What does it really look like to build a budget that not only supports your goals, but evolves with your life? Budgeting is a fundamental tool in achieving financial stability, whether you’re building wealth, running a business, or enjoying retirement. By proactively managing income and expenses, you can live within your means, avoid unnecessary debt, and confidently work toward your financial goals. A well-crafted budget creates discipline and accountability, reducing financial stress and positioning you for long-term success.
Getting Started: Laying the Foundation
- Identify Your Purpose: Are you saving for retirement, eliminating debt, or planning a major life event? Your goal(s) will serve as motivation to create and maintain a budget.
- Access Your Spending Habits: Track expenses by reviewing bank statements, using budgeting apps, or maintaining a simple spreadsheet. Once you have a clear picture, evaluate whether your spending aligns with your financial priorities.
- Be Honest With Your Assessment: identify areas where you can improve and recognize strategies that have contributed to your success. The keys are consistency, replicating effective habits, and adjusting where necessary.
John and Brooke are business owners who come from humble beginnings, especially in the early years of their business. They had a goal of building a business that was going to impact on the lives of the clients they serve. For this reason, all their discretionary money was routed back into their growing start-up. Their entrepreneurial spirit drove them to focus the experiential portion of their budget on the business they believed in. Placing the business as their primary financial goal allowed them to evaluate their purchases and lifestyle to see if it fell inline with their budget.
Distinguishing Needs vs. Wants
A successful budget requires understanding how you allocate your money. Spending falls into two main categories: essentials and adaptive expenses.
- Essentials (Needs): These are unavoidable costs such as housing, food, medical expenses, and utilities. These expenses remain relatively consistent and are necessary for financial stability, regardless of your life stage. Typically, we see essential spending using 50 to 60 percent of your total spending. If you consider savings as an essential spending category, this will add an additional 10 to 20 percent to this category.
- Adaptive Expenses (Wants): These discretionary costs (like dining out, travel, entertainment) can fluctuate based on your income and financial situation. For those accumulating wealth, discretionary spending is often limited by salary and available time. In retirement, these expenses may rise initially at the beginning of retirement and experiences before tapering later in life. After prioritizing the essentials and savings in your budget, the remaining balance in your budget should be allocated to your adaptive expenditures.
In the early years of their business, John and Brooke lived frugally, rarely ate out, vacationed at the local state park, and decided as a family that they were still going to donate to their community as a part of their essential spending. At this time, their budget was approximately 55% essentials, 15% savings, and 30% adaptive. Most of their adaptive expenditures were reinvestments back in the business.
It’s important to recognize that not all expenses fit neatly into one category. For example, food is essential, but frequent fine dining is discretionary. By differentiating necessary costs from lifestyle choices, you can make informed financial decisions.
Putting Your Budget into Action
Once you’ve set your goals, segmented expenses, and established a budget, execution is key. Regularly review and adjust your budget as life circumstances change. A well-maintained budget is a powerful tool for achieving long-term financial security, preparing for the unexpected, and reducing stress.
After many years of consistently reviewing their budget, John and Brooke built a successful business and healthy financial habits. 15 years later, John and Brooke built a successful business and adjusted their budget accordingly. The essential expenditures for them are still the same: living frugally and being philanthropic. Their adaptative spending has changed. Now, John and Brooke’s adventurous spirits have driven them to spend time and money traveling the world and gradually easing into their retirement. John and Brooke have confidence knowing that they are on a healthy budget built on sustained habits throughout the main stages of their life.
When helping clients prepare for retirement, there is commonly a realization that they will now need to spend the assets they have spent their life saving. Having a properly allocated budget provides clarity to your financial, retirement, and succession planning. By building healthy budget habits, you can become more confident in achieving short and long-term financial goals. If you have any questions regarding budgeting and developing a strategy for your long-term financial future, please contact one of our advisors at Aldrich Wealth.
Disclosure: This content is for informational purposes only and not investment advice. Past performance is not indicative of future results. Market data cited is based on sources believed to be reliable but is not guaranteed.
