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Why Your Financial Plan Should Start With a Budget

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By Aaron S. Nuti, CFA, CFP®, CAIA

Many people hear the b-word – budget –  and automatically think that it is a bad word.  They say, “I don’t need to budget,” “I don’t want to be on a budget,” “why are we even going through this exercise?!”  Budget and budgeting do not need to be bad words – the path to meeting your financial goals should start with a budget. So, why should you have a budget?

Knowing Where Your Money is Going

Starting with a budget will allow you to see where your money is going.  Working through your true monthly and annual expenses tends to be an eye-opening experience.  Everyone starts out believing that they know what their expenses are; however, invariably there are always one or two categories of expense that they have significantly under estimated.  Two categories where this often occurs are dining out and entertainment.  Also, they come to the realization that what they believed were infrequent expenditures are frequent.  One month this may be their car needing new brakes, the next it could be needing their furnace or a/c serviced or having to replace an appliance.  Going through the budgeting process allows them to know and see where their money is going.

It’s the Starting Point for Everything

A budget, or an income and expense report, is the starting point for making sure that you can meet your goals and take care of your family now and into the future.  Let’s look at examples that you or other friends and family members may have encountered in life.  Let’s start with a “risk planning” example.

First, insurance is the one thing that many of us pay for, with hopes that we never have to use.  I know you are asking, “why should I pay for something if I never use it?”   Well let’s change the way we ask the question.  What are you looking to protect? Family, home, job, retirement, long term care, etc.?  Once you have your answer, then you can see the value in insurance.

One question we are asked or that primary breadwinners may be thinking is…If something happens to me, will my family be okay?  Without knowing your situation, the answer is it depends… and it depends on if you’ve considered your budget now and into the future.  Imagine for a minute that I’m crossing the street and WHAM! a food truck hits me at a high speed (better a food truck than a bus I suppose), one of three things may happen: 1) I’m moving on up to the big party in the sky, 2) I’m still here, but permanently disabled and never eating from that food truck again, or 3) a miracle happens and I’m completely okay.  I’m not counting on number three.  If my family and I have already taken the time to put numbers down and answer the following questions:

  1. As the primary breadwinner what is my monthly income?
  2. What are the ongoing current expenses such as groceries, utilities, etc. adjusted for inflation?
  3. What are potential future expenses, i.e. education for kids, home improvements, etc.?
  4. What are our liability payments now and into the future?

That means that we have done a budget.  Knowing and having these numbers would allow me to work with an advisor and run an analysis to determine one of two things:

  1. The life insurance and/or disability insurance that I have, through employer or otherwise, will provide a sufficient lump sum payout or cash flow stream for my family to continue to live the life they are accustomed to and make sure they are taken care of, or
  2. That the life and/or disability insurance that I have is not sufficient and there needs to be additional coverage purchased and how much additional coverage is recommended. Answering those questions earlier will also allow the family to determine if there is sufficient cash flow available today to be able to make that additional purchase of life or disability insurance.

As you can see, without a budget it would be hard to determine how much insurance you may need to protect you family.  Also, it would be very difficult to determine if you have the extra cash flow to be able to afford the additional premiums on an annual basis or if it would mean lower additional coverage and a potential change in lifestyle.  These are things we all don’t like to think about, but I have friends who have passed and left behind a wife and kids and no life insurance.  It can make a bad situation worse.

Education

Another good example would be education funding.  If you’re like most parents you want your kids to work hard and earn what they deserve; however, you want to put them in a position to be successful in life.  This typically includes getting them the best education possible.  Considering all the headlines about college loan debt these days, families would like their children to graduate with as little debt as possible.  A good tool for trying to accomplish this goal is through the use of a 529 plan.  If you haven’t taken the time to budget, then how are you going to know what, if any, excess cash flow you have to fund that 529 plan on a monthly/annual basis to help achieve this goal?  Can you afford $50, $100, $200 etc. per month?  That along with some other assumptions can tell you if you are on path to fund that goal, but you need a budget to start with.

It Doesn’t All Have to be About Saving

This is where you and an advisor can figure out what works best for you.  Going through the budgeting process isn’t simply about saying what you can’t do, it is also about what you can do.  It’s about if your spending matches your values and if you are spending that way.

Let’s assume for a minute that we are not all Bill Gates, Jeff Bezos, or Warren Buffett.  Three guys off the top of my head where a traditional budget doesn’t apply; however, I’m willing to bet that they are still very deliberate about where their money is going every year.  So, what does this mean?  This means any discussion around a budget should start with what’s important to you.  I know, this is open-ended and it’s different for everyone, but it’s a topic you should think about and be deliberate about.  Here is a question you could ask yourself:

“What do I want my money to do for myself and my family?”

Jot down whatever comes to your mind, it can be anything from:

  • I/we want to be able to help others less fortunate than us
  • We’d like to be able to spend time together as a family on family vacations, at sporting events, etc.
  • We’d like to make sure our kids understand money, what having it and not having it means
  • I really like those $5 frappes that I drink everyday and I’m not willing to give them up

It can be anything, and it will be different for everyone.

After you’ve done this is a good time to sit down and prioritize and say, ‘yes, family vacations are the most important, so let’s work together and see how much we can spend on a family vacation’.  Giving to charity is important, let’s set aside this much for charity annual.  And guess what, even with doing that I can still have my $5 frappe and we have a little left over for an emergency’.  Looking at it from the spending side can be more fulfilling and representative of your values.  So, it’s important to look at it from this aspect as well as it doesn’t make budgeting seem so bad.

Conclusion

Going through the budgeting process will help you and your family make sure you are able to live the life you want, represent your values through your life, and make sure you are working towards your life long goals.  Don’t fear the budget, embrace it; however, before you cross the street make sure the food truck isn’t heading straight for you!

If you’d like to schedule a consultation with a Fairport Wealth team member to sit down to discuss how we can help show you where your money is going, what you’re spending it on, and how we can help you and your family live the life you want, please reach out to 216-431-3000.

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