For many people, the idea of budgeting can be challenging. Days are taken up with work, friends, family and the energy and activities required just to manage your life. There never seems to be enough time to focus on finances.
However, budgeting is really the foundation of everything in our financial lives. Developing a budget can do more than track your spending and savings. It can help you work toward your financial goals.
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The following steps can help you build a budget that works for your life, so you can focus more attention on working toward your financial goals.
STEP 1: START WITH YOUR GOALS
Take the time to think about your financial goals and actually write them down. They can be as simple as building up an emergency fund, saving for a new car or home, starting a college education fund for a child, or vowing to increase your retirement savings by 1% a year. Make sure the goals are measurable, so include the actual dollar amounts and time frames for reaching the goals. Here are two examples of measurable financial goals:
Divide the dollar amount by the number of months in your time frame to figure out your monthly goal. If your goal is to build up a $1,000 emergency fund in 6 months, your monthly goals is $1,000 divided by 6, which equals a $167 monthly contribution to the fund
STEP 2: KNOW YOUR INCOME
Before you can establish a budget, you have to know exactly how much money you have coming in every month from your employer and other sources. Make sure to include only the money you actually receive (for example, the exact amount of your net paycheck, not your gross pay before taxes and other deductions).
STEP 3. TOTAL YOUR MONTHLY EXPENSES
You can’t budget until you know how much money you’re spending each month. When figuring out your monthly expense number, be sure to include the following:
Also remember to include occasional expenses such as doctor and dentist visits as well as car and other insurance payments. It’s also important to look through past bank and credit card statements to get a realistic picture of your spending.
STEP 4. CREATE A REALISTIC BUDGET
To take your first stab at a budget, add your monthly expenses from Step 3 to the monthly goals you calculated in Step 1. Then, subtract that total from your monthly income calculated in Step 2. If the balance is positive, you’ve created a budget that works for your current lifestyle. Here’s an example:
Monthly income (from Step 2)
$3,000
Monthly living expenses (from Step 3)
-$2,100
Monthly financial goals (from Step 1)
-$750
Total left over
$150
If the balance is negative, you have some more work to do. That leads us to Step 5. See below.
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KEEP YOUR FINANCIAL GOALS TOP OF MIND
Whether it’s retirement, education funding, saving for a major purchase or other financial goals, LPL’s financial professionals can work with you to determine an appropriate strategy to address your goals and how long it may take to achieve them.
LPL’s Client Goals planning tool helps you track your financial goals online each time you log into your account. Your personalized Client Goals dashboard contains clear, easy-to-understand data and graphics, including colorful progress charts to help you visualize success for each financial goal. In addition, your financial professional can distribute progress reports directly to you on an ongoing basis.
As your goals and plans change, your financial services professional can quickly and easily make adjustments within the tool. You can be confident that what you are viewing always reflects your current situation, allowing you to stay focused on what matters most right now.
STEP 5: REVISIT YOUR GOALS AND EXPENSES
If the first swipe at your budget came out negative, rework the numbers and try again. For example, you can revisit expenses and decide which ones are top priority and need to stay in your budget and which you can do without. You can also consider changing the amount of time needed to meet your financial goals. Or you can figure out a way to increase your income.
STEP 6: STAY CONNECTED
Budgeting isn’t a one-and-done exercise. To help you move forward in your budgeting process, check out www.americasaves.org. The site features lots of money-saving ideas, as well as other tips on setting financial goals and making a plan to pursue them.
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Here are four ways to build the momentum you need to help you move forward in your budgeting process:
BUILD AN EMERGENCY FUND
Probably the most important rule of budgeting is to have an emergency fund to help when something unexpected comes up, such as a car, refrigerator or dishwasher breaking down. Here are the key features of an emergency fund:
PAY YOURSELF FIRST
Besides building an emergency fund, your next most important rule with budgeting is to make sure you are contributing to a retirement savings account. Whether it’s a plan offered through your employer or an Individual Retirement Account (IRA), make sure you pay yourself first through an automatic payroll deduction via your employer or through an automatic monthly transfer of funds from a personal bank account (in the case of an IRA).
STOP EATING OUT SO MUCH
Occasionally treating yourself to an evening at a brewpub with friends is totally fine, but the savings can really add up if you start cooking at home more. Strive to plan out a weekly dinner menu and make sure you make enough for lunch leftovers. Before you head out to the grocery store, make a shopping list. Only buy the items on the list!
FIND CHEAPER GAS AND ENTERTAINMENT
Consider using a good gas locator app, such as Gas Buddy, which helps you find the cheapest gas anywhere you are. To get the best discounts on local entertainment and attractions, consider Living Social or Groupon. And if you like concerts, consider getting a ticketing app, such as Ticketmaster or Live Nation. Becoming a member of these services can get you access to valuable presales and exclusive money offers.
KEEP YOUR FINANCIAL GOALS TOP OF MIND
Whether it’s a New Year’s resolution, a spring clean-up or amid-summer or fall project, it’s always a good time to look closely at what you need to do to improve your budget. If you need help getting organized, there are several budgeting apps available out there, such as:
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As you get better with your budgeting, you’ll find you have more money for investing and paying off debts. But just how much better are you getting with your budgeting?
Calculating your net worth is a good way to gauge your current financial health and your progress over time. It is simply taking the value of what you currently own (your assets) and subtracting what you currently owe (your debts). Just think of it as a snapshot that shows where you are financially at a given point in time.
Here’s an example:
ASSETS (everything you own):
Savings and investments
$15,000
House
$325,000
Retirement funds
$35,000
Car
$15,000
Total Assets
$390,000
LIABILITIES (everything you owe):
Mortgage
$256,000
Student loans
$33,000
Car loan
$7,500
Credit card debt
$10,000
Total Liabilities
$306,500
Total Assets ($390,000) – Total Liabilities ($306,500) = $83,500 (Your Current Net Worth)
To help gauge the current value of your home, you can check out online resources such as Zillow, Redfin or Realtor.com. For your car, you can try Consumer Reports, Edmunds or Kelley Blue Book.
If you took a picture of your finances a year ago, today and a year in the future, you could probably see a trend. Assuming you are doing all the right things, your net worth should grow year by year. As you save and invest money, that money has the potential to grow (in a good year) and you continue to pay down your debts, including your home mortgage.
Your financial services professional at LPL Financial can be very valuable in helping you calculate your net worth and offer advice on how to build it up over time. In addition, there are several online net worth calculators that you can access for free, on sites such as NerdWallet, Simple Dollar, or Kiplinger
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Download our net worth worksheet and start working towards your goals.
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This material was prepared by LPL Financial, LLC.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing includes risk including loss of principal.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not anLPL Financial affiliate, please note LPL Financial makes no representation with respect to such entity.
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