Austin Coley | Financial Advisor
If you are anything like me and my family, life is always changing. In the span of a year and a half, my wife and I both changed jobs, bought a house, and had our first child. In fact, my wife and I lived in 15 (!) different places before we purchased our first home here in Nashville (professional baseball certainly requires lots of traveling). In life, change is the norm. Not the exception.
While all of that change has been good for our lives, family, and career progression, it can wreak havoc on our finances. If we’re not careful, we can end up in a hole of debt that feels impossible to climb out of. So how do we stop the overspending and turn our financial outlook around? It all begins with budgeting. Establishing a monthly budget to track your spending is key to laying a strong financial foundation.
While budgeting is generally associated with starting your foundation, we have also found it to be an extremely useful tool for retirement planning. If you are near, beginning, or into retirement, building a solid budget may help you manage your income from social security, pensions, and investment accounts and navigate your expenses.
Two items to note before we get into the nuts and bolts of building a budget:
1. There is no right or wrong way to do it.
I hope what works for me will work for you, but it may not. And that’s OK. Experiment with different options – budgeting tools and categories, for example – and find what clicks for you.
2. It’s never too late to start building your foundation.
Nothing in the past matters from this point forward. If you have student and credit card debt up to your eyeballs, we can still create a brighter future for your finances, as long as you are willing to put in the work. Make today your starting point.
With that being said, let’s jump into my process. If you have any questions along the way, please feel free to reach out to me at austin@mccallandassociates.com.
1. Pick out your fixed expenses
Review your expenses from the last six months and pull out the fixed expenses – the charges that are hitting your credit card or bank account every month. This would include rent, utilities, car payments, student loan payments, insurance premiums, subscription services, cell phone bill, and monthly giving. Essentially, anything that charges you a fixed monthly fee should go into this bucket. Itemize these charges at the top of your paper, because we know we need to account for them each month. Consider any other non-negotiable expenses you have and include them in this category. For my family, that’s charitable giving – treating this as a priority in the budget ensures it remains a priority in our lives.
2. Find fixed expenses that happen sporadically throughout the year
In my budget, this includes vet bills, car insurance payments, life insurance premiums, and haircuts. Essentially, it’s anything we know will happen, but is not a monthly expense. The trick is to take the expense, calculate how much you will spend on an annual basis, and then divide it by 12. This will give you the exact amount that you should save each month so that when it is time to pay the expense, you will have the cash to do so.
3. Comb through your variable expenses
This usually includes groceries, restaurants, consumer staples, gas for your car, shopping, entertainment, etc. Anything that changes from month to month. Add up your last six months from each category, and divide by four to create a monthly average. This is what you will put in your budget.
**We divide by four here because it is always better to plan for more than less.
4. Add up your savings over the last six months and divide by six
If this number is zero (or negative), that’s okay! Again, today is the day when we are turning it around, but it’s important to know where you currently stand.
5. Add all of your expenses together and compare it to your net income each month
If your spending is greater than your income, no worries. We will work to bring that down. If you are in the black, great job! But there is still work to be done.
If you’ve made it this far, props to you. We now have a grasp of where we are, and can now plan for where we are headed. There’s no need for anxiety, worry, or even excitement. The important thing is that we keep working our way down the list and put one foot in front of the other. So, take a breath and let’s continue down the list. We’re about to shake everything up.
“The important thing is that we keep working our way down the list and put one foot in front of the other.”
6. Look at all of your expenses and circle the necessary ones
Necessary means you cannot live without these expenses. Mortgage/rent, electricity bill, car payment, groceries, gas, health insurance, and your cell phone bill will all be applicable here. Contrary to popular belief, Netflix, gym memberships, and Starbucks don’t live in this category. Once you have these sorted, see if there is a way to trim the cost of these expenses. Could you move from cable to a streaming service for television? Can you work on turning off the lights when you leave the house to reduce your electricity bill? Can you reduce the number of miscellaneous purchases at the grocery store? See where you can trim this necessary expense number without eliminating the expense as a whole.
7. Now, put a star next to all of the miscellaneous expenses
These should all be things that are not vital to your life. This section would include restaurants, entertainment, shopping, and hotels. If we’re honest, this is the section that gets most people. We eat out with our friends or buy a couple of items off of Amazon, and all of a sudden have spent more than we ever intended. But we must carefully manage this portion of our budget, and it doesn’t require giving up all of your favorite things. Go through this category and cross out everything you can live without. This allows us to prioritize our “for fun” activities – instead of doing it all, pick the activities you want to enjoy and cut out the ones that don’t matter very much to you. For example, I love playing golf on a nice day. I also enjoy going out to lunch, even if I have leftovers from the night before. I can easily save money by eating leftovers and play one round of golf instead.
8. After you have trimmed your expenses, compare it to your net income
You should be in the black (Net Income > Expenses) by this point. Ideally, we would like for the gap between your income and expenses to be at least 15% of your net income. If it is greater than this, good by you! If it’s less, you should go back and cut a few more miscellaneous expenses, or find where we can make some additional income through a side hustle.
9. Tag your savings as the ultimate fixed expense, and automate, automate, automate
When your paycheck hits your bank account, automate a withdrawal equal to your savings expense and send it to your savings account. This way, the cash is not sitting in your checking account and tempting you to use it. Do you have additional expenses that you are saving for such as a vacation or new home? Automate that as well so you can make sure it’s safe.
10. Find the budget tracking process that works best for you
Are you inclined to spend too much on your credit card or regularly spend more than you make? Try to only pay with cash from your expense envelopes and track each transaction in an excel spreadsheet or paper document. If this isn’t an issue, you can use a budgeting app or manual transaction sheet to help keep track as you move along. Whatever process you use, make sure you note each transaction in your budget. When a category is zeroed out, it is done for the month. We can’t borrow from the next month to satisfy this month’s craving. Doing so creates a slippery slope where we can disregard our budget for immediate gratification while justifying it internally. Hopefully, you will have extra savings from unused expenses left over at the end of the month to spend!
11. Create a plan for your savings
First, if you do not have an emergency fund (3-6 months’ worth of expenses), save for this first. The last thing we want is for a big, unexpected expense to come along and make you borrow from your credit card or withdraw money from your retirement account. After you’ve tackled that, we can look at saving for expenses down the road – whether it’s a new house, retirement, or a trip you are wanting to take.
12. Track your monthly budget
Finally, it’s time to put this budget into practice. Use the budgeting methodology you decided on to track your spending each month. If you come out of a month behind, don’t worry. Each month is a new chance to save a little more. You’d be surprised how much a small amount of savings every month builds up in 1, 10, or 50 years.
13. Accountability
I know I said 12 steps, but this last one is the glue that holds the whole process together. Whether it’s a trusted financial advisor or close friend, share your budget with someone who will keep you on track if you start to veer. Personally, I hate working out in the morning, but if I have scheduled a workout with someone else, I have no choice but to climb out of bed and get my work in. The same is true for budgeting.
Now the hard work begins. Creating the plan is easy, but staying diligent is tough.
Good luck, stay strong, and happy budgeting!
There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any opinions are those of Austin Coley and not necessarily those of Raymond James.