May 5, 2017
Growing up comes with so many decisions. If you’re about ready to graduate from high school or college, you could be focused on either your lifetime goals or just on what you want to do for the next few years.
And there’s so much you can do. Maybe you’ve already figured out what your career is going to be and have targeted a specific degree. Perhaps you want to travel the world. You might have a great idea and want to launch a ground-breaking company now. Getting married and starting a family could be your highest priority. Or maybe, you just want to take it easy and work part-time for a few years until you figure out your true purpose in life.
No matter what your goals are, whether you have a lot of money or a little, managing that money well is your key to achieving them. And the first step in sound financial planning is setting up, and sticking to, a reasonable budget.
Your personal budget is the foundation for all of your spending decisions — from the big lifestyle purchases you dream of, to the many small choices you’re already making every day.
“When thinking about budgeting, it’s important to flip the switch from thinking it’s an exercise that’s constraining to it’s an exercise that’s empowering,” says Linda Kitchens, a director of Wealth Management and principal at Aspiriant. “You become in control of information and all the decision-making.”
For example, if you were handed $4,000 to spend this year, what would you buy? When given a lump sum, you might think big: a car or Mexico trip, perhaps. But did you realize that a deli lunch and latte every day for a year can also cost $4,000?
And there’s nothing wrong with wanting to spend it on that. But it is a choice only you can make. For example, that $4,000 could be saved for a major purchase, like a home. Or better yet, it could grow into a small fortune over time in an investment account.
Earmarking money for important expenses and financial goals is the essential and basic process of budgeting.
For starters, it’s a good idea to differentiate between discretionary and non-discretionary spending. Think of discretionary items as things you want, and non-discretionary purchases are things you need. While it can be sort of obvious, everybody’s discretionary and non-discretionary purchases are different.
“When thinking about budgeting, it’s important to flip the switch from thinking it’s an exercise that’s constraining to it’s an exercise that’s empowering.”
– Linda Kitchens, director of Wealth Management
You need to eat, for example. So buying groceries is non-discretionary, while eating out at expensive restaurants could be considered discretionary. But even with grocery shopping, you’ll have to decide whether buying all-organic at a local market fits within your budget, or if you have to purchase groceries at a discount superstore.
Today and throughout your future, your budget is the essential tool for making smart lifestyle decisions.
Whether you’re living on an allowance, working part-time or will soon be fully financially independent, now is the time to start setting a budget. That’s exactly how successful families and businesses are run.
A budget simply compares your income to your expenses — and tells you at a glance how much you can afford to spend.
“One of the advantages of making a budget is it helps you to see the big picture,” explains Don Gettinger, a director of Wealth Management at Aspiriant. “When you put it all down on paper, you might be surprised to see how much things cost.”
“But do not panic!” Linda adds. “NEVER has anyone not been surprised by how much they spend.”
Here’s how to get started:
At this stage in life, you probably have little flexibility to change your income, so when and how you spend are the keys to managing your finances. Spending, however, tends to creep higher (temptations are everywhere) and ends up being more than you estimate. So it’s important to keep track of what you actually spend.
To make it easy, set up online banking and autopay for your monthly bills. It’s important to also automatically set aside a specific amount up front for your savings account.
Use your ATM card or credit card (be sure to you pay it off each month!) for most purchases, no matter how small. This will give you a monthly record to easily track spending.
“Don’t make a habit out of pulling out cash — as we all know this disappears,” Linda says.
When you do use cash, adds Don, set a spending limit and keep receipts or a diary of what you buy.
Download your monthly bank statement and enter other expenditures into your money management software to make it convenient to calculate your spending by categories. Check them against your budget at least monthly. Then you can juggle available income between competing priorities as needed.
Make a habit out of reviewing your budget, or spending plan. “The more attention you give it, the more natural it will become,” says Don.
At least four times a year, calculate to see if your actual spending tracks within the following budget guidelines.
On track? Congratulations! If not, you can adjust your spending in discretionary areas, such as recreation.
Setting a budget may seem boring, and sticking to it isn’t always easy. But the financial decisions you begin making now will affect your life as profoundly as your choices in personal behavior, lifestyle and career.
Your budget puts you in the driver’s seat, in control, and on the road toward the future of your dreams.
“Money is like the fuel in your car,” says Don. “You need to keep your eye on the gauge to be sure you have enough to get you where you want to go.”
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