Quoted in “Don’t Know Where Your Money Goes? That’s a Problem-WSJ”
I contributed to an article by a WSJ reporter about the importance of budgeting: you can read her full article here. http://www.wsj.com/articles/dont-know-where-your-money-goes-thats-a-problem-1461835800?mg=id-wsj
The most fundamental element in personal finance is budgeting or cash flow management. As the saying goes ‘all roads lead to Rome’, in personal finance, ‘everything flows from cash flow.’
But most surveys show that only 32% of Americans have a budget for their households which means a whopping 68% do not. Often times money issues are one of the biggest causes for divorce (22%) only behind basic incompatibility (43%) and infidelity (28%) according to a Certified Divorce Financial Analyst Professional’s survey. After a certain income level, your financial security almost becomes irrelevant to how much money you make if you do not watch your spending. This is why we often hear about celebrities or pro athletes going bankrupt even after earning stratospheric incomes, (78% of NFL players go broke within 2 years of retirement and the numbers for NBA players are 60% and 5 years) while unassuming ordinary individuals leave an extraordinary amount of fortune relative to their incomes to universities, hospitals or other causes dear to their hearts. If your cash outflow consistently exceeds cash inflows, you will incur debt which eventually will blow up in your face.
So what are some basic tips that can help you build a budget and stick to it?
Pay yourself first.
Even as we are talking about spending habits, the first item on your budget should be savings. While you are doling out money to everyone (grocers, bankers, car makers, doctors, educators, clothiers and etc.) for sustaining your current life, you cannot neglect your older self’s needs in the future. It could be for 5 yrs down the road or 50 years down the road. Most industry experts recommend 10%-15% of your income should be earmarked for retirement savings.
Be honest and be thorough and be diligent.
Start out by backtracking the past 3-6 months’ spending to see a trend or range. Create every spending category possible and record every spending that you incur. Avoid a miscellaneous category altogether, as it amounts to a black hole in which you cannot see exactly where the money is spent. This will help you be more accountable for what you spend money on. Fast food or Starbucks runs can rake up hefty amounts without you realizing.
Goldilocks: Be realistic.
If your budget is too tight, you are likely to give up. If your budget is not tight enough, you will not likely achieve cost cutting measures needed to ensure positive cash flow each month to save for different goals either short term or long term.
If you successfully stay within your budget, reward yourself a little. If this feat was achieved by cutting out frequent meals out, plan to have a nice dinner out as a special treat and experience. Similar to people trying to lose extra weight needing to mind calories consumed, you need to practice mindful spending rather than impulse spending.
Streamline to one card.
Avoid having multiple credit cards. The more cards you carry, the more likely you will rake up balances in all of those accounts. That is why they offer you those cards. Consolidating will also make it easy for you to keep track of your spending and save you time.
Budgeting can seem daunting at first but it is not that complicated. Just like anything else, you need to plan your spending and stick with it. If you do not control your money your money will control you. By taming your budget, you can achieve financial stability which will allow you to live the life you would like to live.
Boonseon Gudmundsen, CFP®
Beacon Financial Management LLC