunities and will avoid competing priorities.
Savings is sacred
This system works incredibly well if savings is considered off limits outside of emergencies. Once you save money into retirement accounts, a brokerage account, or your emergency fund it does not come back out for discretionary spending.
While auditing your spending and being organized is critical, budgeting set amounts for different categories for spending is often counterproductive. Instead, set ambitious savings goals and then feel confident in spending and what you can afford to do in life.
This is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.
LPWM LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers.