Yeah, I know: Keeping a budget is important for good financial health. But in terms of creating and sticking to one, what are the pointers I need to keep in mind? How often do I reassess? What should I focus on the most? Should it fluctuate? What budgeting tips are most important? – Shaun, via email
Most of us realize that a budget is the cornerstone of financial well-being. A Bankrate survey from last year found that about two-thirds of Americans have one, which should be good news indeed.
And yet we’re evidently not using them very well. Only 40 percent of adults have enough savings to handle an unexpected expense of $1,000 or more, according to Bankrate. As for retirement planning? We’re no better. Investment giant Vanguard just put out a report showing that its median retirement account balance — where half the population is below and half is above — is a measly $22,217.
So you’ve hit on an important question: How do we create budgets that actually help us achieve our major financial goals? Your email was a good excuse to connect with someone who knows a little about the subject: Frankie Corrado, a Holmdel, New Jersey–based financial advisor who also serves as president of the Alliance of Comprehensive Planners.
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As their name implies, the ACP’s mission is to address finances holistically, and there’s arguably nothing more important to it than a solid budget. Here are a few of Corrado’s pointers on the topic.
4 Budget Tips Everyone Needs to Know
Pay Your Future Self First
Mentally, a lot of folks spend their paycheck before it even hits their bank account. There’s the four-burner grill for the back deck, the new video game that just hit the shelves, or the long-awaited night out with the guys.
That stuff is fine — if you have money left over. Corrado recommends diverting an appropriate percentage of your income to your retirement and savings accounts first. If you start young, socking away 10 percent of your salary toward a 401(k) should put you in good stead. But if you can, reaching the 15 or even 20 percent mark will give you a little breathing room.
Will building a nest egg give you the same thrill as a trip to Gamestop? No, but your future self will thank you when you get to retire before hitting a 75th birthday.
As long as you take care of those long-term needs first, you’re giving yourself some financial freedom, too. “So long as you’re hitting these minimum thresholds, the budget becomes less of a necessity,” says Corrado.
Focus on the Big Picture
Can it be helpful to look over your debit card statement to know where your cash is going? Sure. In fact, Corrado says new clients, in particular, can benefit from tracing their expenditures for three months or so. (He likes the Mint app for its ease of use, although other tools can also help you get a handle on your transactions.)
But the point isn’t to flog yourself over every visit to Starbucks or trip to the McDonalds drive-thru — it’s to recognize the larger trends at play. Maybe what you thought of as a once-in-a-while habit of streaming videos is actually costing you $50 a month. Once you know that, you can do something about it.
“The trouble is when you trying to detail everything out immediately,” says Corrado. So, don’t lose the forest for the trees — the more important thing is to know how much you’re spending overall and which expense categories are really pulling you back over a period of weeks.
Uber-ambitious targets sound great. In reality, they fail miserably in most cases. Corrado uses the example of a couple who hopes to cut their $6,000-a-month spending habit down to $5,000. Chances are it’s not going to happen in one fell swoop. “They tend to get discouraged and stop altogether,” he says.
One of the strategies Corrado likes is setting it up so your entire paycheck goes into a savings or brokerage account. That first month, you might divert the entire sum into your checking account. By month number two, try scaling that transfer back so that $50 stays in savings, and so on. It’s about baby steps.
Not only are you less likely to get totally discouraged, but with less money at your disposal you’ll have a harder time falling into what Corrado calls “lifestyle creep” – that unwitting tendency to start spending more than you can actually afford.
Know What You’re Aiming For
One of the linchpins of effective budgeting is simply having awareness, says Corrado. Unless you know what your spending and savings habits are, you’ll be stuck in first gear.
But there’s an emotional component to it as well. Simply put, we need inspiration. That’s why Corrado emphasizes “goal visualization” — the ability to see the light at the end of the tunnel. For younger workers, it might be the down payment on a new home. For folks in middle age, a retirement in 10 years is more likely the next milestone.
Some planners actually recommend naming your savings accounts, be it “home purchase,” “new car,” or whatever your goal is. It’s a mental trick that helps you focus on the end goal and makes you feel like your financial sacrifice is doing some actual good. As Corrado puts it: “If your goals are uncertain, it’s a lot harder to actually feel like you want be intentional.”