Mind Your Money: Budget Carefully
Before we flip the calendar to 2024, let’s examine one basic building block of personal finance that can provide better clarity for the new year — budgeting.
The thought of doing a personal budget may seem confusing or restrictive, but it’s really just a spending plan for your after-tax income and expenses of meeting your financial goals over a set time period.
Choose the method below that best meets your financial goals:
- 50/30/20 — allocating 50% toward needs (housing, food, transportation, debt, etc.); 30% toward wants (Netflix, movie tickets, travel, etc.); and 20% toward savings and debt elimination (emergency fund, retirement accounts, additional debt payments, etc.). This method provides a framework if you’re looking to get a handle on your expenses or looking for a fresh start. It can provide basic guidance on how to save and spend but is not ideal for people pursuing aggressive debt elimination.
- Zero-based budgeting — allocating every dollar of your income toward expenses and financial goals, like savings and debt repayment. This method closely tracks expenses and works well if you have a predictable income. If you’ve wondered where your money is going, this is the best budgeting method for you.
- Pay yourself first — setting aside a lump sum or percentage of your income each month toward your savings and investments, thereby ensuring that you’re preparing for the future while building a habit of saving and investing. This is the preferred method if you struggle to set aside money for your future or you feel like there’s not much left to actually save after paying all your expenses.
- Envelope system — using different envelopes to put cash away for various budget categories. Once the cash is gone, the budget limit has been hit and no more should be spent in that category. This method can help pay off debt and combat overspending. The challenge is that with our increasingly cashless society, it can be difficult to manage but should be considered if you have had difficulty budgeting in the past.
- Values-based budgeting — spending on things that are important to you or that you feel good about, rather than operating on autopilot. This method is less about percentages and more about identifying your spending patterns and matching them with your values. For example, you may value dining out and having new experiences or donating to worthy causes rather than mindlessly getting drive-thru coffee every day or shopping online just because. List what you value and allot funds for each category to ensure your money supports your values.
As a final note, remember to revise and adjust as needed, especially during big life changes such as marriage, childbirth, divorce, moving or a job layoff.
Entering the new year is cause for being philosophical, so, in closing, I share this quote from Socrates: “The secret of change is to focus all of your energy, not on fighting the old, but on building the new.”
Wishing good health and good fortune to all you readers in the year ahead.
Wendy Bennett is a senior financial adviser at Bennett Associates Wealth Management in Butler. Bennett Associates is a registered investment adviser and does not provide any legal, accounting or tax advice. The material prepared is the opinion of the author and for informational purposes.
