I understand that writing about budgets isn’t a big winner when it comes to clicks on my blog. But you are reading this, so we’ve made it this far... Let’s start with some fun facts about budgets!
• The word budget comes from the Latin bulga, meaning “small pouch”. In turn this led to the French term bougette, a nickname for a bouge, or leather bag.1
• The first use of budget relative to financial planning comes from a 1733 pamphlet, The Budget Opened, by William Pulteney, the 1st Earl of Bath. Pulteney used the term budget to critique the government’s fiscal policy on wine, among other things.2
There you go, when you think of budgets, think of fashion accessories and wine! I told you we were going to have fun.
Contrary to what most people think, creating a budget should be a stress reliever, not a stress inducer. Having a plan in place and making spending decisions within the context of that plan provides confidence and clarity.
Start with looking at your after-tax income. That’s how much you get paid after paying federal, state and payroll taxes — but before deductions for health insurance, your contributions into retirement accounts, or other deductions.
After-tax income, deductions… it's time for a “fun” break. Did you hear about the medical examiner’s office that was told to reduce their budget? They had to start cutting coroners.
Back to business, thankfully. Now it’s time to track where all that cash goes. Download spending information from checking and credit card accounts into Quicken, Mint, Excel or just use paper and pen. Categorize each expense into one of the following “buckets” — Needs, Savings or Wants.
The 50/20/30 Rule
As a guideline, check your spending against the 50/20/30 Rule:
Of your after-tax income…
- 50% goes toward Needs
- 20% goes toward Savings
- 30% goes toward Wants
Here’s a little more about each category …
These items are your essentials. Needs include:
- Housing costs (mortgage, rent, taxes, utilities, etc.)
- Health care and health insurance
- Insurance – life, disability, auto, etc.
- Childcare and other kids’ expenses
Changing "Needs" spending may include making lifestyle changes — are you willing to move to a less expensive house or apartment, or drive a cheaper car?
20% Savings/Debt Reduction
Start with saving as much as you can in a retirement plan at work — often your employer will provide a “match” for your 401(k). Along the way, look to build a six-month reserve of monthly “Needs” spending — a rainy day fund. Next, use your savings/debt reduction allocation to pay off any credit card balances.
After you have “maxed out” your retirement savings at work, have built that rainy day fund, and have wiped out any credit card debt, it’s time to save for:
- Large purchases
- College tuition (open 529 plans – very effective)
- Retirement (IRAs, Roth IRAs)
- Long-term wealth (investment accounts)
Well of course the most fun part about budgeting is thinking about your Wants! These are discretionary items, and you have more flexibility here:
- Dining out / entertainment
- Luxury purchases (jewelry, art…)
- Gym memberships
Some people will look at charitable contributions as a need, others as a want…
She Has a Plan for That!
Another fun fact: the 50/20/30 rule was popularized by Senator Elizabeth Warren in her 2006 book, All Your Worth: The Ultimate Lifetime Money Plan. Between 2003 and 2005, Warren appeared three times on the “Dr. Phil” show to offer personal financial planning advice!
Aligning Spending with your Core Values
Is your spending in line with your Core Values? I’m reminded of a client who valued flexibility, but was tied down by two homes, and the related maintenance, and taxes, etc. She made the tough decision to downsize, but travel more, and didn’t feel as much weight on her shoulders.
My Dad's Quote
Has this conversation about budgeting been fun? I think so and I hope you do to. I’ll leave you with a saying (really, a philosophy) that I learned from my dad, Dante Greco. It always brings a smile to my face.
Shari Greco Reiches
Shari co-founded Rappaport Reiches Capital Management with one goal - to maximize the return on life for her clients. Please connect with Shari below. She loves to talk about investing, financial planning, and Barry Manilow.