Hi, my name is Tyler Dolan. I’m a CERTIFIED FINANCIAL PLANNER™ professional at Society of Grownups.
Today we’ll discuss an important financial planning topic: budgeting. Knowing how to make and keep a budget can directly impact almost every aspect of your financial life.
Some people use a budget as a general guideline, while others track everything down to the penny. There’s no one right way to manage your money. What’s most important is you’re comfortable with your strategy.
Consider what’s important to you
Your best budget is built around what’s important to you.
What are your financial goals? Think both short and long term.
Are you planning on buying a house or condo in the next few years? Do you have children and want to start putting some money away for their education?
We’ll get back to your goals in a minute.
Create a spending plan
A spending plan is a budgeting strategy I’ve seen work for people across many different financial circumstances.
It’s a different way of thinking about a budget. You’ll simply distribute your after-tax monthly income into three buckets: Needs, Priorities, and Wants.
Think about each one as a different bucket of water. You start with a full bucket of your after-tax monthly income, and then you first pour some into the Needs and Priorities buckets as you see fit. Then, you pour what’s left in the Wants bucket for you to spend as you wish.
A spending plan is all about taking care of what’s important to you first, then treating yourself to the rest. It can feel a little less restricting than your typical budget.
Let’s take a deeper dive into each bucket.
The Needs Bucket
Be honest here. What would you need to spend on, even if you didn’t have any income coming in? Think: a roof over your head, food to eat, monthly debt payments, and even your cell phone bill. As for the Netflix subscription...that’s probably not a need. You get the gist. Just the essentials.
The Priorities Bucket
You may have heard the budgeting strategy of “paying yourself first” somewhere down the line. The same idea applies here. Remember: What’s important to you?
These are your priorities, also known as your savings goals. Try to quantify them too.
How much would you like to actually save for your child’s education? Or how much is summer camp going to cost this year?
Depending your timeline and how much you’ll need for each savings goal, you should be able to start prioritizing.
You might consider contributing more each month toward your higher priority goals until those buckets are full. Then you can re-prioritize and concentrate on other goals.
For example, our lawnmower recently decided to stop working. So that’s now on top of our priority list. My wife and I will set some money aside for that first, then we’ll start saving for another goal such as updating our front door.
Your Wants Bucket
Once you fill the first two buckets, whatever is left is all you, it’s your fun money! Reserve a night to head out for a fancy dinner. Go to a concert or sporting event. Or send your kids to Grandma’s house and enjoy a weekend getaway.
When you’re building your spending plan, you might find you don’t have much to add to your Priorities and Wants buckets after taking care of your Needs. If this is the case, take a hard look at the items in your Needs bucket. Were you honest with yourself? Are there any areas where you might be able to cut back?
Remember, perfecting your budgeting strategy can take some time. Don’t get frustrated. Changing old habits is never easy. You also don’t have to write everything out on paper or build a fancy spreadsheet. There are many apps out there to keep you on track.
Thanks for watching today.