Putting together your first budget is the most difficult. It may take a few months to get it fine-tuned.
Creating a budget for your financial success is the most important element in wealth building. Always start with the foundation. When you build a house, the most essential and critical element is the foundation. Building upon a solid financial foundation will enable you to create good habits to build wealth.
When you set out to build wealth, the foundation is your budget. Without a budget, you are just spending with no goal in mind. Buy this, buy that, and when the money is out, you complain that you do not have enough money. Or, is it because you just spend until you drop?
Many say they do not know how to do a budget. I say, “Really?” A budget is not difficult and if you want to be successful in finances and build wealth, you need to learn.
Personal Budget Basics
How much do you make? That’s a simple question, but I am astounded as to how many folks don’t know. If you are working for someone collecting a paycheck, then you likely have a pay stub. Begin there. Do you look at it?
If you are running your own business, it is a bit more complicated. You will need to know what you are bringing in from sales of goods or services and what you are spending for materials, labor, rent and any other business expenses. The difference will be your net income. This is what you have available.
If you are retired, then you are collecting social security and perhaps drawing down on your retirement savings.
Pay the Tax Man
Unfortunately, the government wants its money and they take it off the top. Social security tax 6.2%; Medicare tax 1.45%, both matched by your employer. Federal and state tax is next. Always have a goal to pay just what you owe. If you are getting a refund, then you are overpaying your taxes and not taking home all your spendable income.
For retired folks, it will be just income tax.
Here is a tax calculator from the IRS. Give it a try. It is accurate, but make sure you get the information correct: https://www.irs.gov/individuals/irs-withholding-calculator.
Or, consult a tax expert.
What Else is Reducing Your Take-Home?
Most of us are purchasing health insurance, perhaps life insurance and disability, contributing to an HSA (Health Saving Account), 401k, 403b or some other deductions.
Are you maximizing your contributions to your 401k? The goal is between 10-15% to be able to create a comfortable retirement. Are you getting the match from your employer? Free money!
Get the most out of these deductions. Don’t just buy some of these because you can. Are you getting a good return on your dollars?
Make the adjustments to maximize your take-home.
Begin Building the Four Walls
The four walls are the essentials. If you do nothing more, these are absolute. What are the four walls?
The four walls are food, shelter, clothing and transportation. With these essentials in place, you can then build out the remainder of your budget. When you have food and your stomach is full, there is one less thing to be concerned about.
Shelter is important, as having a roof over your head keeps you out of the cold. Make sure you can pay the rent or mortgage. Keep the lights on and have heat, a nice meal and a warm place to sleep. What more do you need?
Transportation and clothing are important so that you can go to work to continue to earn an income.
These items should not exceed about 45% of your total budget. Housing at about 15%, utilities 5%, food 10%, transportation 10% and clothing 5%.
These are the needs and must come first. Based on this, we can then build the rest of your budget. Everything from here is a want and you can live without it.
Where Do We Go From Here?
The essentials are covered. What else could we need? How about debt? Do you have debt, like credit cards, student loans, car loans or leases, personal loans and payday loans?
The average car payment is about $640 per month. Do you have one of these? Student loan payment is $460, how about this? The average minimum credit card payment is $110, adding up quickly. Hopefully, you don’t have all of these, but if you do, that totals $1,210 per month, or $14,520 per year.
Not having much fun? What could you do with an extra $1,210 per month? Build wealth!
What About the Fun Stuff?
If you survived the four walls and the debt payments, what is left can be spent on recreation and other items you want to enjoy life.
How about eating out, going to the movies or perhaps Christmas and birthday gifts? Get your hair done, maybe your nails. Like to take a vacation? How about cable TV, Internet, cell phones or subscriptions?
What about giving to your favorite charity, buying a new computer, getting a coffee at your favorite coffee place?
You get the idea.
Keep at It
Putting together your first budget is the most difficult. It may take a few months to get it fine-tuned. Don’t give up. You will get it down. It takes an average of three months. Adjust it each month and get it fine-tuned.
What do you think? Will you do it? What do you have to lose? What you are doing now may not be working.
You work hard for your money, make sure it stays your money!
Thanks for reading. I hope you found this helpful. QCBN
By Steven Calabrese
Steven Calabrese, CPA, is the CFO of Polara Health. He also is the owner/operator of a website known as thebiweeklyadvisor.com, where topics such as budgeting, investing, paying off debt and goal setting are discussed.
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