The “B” Word…Yep, Budgeting!

By Ben Dolan, CFP®

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One of the great joys of serving our clients is the variety of financial situations and circumstances we can assist with. No two clients are exactly alike. Some of our clients are in their late 80s, others are just starting families and settling into careers, and many are somewhere in between.

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Despite the different phases of life, most of our clients still hear me talk about the B word…yep, budgeting! While budgeting is very important for young couples with life events trying to accumulate assets, budgeting does not stop once you retire. Clients in retirement budget to ensure their assets last them through retirement, or to ensure they can pass along a certain amount of inheritance to their heirs. Meeting these goals requires a hard look at expenses.

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In a recent meeting a client asked me what budgeting technique works well for the Dolan Family. While what works for each family is different, below are some tips that have worked well for my family:

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Uncle Sam – We know he’s going to get his, so we start our process by projecting our liability and ensuring that, between payroll withholdings and firm distributions, we set aside enough to cover estimated tax payments. In the chance we may owe some taxes, I fund a separate high-yield savings account for taxes so that these funds never stay in our checking account.

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Pay Yourself First – Saving for retirement, college, and vacation comes next. Retirement savings go directly to the 401(k), Health Savings Account (yes, if used optimally this is a retirement account), and an after-tax account at Schwab. Funds for college savings go to 529s with Vanguard, and vacation savings to a high-yield savings account. I have separate accounts for each of these items, so that I don’t co-mingle the funds. While some of these funds do hit my checking account, they are moved immediately so that I’m not tempted to spend the money.

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Know Your Expenses – Next, I breakdown my expenses into fixed and variable buckets. I also review whether my expense is once per year (like my auto property tax) or monthly (like my auto insurance premium). For the annual expenses, divide them by 12 so that you come up with a monthly figure.

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Focus on Variable Expenses – Since the fixed expenses won’t change, Alexa and I will focus on the variable expenses and come up with a weekly spending number. Why weekly? We found that tracking monthly spend was just too long to keep up with, and a daily spending number was too tedious. With a conservative weekly spending number, we know we can spend a certain amount that will still provide cash flow for the annual items when they pop up throughout the year. We stick to this weekly number…when the number is spent, there is no more spending.

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Weekly Spend Trend and Shared Notes – Alexa and I set up a shared note on our phone to track spending together. Every transaction is entered so we always know where we are with our weekly spending number. We also track all our spending on a good old spreadsheet. Tracking helps us make sure the budget is a priority.

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Look Ahead for Trends – Whether it’s Costco week or the months leading up to Summer activities for the kids, keeping an eye on our spending trend helps us build cash for future outlays. For example, we know January and February are light spending months compared to July and December, so our goal is good cash flow during the lighter months to pay for larger expenses in future months.

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Review the Results – Alexa and I meet for 5 minutes each week to look at the results and discuss the upcoming week. We will review it again at the end of the month. This keeps us on the same page and lets us celebrate our achievements or adjust as needed.

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Figuring out what works best for you will take time and lots of trial and error. We went through many iterations of this process before we got it just right. In the end, it took a commitment from both of us to track our spend and a lot of open communication.