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The word “budget” can strike fear in the hearts of many.  A budget means operating (i.e. spending) within a specific set of parameters.  As a firm, Trilogy has found that clients who have a budget have the greatest financial success because a good budget enables them to make great planning decisions.  For example, I met a couple a few years ago who made a good income (over $250k a year), had over $100k in the bank, but unfortunately had no idea where all of their money was going.  This is because they did not have a budget and could not get on the same page when it came to their financial goals. In contrast, around that same time, I met a couple a few years younger than the first couple who made closer to $150k a year, barely had 3 months of fixed expenses in the bank, and diligently worked on their budget.  As a result, this couple was able to determine how much money they could save AND they were able to commit to saving more for retirement than the first couple. All of this could result from being able to put together (and sticking with) a budget!  
Here are three steps to creating a budget in its simplest form.  A good way to completing this would be to list each of these expenses out on paper or on a spread sheet to give you a visual of what you will spend your money on each month.  

  1. Necessities.  A necessity is something that MUST be spent each and every month.  They include food, housing (rent, mortgage, property tax), transportation (gas for your vehicle), debts (credit card interest, student loans), and insurance (car, health, life).  While this may sound simple, the biggest challenges come about from how people interpret what a “necessity” is.  For example, do you REALLY need to go out to eat 5 times a week?  This is not implying that you can’t go out to eat, but most people don’t even realize how often they’re dining out!  If your situation is one where you really do need to eat out frequently, can you cut the cost of this expense in any way?  Cutting back $50 a month on your food bill and being able to save it for 25 years at 8% would result in over $45,000 (not accounting for taxes).  Who wouldn’t want to have an additional $45,000? 
  2. Your savings goals.  Now that you’ve accounted for all the necessities, you now need to account for your savings goals.  The savings goals we cover with clients include unexpected/irregular expenses (such as gifts, car maintenance, etc), an emergency fund (to account for a layoff or being unable to work), retirement, and college if you have children.  In general, I recommend aiming for 15% of your pre-tax income for retirement and then setting goals for what you want to save for your children’s college funds.  If these numbers sound too high initially, don’t get discouraged!  Start out smaller and work your way up – but the point is start now and do something rather than nothing.
  3. Allocate the remaining monies towards the rest of your expenses.  You’ve now accounted for your necessities and your savings goals.  Whatever remains can now go towards your discretionary expenses.  Do you want to want to go to a nice dinner a few times a month?  Do you want to go on a mini weekend getaway here and there?  Is that large screen tv calling your name?  They may or may not be affordable at this point depending on your situation, but if it is not, then it may be time to go back to step one and see if everything was truly a necessity.  


Doing a budget and sticking with it isn’t easy, but the results are well worth the effort.  Better financial decisions can be made and better planning for the future can be implemented.

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