In my experience, the budget, is the single most difficult part of the financial planning process. Everything we do in financial planning is based on it, and yet, it is nearly impossible to derive, let alone maintain.

The first problem with budgeting is that top line. We often mis-characterize our income. When business owners tell me how much money they make, we clarify if we are talking about revenues or net income, or something in-between. When we talk about salary, we always talk about “gross” salary. We say, “I make 50k or 100k a year”. We can start there, but then taxes and other payroll deductions need to be accounted for in the budget.

The other problem is that expenses are difficult to predict. We all have unexpected expenses that ruin our budget every month. But, it is still better to have a budget than not. It is difficult to make, let alone reach goals, when you don’t know where your money is going. Taking a step back let’s you know what you are prioritizing today and allows you to change those priorities for tomorrow. Even if you start with one line on your budget, titled miscellaneous, and then put your entire income in that line, it is a start.

Then, specify your fixed costs of rent/mortgage, car note, insurance. Your utilities and groceries are variable and can be managed. However, they still fall within a range. I take the highest amount in utilities I have ever paid, and that is my utilities budget. Then I work hard to keep my utilities as low as possible. Groceries work the same way. It is a fixed cost. You have to eat. But it is also a variable cost. We can buy less or buy differently. We can use coupons. I have a cap on my grocery expenses. When we hit the max, we get very creative in the kitchen, but I don’t go back to the grocery store until next month…. Some essentials excluded.

Importantly, for many of us, savings and investments are not a part of the budget at all. The planner’s job then is to carve out a small piece to put towards savings and investments to help create financial security. In an ideal world, we would figure out our saving and investment targets first, and then figure out how much house and/or car we can afford. In other words, remember to pay yourself first in the form of savings and investments. A wise saying comes to mind: “a penny saved is a penny earned”.

Extras:

• the average US home has increased in value by 14% over the past two years (Office of Federal Housing Enterprise Oversight)
• the wealthiest 10% of US households own 80% of all US stocks (census bureau)
• the 6 largest banks in the US held $9.67 trillion of assets as of 12/31/2013, which is 66% of the total assets in the entire banking industry (FDIC)

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