Some people find creating and managing a budget to be overwhelming, because it can be hard to look at your financial situation with a critical eye. According to research, only 32% of Americans keep a formal budget. Only 30% of Americans have a long-term financial plan. Having a budget is an important part of being financially stable, because it can help you address long-term goals (such as paying off debt and saving for large purchases).
Why Make a Budget
If you have been doing fine without a budget, you may wonder why you should make one now. Two of the biggest reasons are stability and stress relief. Most people consider talking about money to be stressful, but when you know exactly how much you have to spend and where, you’re in more control of your finances.
Here are some of the reasons why creating a budget with a CPA can be helpful:
- It can make sure your household or business is financially stable.
- It can prepare you for retirement or building a profitable business.
- It can help you get out of debt.
- It will allow you to have a rainy day or emergency fund.
- You can start saving money for your financial goals.
You should put together a budget as soon as possible because even if you have never budgeted before, doing it now can be a huge step forward in reclaiming your financial future.
What Should be Included in a Monthly Budget
Because we live in a time of rising costs that seem to get higher each day, budgeting your finances and saving for the future has never been more important. It’s easy to get caught in the currents of rising prices and growing debt while trying to balance between present expenses and future security. The first step in creating a more stable financial future is to understand your spending and what’s important (as opposed to what’s extra).
To help you come up with a budget, expenses can be broken up into the following categories:
- Needs — You should start by creating a budget for your essential expenses (such as housing and groceries). They’re non-negotiable items that you can’t live without, and they will form the foundation of your entire budget. You should allocate a percentage of your income to cover these necessities, because it will ensure your financial stability and security.
- Wants — It’s important to take care of your needs. But even if you’re on a tight budget, you should consider at least some of your wants. You may not be able to spend as much as you would like, but you don’t want to get rid of it completely. No budget will be exact every month, and this is where you’ll have some wiggle room. Prioritize the things that make you the happiest, because it will allow you to enjoy your life while keeping you financially responsible.
- Debt Repayment — Going into debt is the worst thing you can do when you’re on a budget. If you have a lot of debt, you will keep falling further behind because interest payments will increase. You can start by making the minimum payments and making a commitment not to add to your total debt. You also want to allocate any extra funds toward the balance so you can get out of debt faster.
- Retirement and Emergency Expenses — Everyone needs to put money into some type of emergency fund, because it can help them prepare for monthly expenses. So, you should create one as soon as possible. Most financial professionals recommend having at least 3-6 months of expenses saved up for basic needs. That way, you won’t have to allocate important parts of your budget when your car needs to be repaired or have unexpected medical expenses.
A common budget framework that’s easy to understand and follow is the 50/30/20 rule, which recommends taking your monthly after-tax pay and splitting it up in the following manner:
- Allocate 50% towards your needs.
- Allocate 30% or lower to be spent on wants.
- Allocate 20% for savings and paying off debt.
If you follow this plan, you’ll be able to manage your monthly needs and still have fun (all while creating a savings pool that you can use to cover costs and prepare for retirement). If your needs make up more than 50% of your take-home pay, you may want to reduce how much you spend on your wants and reevaluate your long-term situation.
If you’re looking for a CPA in Corpus Christi who can help you with your budget planning, be sure to get in touch with Jennings & Hawley.