Trilogy Financial, a privately-held financial planning firm with more than $2 billion in client assets, utilizes a combination of our latest technology and broad perspective to help you advance your tomorrows.

Budgeting Tools and Tips

The purpose of financial planning varies from household to household. Some couples see Financial Planning as a tool for short term goals like paying down debt or getting a budget put together. Others interpret the definition as a need only for when you are in your later years of a career and are thinking about retirement. The fact is, financial planning has a very broad and deep meaning on which every financial household should stay focused, regardless if you are in the beginning stages of your career or nearing retirement.

One of the most important exercises of a financial plan that our advisors teach clients is keeping a written budget. There are two kinds of households who budget. First, there are those who keep a written budget because they live paycheck to paycheck, and watch every dollar they spend to pay off debt and keep their heads above water. Second, are those who keep a written monthly budget so they can understand how much to save and maximize their wealth accumulation. While sometimes the difference between these two groups is driven by the amount and stability of their income, in many situations, the difference between these two is the clarity of their goals and commitment to reaching those financial goals and priorities.

The first step to a successful budget is to figure out exactly what your monthly household income is. You then allocate your monthly income to the areas you anticipate spending each month. There are a lot of good budget tools you can get online, or your financial advisor should be able to provide you with one. Examples of budget categories are: home expenses, transportation, health, charity, daily living, entertainment, savings, obligations etc. Generally we encourage clients to breakdown their monthly expenses into four categories:

  1. Critical Expenses: These monthly costs include things like rent, basic groceries, electricity, phone bills, medications and health insurance payments. These expenses are mostly fixed and do not change much no matter your income situation. These have to get paid every month and will need to get paid even if you should get disabled or be between jobs. For this reason not only do you need to budget for them first, but you also need to budget for a cash emergency fund to pay for them should your income become unstable.
  2. Lifestyle Expenses: These costs make up the financial commitments you take on to establish your particular lifestyle. They include things like gym memberships, car payments, cable and internet, club dues, eating out and entertainment. Depending on the item, these can vary greatly with your income. These tend to be the place where you can make the most “budgeting impact” because they are the most discretionary of your monthly commitments. When clients are looking to save more money per month we usually send them here.
  3. Asset Protection: This is the monthly allotment of funds that you are setting aside to protect your financial security. This generally includes various insurances like life, disability and long-term-care. It makes little sense to build up an asset base in various savings vehicles if that asset base is fully exposed to life events that could dramatically diminish or eliminate it all together.
  4. Savings Rate: Savings rate is the amount you have left monthly after you have subtracted the first three from your income. Savings rate, once you are clear on it, should then be allocated according to your most important short, intermediate and long-term goals.

Once you allocate your total monthly income, it is then time to start tracking your spending. A successful budget usually takes three to four months to get it down to a science. We all know that events happen in life that can very easily alter a budget. As you begin tracking your budget, remember to update it often and hold on to your proof (receipts, bank statements etc.). The goal for the monthly budget is to keep your spending within the budgeted amount for each category. If you end up spending less in that particular category, that money can be rolled over into the next month, which begins to create a cushion and wealth accumulation in your household. If you end up spending more in a particular category, you should assess your budget and determine if it needs to be adjusted, or perhaps you just simply overspent that month.

For the areas of your budget that are very likely to change month to month, we recommend using the envelope or cash system. The envelope system is widely used in the areas of: dinning out, groceries, clothing/personal supplies, entertainment. The purpose of the envelope system is to fill each envelope with your budgeted amount of cash in the beginning of the month. Once those envelops are empty, there is no more money to spend within that budgeted category for the month. This is powerful because it encourages the client to not overspend and make unnecessary purchases. Imagine that you are at the grocery store with your cash envelop. While you are checking out at the register, the cashier tells you the total is $156.50. You look in your envelop and all you budgeted for the month was $150. Most people would just take out their debit or credit card and swipe the difference because let’s be honest, $6.50 does not seem like a big impact on your budget. If you are serious about your budget and making a positive impact on your financial situation is important to you, the correct action should be to remove one item out of your basket and get below the $150 total. That is the secret and power behind the envelope system.

Our Advisors have first-hand experience of budgeting in not only our personal household, but educating our clients as well. We understand that budgeting isn’t as easy for some people because it is possible they have an irregular income. Maybe that person is a business owner and has a hard time predicting his/her income from month to month because it fluctuates at different times of the year. A suggested strategy for a volatile income is to use averages. That business owner should analyze his/her income the prior 12 months and then take an average and use that number. Your budget will be higher and lower in some months, but you will at least have a consistent place to start. Another strategy some people with variable income use is to budget quarterly rather than monthly to have a more consistent expectation.

As mentioned earlier, it takes about three to four months to get your budget down to a science. Part of that reason is because of irregular expenses that come up annually, semiannually and quarterly. There are going to be times when you forget about a bill that shows up in your mailbox, and you look at it with a blank stare knowing that it is going to throw off your budget. It is extremely important to thoroughly understand what irregular expenses you have and break them down monthly. Once broken down monthly, you need to then set money aside in a separate account that you have easy access to. As soon as that bill shows up in your mailbox, you will no longer need to scramble for the money to pay that bill because it has already been set aside in a separate account.

By using these tips and strategies, you will slowly start to understand that budgeting is not difficult when you have a game plan and stay focused on making is work. It will soon become a natural part of your monthly routine and how you handle your finances.

By using these tips and strategies, you will slowly start to understand that budgeting is not difficult when you have a game plan and stay focused on making is work. It will soon become a natural part of your monthly routine and how you handle your finances.

All information herein has been prepared solely for informational purposes and is not an offer to buy, sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. Advisory services provided by TrilogyCapital, Inc, a Registered Investment Adviser. Separate advisory and securities services may be provided by National Planning Corporation (NPC), a SEC Registered Investment Adviser and broker-dealer. Member FINRA and SIPC. Certain registered representative with NPC are doing business under the name of Trilogy Financial. TrilogyCapital, Inc. and Trilogy Financial are affiliated by common ownership and are separate and unrelated to NPC. Please consult with your representative to confirm, on which company's behalf services are being provided. Registered Representatives of NPC may transact securities business in a particular state only if first registered, excluded or exempted from Broker-Dealer, agent or Investment Adviser Representative requirements. In addition, follow-up conversations or meetings with individuals in a particular state that involve either the effecting or attempting to affect transactions in securities or the rendering of personalized investment advice for compensation will not be made absent compliance with state Broker-Dealer, agent or Investment Adviser Representative registration requirements or an applicable exemption or exclusion. Content is for general purposes only and is not an offer to buy or sell any security. NPC does not provide tax or legal advice. NPC Privacy Policy.