During this time in your life, you’re likely busy establishing yourself in your job or career, building new relationships, enjoying activities with friends and family, and generally figuring out how to navigate through new challenges and opportunities. There never seems to be enough time to focus on your financial life. However, a budget can help you achieve true financial wellness. The following 5-step process can help you create a budget that helps you work toward your financial goals.
STEP 1: DEFINE YOUR GOALS
Financial goals should be both short-term and long-term. Here are some examples of short-term goals:
- Save for a vacation
- Purchase the latest Apple Watch
- Upgrade your furniture
- Save for a wedding
- Start an emergency fund
Here are some examples of long-term goals:
- Buy a home (if you’re renting)
- Pay off student loan debt
- Buy a franchise/start a business
- Build up emergency fund to cover three to six monthsof living expenses
- Retire early (or just start saving for retirement)
Make Your Goals Measurable
Write down your financial goals and make sure they’re measurable (include the actual dollar amounts and time frames for reaching the goals). Here are some examples of measurable financial goals:
- Build up a $1,000 emergency fund in 10 months.
- Pay off $3,000 credit card balance in 18 months.
- Contribute 8% to company retirement plan.
- Increase retirement contributions every January 1st by 1%.
For goals similar to the first two above, divide the dollar amount by the number of months in your time frame to figure out your monthly goal. If your goal is to build up a $1,000 emergency fund in 10 months, your monthly goals is $1,000 divided by 10, which equals a $100 monthly contribution to the fund.
STEP 2: KNOW YOUR INCOME
Before you can establish a budget, you have to know exactly how much money you have coming in every month from your employer and other sources. Make sure to include only the money you actually receive (the exact amount of your net pay, not your gross pay before taxes and other deductions).
STEP 3: TOTAL YOUR MONTHLY EXPENSES
You can’t budget until you know how much money you’re spending each month. When figuring out your monthly expense number, be sure to include the following:
- Groceries
- Student loan payment
- Credit card payment
- Cable/wifi/streaming apps
- Rent
- Car loan payment
- Cell phone plan
- Entertainment/eating out
Also remember to include expenses like doctor and dentist visits, insurance payments, haircuts, gifts, manicures and/or pedicures, and others. It’s easier if you look at past bank and credit card statements to get a realistic picture of your spending.
STEP 4: CREATE A REALISTIC BUDGET
To take your first stab at a budget, add your monthly expenses from Step 3 to the monthly goals you calculated in Step 1. Then, subtract that total from your monthly income calculated in Step 2. If the balance is positive, you’ve created a budget that works for your current lifestyle. Here’s an example:
Monthly income (from Step 2) $3,750
Monthly living expenses (from Step 3) ($2,900)
Monthly financial goals (from Step 1) ($ 700)
Total left over $ 150
If the balance is negative, you have some more work to do. That leads us to Step 5.
STEP 5: REVISITYOUR GOALS AND EXPENSES
If the first swipe at your budget came out negative, rework the numbers and try again. For example, you can revisit expenses and decide which ones are top priority and need to stay in your budget and which you can do without. Are there apps you don’t use or movie channels you don’t watc? Also consider changing the amount of time needed to meet your financial goals. Or you can figure out a way to increase your income.
Thinking about your goals can give perspective on how to approach financial planning. Once you have the bigger picture sketched out, you can fine tune the details of your action plan to work toward your goals.
TACTICAL TIP
Set aside enough money in an emergency fund to cover an unexpected expense. For example, your budget might be doing fine for several months before you suddenly need a $750 car repair. It can be hard to get back on track once the emergency is over.
Keep in mind that emergency savings are just that — money to use for an emergency. It’s critical to avoid using a credit card when an actual emergency comes up (and then have to pay interest when carrying a credit card balance). Use the emergency funds and then start to rebuild those funds again — that’s what they’re for!
Sources:
Investopedia
Smart Asset
Kiplinger
IRS.gov
Myfico.com
This material was prepared by LPL Financial, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. LPL Financial does not offer tax or legal advice.
This material was prepared by LPL Financial, LLC.
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Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL Financial affiliate, please note LPL Financial makes no representation with respect to such entity.
