Your Money Matters by Barry Feigenbaum : Budget: the Foundation of Your Financial Roadmap

By Barry Feigenbaum

Welcome back to Your Money Matters. In this installment, I want to discuss how your financial planning functions like a driving app on your phone; you know, like Google Maps or Waze. It’s a tool that tells us how to get to where we want to go. The driving app needs two pieces of information to give us directions. The first is: Where are we now? The second is – Where do we want to end up? What’s the destination?  

Like the app, our financial plan requires knowing where we want to go. When we are younger, our goals may include a down payment for a home, a new car, education for our kids, or a nice vacation. As we age, our goals become focused on funding retirement. They may also include our grandchildren’s education, leaving a legacy for our heirs, or funding a charity that has meaning for us. Somehow, we have to figure out how we can save enough to meet these goals. In driving app terms, that means planning how to reach our destination.

Just like in the driving app, the starting point is where we are now. One part of this starting point is a balance sheet composed of the financial assets you own and what you owe. The other part is your income statement – what you bring in compared to what you spend or save. This latter tool is the much-maligned budget and budgeting process. I’ve heard all the excuses about why people don’t want to create a budget. I don’t need a budget; I know what I spend. Or, I’m no good at math. Or, it’s so complicated.

Preparing a budget is not actually very complicated. The hard part is often gathering the information. There are 3 main sources: your financial/bank statements (including online accounts), the annual breakdown of your expenses by expenditure category provided by many credit card companies, and your cash expenses. Cash expenses may take some time to reconstruct. Alternatively, you may take notes for a period of time on the cash you spend and annualize that amount.  

The budget starts with your income or revenue and identifies all your sources of income: work compensation, investment income, social security, pensions, etc. The budget then moves to your expense categories in as much detail as you can provide. Here are some items to include: housing costs, taxes, retirement savings, food, insurance, transportation, medical expenses, charity, pets, financial costs, entertainment. Capture all your spending.

The outcome is important. Are you positive or negative at the end of the year? Are you in deficit- spending more than you take in? Are you positive – are you saving- and is it enough to meet your goals? What are the implications for your financial life?

Equally important is reviewing where your money actually goes: that’s the budgeting process. Look at the bills carefully. How many streaming services do you purchase? Do you use them? Dig into the phone bill. What are you actually paying for? Look carefully at the bills that the service provider automatically takes from your checking account or is automatically paid through your credit card. This payment process may save you a few bucks each month. However, over the course of a year, the provider may increase prices bit by bit. Since you aren’t looking closely at the bills that are automatically paid, the supplier often takes back the entire monthly savings and then some. Look at how much you spend on food deliveries and eating out. My personal favorite is the insurance premium on home and auto. These are low-frequency (but potentially large loss) events. You may want to consider paying a lower premium by increasing the deductible a bit (which means bearing some additional financial risk).

You should do a budget and dig into your individual expenses at least once a year -if not more often.

I have so many anecdotes regarding what people learned from doing their budgets. Coffee costs. Cable services. Shipping costs. Credit card fees. Every category is a potential silver mine.

When I lead budget classes, and participants look into their finances, they are normally excited to report what they learned. Two things are true. First, they are always surprised to see where some portion of their money goes. Second, they are able to free up money for purchases or savings that have more meaning to them.

Create a budget process that you can repeat. Make records of your process for ease and consistency. Let us know what you learned about your financial life. I will report back to you in a few months on what we discovered. 

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This presentation should not be used as a basis for legal, tax, or investment advice.  In any specific case, the parties involved should seek the guidance and advice of their own legal and tax counsel and financial advisor. 

Barry Feigenbaum is a Certified Financial Education Instructor® with more than 40 years of financial services experience who has taught thousands of students in educational, corporate, and not-for-profit settings how to take control of their financial lives.