Budgeting 201

In the previous month’s financial article, we outlined the value of budgeting. Budgeting is about being proactive and being in control of financial decisions. A budget is the tool to create direction and purpose with your income. The objective of this article is to dig deeper into the logistics and functionality of budgeting, while offering some sug – gestions in creating a budget.

The budgeting process should be completed before the stated time period, generally before the start of each month as many expenses are incurred on a monthly basis. There are various methods to budgeting and I advocate zero-based budgeting. With this budgeting method, every dollar finds a “home”; every dollar has an identified purpose. The first step is to list all income sources and the dollar amount at – tributed to that source. Income may include employment or self-employment income, social security or pension in – come, and investment income such as dividends, interest, or rental income. Total the income dollar amount.

The second step to zero-based budgeting is to list out all possible expenditures for that given period of time. These may include housing (rent or mortgage), utilities, transpor – tation, food, childcare costs, gifts, charitable donations, savings, investing, insurance, clothing, medical premiums/ costs, entertainment and vacations, pet costs, child support or alimony, etc. It may be helpful to lump similar expendi – tures together in a sub column, such as total debt payments or savings and investing to have a better “big-picture” idea of where you are allocating your income. Alternatively, you may consider listing expenditures in order of priori – ty, identify those highest “needs” first (commonly food and shelter) and lastly the lowest “wants”. The next step to zero based budgeting is to write out, in dollars, how much of the total income will be allocated to each of the written expenditures. Allocate a dollar amount to each of the expenditures until all the of income has an identified purpose. This is the step of the budgeting process where disciplined decisions are made and it is easy to iden – tify trade-offs. For example, if the decision has been made to finance an auto on monthly payments, this means there is less of the income to be allocated towards other financial priorities such as saving for retirement or donating to a spe – cial charity. This is the part of the budgeting process where you make financial decisions to prioritize what is import – ant, and what is not important. Lastly, track expenditure versus the budgeted amount for each item. This will help track spending and be a tool in future months to look back to really understand your in – come and expenditures. This part of zero-based budgeting is where accountability is found. For example, if spending on food was over the budgeted amount, this will result in a short-fall for some other expenditure. Remember, with ze – ro-based budgeting every dollar of income is allocated to a purpose. Using credit to cover those “extra” expenses will not produce financial freedom as using credit today is con – suming and borrowing against the earnings of tomorrow. One point of emphasis in budgeting is that it should be done in writing. This can be done with a spreadsheet, app on your tablet or phone, or simply with a pencil and pad of paper. Budgeting is elastic; it changes as your financial priorities evolve. Don’t beat yourself up for imperfections. Brett Farve threw 336 interceptions in his career but also threw 508 touchdowns! The point – he kept slinging the ball and overall did a pretty good job winning games!

In the next monthly financial article we will explore some of the more common budgeting challenges and offer suggestions in how to overcome them. Adam Smit is CERTIFIED FINANCIAL PLANNER™ and a registered principal of LPL Financial. This article is for general information only and not intended to provide specific advice or recommendations for any individual. Se – curities offered through LPL Financial. Member FINRA/ SIPC.

BY ADAM SMIT