This article was published in the New Haven Register on April 12, 2020.
Trying times call for a return to basics. In the world of financial planning, one of the most basic tools is budgeting.
Creating and following a household budget is not about denying yourself the pleasure of spending money. Budgeting is about freeing yourself from debt and worry by establishing a roadmap to achieve your financial goals. It’s about taking control of your finances and your future.
When you follow a budget, you will know whether your spending is advancing your goals or holding you back. And you will know what to do with your income without having to constantly make decisions, because you will decide ahead of time
As with many high-quality practices in life, the hardest part of budgeting is getting started.Here is a step-by-step guide:
Determine your motivation. Do you need to get out of debt? Is there a big item you want to save for? The first step in starting a budget is to define your objectives. Write down your financial goals and let them guide you.
Get a handle on your income and expenses. Gather up all paperwork related to your income and your bills, including bank and credit card statements. List all sources of income, from paychecks to stock portfolios, and know the monthly and yearly totals. Then write down all the expenses you’ve had over the last three months. Break expenses into categories, and list them all from the most important to least important, to set spending priorities. Don’t forget irregular expenses, such as holiday and birthday gifts, annual dues and medical co-pays.
Calculate your bottom line. Compare your income with your expenses. If your expenses exceed your income, your first priority will be to work on eliminating debt and cutting expenses or finding ways to increase your income. If your income exceeds your expenses, decide where to place the additional funds. You may want to build up an emergency fund, or start a savings account dedicated to a goal such as a new house or a big vacation.
Allocate money by categories. Now that you have a clearer picture of where your money goes, it’s time to set up a budget by adjusting the picture. In other words, determine whether you have the right amount of money going into each facet of your life. If not, decide how much money should go to that category. For example, let’s say you’re spending more than you realized on clothing. Decide what percentage of your income should go toward clothing, and you have set up a clothing budget. Do the same for other categories, including saving and investing. You can go online to research ideas on what percentage of income should go toward different categories such as housing, utilities, entertainment, etc., or enlist the help of a financial planner.
Follow your budget. You now have a budget, a plan of how you will spend your money going forward. Now you need to track your spending every month and make sure you are hitting your targets. If you overspend in one category, transfer money from a less important category to cover it. You’ll get it right over time.
Eric Tashlein is a Certified Financial Planner professional and founding Principal of Connecticut Capital Management Group LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be reached at 203-877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Investment Advisor Representative, Connecticut Capital Management Group LLC, a Registered Investment Advisor. Connecticut Capital Management Group LLC and Connecticut Benefits Group LLC are not affiliated.