Issue 3: Why a budget?
Fall 2024
Welcome to the budgeting newsletter! Budgeting is one of those topics that is more about the why and less about the how. Most children are quite good with addition and subtraction in elementary school. It’s not a matter of knowing how to run the numbers. The knowledge is there, yet we keep hearing about Americans living paycheck to paycheck. Financial ruin is not an overnight event as it takes many years to amass the debt and obligations to bury yourself. When you put a budget into practice, you instead open the door to financial control, reduced stress, and long term wealth.
FINANCIAL GOALS
Living in the moment is living within your means. Creating a budget allows you to track your income and expenses, giving you a clear picture of where your money is going. This helps you stay in control and avoid overspending. By setting spending limits for different categories, like groceries or entertainment, you can make sure you don’t spend more than you earn. When you encounter the unexpected, or splurge to “live a little” - you know the consequences.
It’s an ongoing process, so reviewing a monthly budget lets you scrutinize that value of each line item. Do you really need 3 streaming services? Time to switch that insurance or internet provider? The more you can squeeze out of your monthly income, the more you will have for long term goals. Whether it's saving for a vacation, paying off debt, or building an emergency fund - a budget makes it easier to set and work toward financial goals.
BETTER DECISIONS
The cycle of financial stress and poor decision making can be epic. Having a budget reduces financial uncertainty. Knowing how much you have available for necessities and leisure can alleviate the anxiety of living paycheck to paycheck. With a plan in place, you're less likely to worry about running out of money.
With a budget, you make conscious decisions about your spending. Instead of impulsive buying, you’ll think through how an expense fits into your overall plan. This leads to more thoughtful financial choices, like saving instead of splurging on low-impact trinkets. What is truly essential? When something no longer makes sense, you simply get rid of it from the budget.
It’s an American reality that so many young adults start their financial life in student debt. A well-structured budget can help you avoid the worsening spiral and prioritize debt repayment. By tracking your spending, you’ll be able to cut back on unnecessary expenses and use that money to pay off loans faster, reducing interest costs over time.
Life events such as job changes, going back to school, moving, or having children can dramatically affect your financial situation. A budget allows you to adapt by adjusting your spending to align with your new income or priorities. It helps ensure that unexpected changes don’t derail your financial stability.
It’s nothing new to get caught up in social and professional pressures that impact our financial stability. Your friends are getting sports cars and boats. The grandparents would love you to see a 4th child. Your budget is an objective preview into the financial consequences of such choices. Keep it close by when external pressures threaten your financial life.
WEALTH
We tackled the importance of saving in Issue 2: Mindful Consumption.
Budgeting makes saving automatic.
By setting aside a portion of your income each month for savings, you build a habit of saving regularly. This helps you prepare for future needs, like retirement or large purchases, and provides a cushion in case of emergencies.
Consistently following a budget can help you grow your wealth over time. With a focus on saving and investing, a budget ensures that you’re not only meeting your short-term needs but also preparing for long-term financial success.
SUMMARY
Making a budget provides clarity, reduces stress, and helps you achieve both short and long-term financial goals. It’s a simple yet powerful tool for gaining control over your finances and securing your financial future. Encourage children and young adults to budget early.
Sample Monthly Budget
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Post-tax Pay: $3000
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Studio Rent: $1500
Util/Internet/Cell: $300
Groceries: $400
MetroCard/RideShare: $100
Roth IRA: $400
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Disposable: $300
Budget Review
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Post-tax Pay: What is the trajectory of my post-tax pay? Does this corporate ladder make sense, or is it time to shop myself around? Should I return to school (potentially take on debt) to increase my post-tax pay? Are there IRS incentives to reduce my taxation?
Studio Rent: Does this neighborhood still make sense? Does living alone still make sense? Can I lower my costs moving in with my partner or having roommates? Can I afford to buy? Does it make sense for me to lock up a down payment and take on ownership costs to avoid rent hikes?
Util/Internet/Cell: That salt water fish tank eats up a lot of electricity! Can I change internet providers to get a better deal? Can I join up with my family for a better cell phone price?
Groceries: Maybe Erewhon isn’t the best place for produce. The people are better looking at Whole Paycheck, but I’m not so sure about their prices. Is there a Trader Joe’s on the way home from my jog at the park?
MetroCard/RideShare: This seems pretty efficient, but I’ve been wanting a car. I wonder how that would impact my budget right now. Need a down payment, gas, insurance, monthly payments, depreciation…ugh!
Roth IRA: I’d love to put a little more in to max this out. Tax free gains!
Disposable: This goes a lot further if I stick to happy hour and mid-week specials.
