Budgeting is the foundation of every successful financial plan. A budget helps you identify income and expenses sources, allowing you to manage your cash flow accordingly. Budgeting aims to maximize your net cash flow by increasing your income sources or reducing unnecessary expenses.
Basics of Budgeting
- Budgeting is the management of incoming cash and outgoing expenses
- The goal of budgeting is to maximize net cash flow by reducing unnecessary expenses
- Incoming Cash Flow – Expenses – Savings = $0
Creating a Budgeting Worksheet
We recommend our clients use an excel spreadsheet to update their budget periodically with a few clicks of the mouse. We have an in-house document that identifies just about every monthly/annual expense you could think of, and the spreadsheet will automatically calculate your net cash flow. (Let us know if you would like a copy!)
Maximizing Your Income
Not everyone has the option to increase their income, but this is the most obvious way to increase your cash flow since income is the beginning of the budgeting equation. If you can get a promotion, work extra hours, pick up an additional job, etc., then your overall incoming cash flow should be higher. This will give you a cash flow head start and be more flexible with your expenses or savings.
Cutting Unnecessary Expenses
Since increasing income is not usually an option, most people use a budget to control their expenses. By listing every expense, you can identify areas that may be too high or too frequent. For example, if you spend $1,000 per month at restaurants and only $200 at the grocery store, then perhaps you can flip these around and try to save on your food bills. Maybe your cable bill is $100 per month, but you have another $50 in streaming subscriptions. This could be a sign to cut back, perhaps one or the other. By listing every expense you incur, you may find weaknesses or areas of overspending in your budget.
Keeping Your Budget on Track
Believe it or not, every dollar you earn is allocated towards a financial goal, even if you are unaware! Every dollar of incoming cash flow is geared towards either spending or saving, so if your accounts are not increasing in value every month, then this means your untracked dollars are all being allocated towards expenses. It is generally preferred that you set aside monthly savings towards a future financial goal rather than spending all of your incoming cash flow. Without a budget, you may be allocating more money to expenses than you realize, and perhaps you could reroute that spending towards savings.
Want to Learn More?
If you’d like to discuss how your portfolio is positioned from a risk standpoint, please reach out to us right away. In addition, if you’ve had any changes to your income, job status, marital status, 401K options, address, or any other financial changes, don’t hesitate to contact the team at Summit Financial today.
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