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Where Does It Go?

Some people seem to have a built-in ability to budget their money.  More of us cringe when we hear the word ‘budget’.  It seems restrictive, and time-consuming.  Even if we want to know the answer, we don’t want to commit to the process to get it (see my previous blog on Change)

In 14 years of advising, I have only met a handful of people who budget the way we traditionally define that word- they can itemize (down to very small dollar amounts) where all of their money goes.  The rest of us need some help, it takes some practice, and we likely have larger ‘bucket’ categories, not line by line expenses.  The good news is, that’s okay.

The traditional definition of budget is a bottom-up approach- itemize all of your costs, add them up and compare to your income.  It’s possible to take a top-down approach to this- look at what comes in (after tax), and set aside both long-term and short-term savings.  After that, if your bank account is positive every month, you don’t need to itemize further.  If you’re running a shortfall, you do need to start itemizing, to decide where to stop spending.  If you don’t know, you can’t make a rational decision to make a change.

There are many budgeting tools available, including apps from your bank, programs by companies such as Quicken and pen-and-paper methods outlined in books.

Why budget at all?  There are several benefits:

The more familiar you are with your finances, the less overwhelming they are.  When unexpected changes happen in your life, it’s easier to make adjustments to something you’re familiar with.
When you have a goal that has a larger price tag and on-going expenses, like purchasing a cottage, being familiar with your finances gives you a realistic idea of whether you can afford it, what expense you could give up to reach your goal and how one choice will impact the rest of your life.
Pre-retirement, many clients ask me questions about how their retirement income breaks down.  For example, the clients may have saved enough that they can spend $120,000 per year in retirement.  In the 3-5 years before they retire, they often have more specific questions about budgeting worksheets, or programs, that can help track where they are currently spending, so that they can forecast a bit more into retirement or make choices about increasing or decreasing certain categories.
It’s good for all of us to review occasionally- think of it as financial decluttering.  Even if you are spending less than you earn, a review can be worthwhile.  Have a subscription for years that you aren’t really reading any more?  Get rid of it and spend the money on something you really love or save it towards a goal.  Could you afford an extra vacation or a house refresh if you cut 10% from your grocery and lunch spending?  Re-examining why and how we do what we do is rarely wasted time.

If you have further questions, or would like help with the process, please contact [email protected]

5 Common Budgeting Techniques

Ideas for Getting Started