Budgeting: A Roadmap to Your Expenses

Michael Walsh

Michael Walsh, CFP® Financial Advisor

Understanding how much your lifestyle costs on a yearly basis is an essential first step toward planning for your financial future. It is not uncommon for prospective clients to visit us, having accumulated a large amount of money through years of diligent savings, and not have any idea what it costs for them to live on a yearly basis. Typically, we hear from these folks, “I guess we spend somewhere between $150,000 and $300,000 per year to live the way to which we have grown accustomed.” With such a large range in actual cost, we must sit down with them and come up with a realistic number. The way we identify this number is to start with a budget.

People typically hate keeping track of all their expenses for two main reasons. The first is that it is challenging to keep all the receipts and a current running tally of their expenses. Between credit cards, debit cards, checks, and cash, there are a lot of moving parts on top of which to stay. Aside from the clerical aspect of the exercise, there are months when most folks are scared to look at how much money they spent. This is not to say that they are financially irresponsible, but there are times when more money was spent than anticipated. People often do not realize that they have a large amount of their yearly expenses lumped together such as insurance premiums, tuition payments, or various taxes/assessments.

For years, I talked with my peers about an easier way to keep track of what I am spending on a yearly basis. After doing some preliminary research, I found the answer in the form of an application that keeps a running tally of all my cash inflows and outflows (I use http://mint.com, but there are numerous other services available). I set up an account through a secure server and the aggregating system feeds information from my credit and banking institutions daily. Once each quarter, I log in and track my spending over the previous three months, which helps me understand how and on what I spend my money. It helps me understand both my necessary and discretionary expenses. Note that before you begin using any system, you should make sure it is safe and secure. Speak with your financial advisor, banking institution, and credit card company to start the process and see if they can make any recommendations. In today’s world, you must be extra careful when it comes to putting your financial information online as there are predators out there trying to steal your information.

It is essential to understand the extent of your necessary expenses, as these are things without which you cannot live. These would be expenses such as your rent or mortgage, vehicle expenses (insurance, gas, and general upkeep), food, electricity, water, gas, and for many people, their student loan payments. Anything that you can live without falls into the discretionary category, as in a pinch, you could do without these things.

Once you understand what you need to cover basic expenses, I suggest you budget for an emergency fund, just in case something happens and you need to maintain your lifestyle. Typically, a good rule of thumb is to have three to six months worth of expenses in cash should something happen to cause you to lose your source of income. At the end of each year, I look back at the different categories of spending and cash inflows (i.e., money from my bi-monthly paychecks) to see what my current lifestyle costs. This knowledge allows me to set up smaller budgets that are used for specific things. My parents are planning a big family celebration for their fortieth wedding anniversary. They have developed an anniversary budget and deposit a certain amount of money from each paycheck into this bucket; these funds will help offset the cost of the celebration. Another example of a specific budget is for people who are planning to travel and want to set aside a specific amount of money for that trip to Europe (or anywhere else) they are going on next year with their friends. No matter what the money is used for, before you can start on your path to financial freedom, you need to understand your current spending habits and set up a plan with which you are going to stick.

Feel free to contact Michael Walsh, CFP®  with any questions by phone 305.448.8882 ext. 213 or email: MWalsh@ek-ff.com