Thanks for coming back for the latest edition of Planning for your Purpose; Telos Financial’s blog where I discuss different topics related to financial planning. Dennis LaVoy is Michigan’s financial advisor serving clients throughout the Ann Arbor and Detroit area, across Michigan, and across the country.
The purpose of the blog is to introduce financial planning concepts and questions I receive from clients that I believe are important. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!
Budgeting. A word that strikes fear into many. Fear of responsibility. Fear of losing spending independence. Fear of insufficiency. Whatever it is that is stopping you from budgeting, I would encourage you to conquer your fear and make a budget.
Do I need a budget?
Maybe. Most likely. Whether you do or don’t, it’s an informative exercise to go through. I think there are a few different ways to view this that can work, depending on your family. I recommend having a budget or at least reviewing your spending with everyone.
Let’s look at three scenarios and the pros and cons of budgeting.
First, let’s say you have regular income, have enough to pay your fixed expenses, live comfortably with fun expenses, and are able to still save each month. The first question is are you saving enough to achieve your financial goals? Have you thought about your goals? You may be wise to work through a financial plan and set this up.
In this case, one benefit of budgeting is knowing where your money goes. You know what your car payment is, you know what your housing costs are, but what else? Are you spending hundreds on coffee or shoes or something else that you don’t intend to? If you review your previous years’ spending, you can at least see where you spent and make an informed decision about spending going forward. You don’t necessarily need to have a hard, fast written guide and allowance for yourself. It’s more about gathering information and making a smart decision about where you want to spend your money.
The next scenario, let’s say you have regular income, have enough to pay your fixed and fun expenses, but are not able to still save each month. The benefit to budgeting here is clear and I would suspect there is most likely one of two problems. First, I’m assuming you have some sort of financial aspirations and you don’t plan to work until you die. The first problem (potentially) is that you are a victim to lifestyle creep. That tricky vixen who eats up every extra dime you have. You may have good intentions to save some extra money, but instead, you go and pick up that new (insert thing you don’t really need here) you wanted. More likely you order it online, but you get my point.
The next probable culprit, in my experience, is sheer overspending. You are just living life comfortably and spending what’s in your bank account and not worrying about it. Nothing wrong with either of these, but if my earlier assumption that you have some future financial goals is true, you could be in a pickle. Budgeting is the answer. You can benefit here by identifying areas to cutback, you can set an amount to save to reach your goals as the first expense to limit the excess funds burning a hole in your pocket, or you can determine all areas are necessary and make some hard decisions about are your current expenses really necessary and if so, are they more important than your future goals?
The point here is to be intentional, responsible, and knowledgeable about how and where you’re spending. Whether you like it or not, every dollar you spend is a vote for lifestyle today or goals in the future.
The last scenario, let’s say you have regular income and struggle to meet your bills. This is the most difficult situation to be in and I believe would get the most benefit from budgeting. At the extremes, you either don’t make enough for a reasonable standard of living or you simply live a lifestyle that is too grand for your cash flow. In the second, you are the opposite of the millionaire next door.
If you make a good income, but just over spend, I can’t recommend forcing yourself into a budget enough. You probably need to have a really honest conversation with yourself and part with some of your things or downsize some of them. Constantly trying to keep up with the Joneses is a recipe for disaster. In others, you need to take responsibility for your actions and take control over your life. If your goal is you will work until you die, that actually is a financial plan and a goal and that is fine, but you are accepting some risks. If you get sick or can’t work, etc. you could still run into problems. There are insurances and other ways to mitigate this, but you should be informed.
To sum up, I truly believe most folks can benefit from creating a budget or at least reviewing their past spending habits. If you are a millennial or young family starting out, budgeting can be critically important. It can create lifetime habits that will benefit you, provide structure and stability to your financial life, stability with your partner, and will help you stay on course with your long term financial goals.
Telos Financial is a Michigan’s financial advisor for Millennials, Xennials Generation Xers, & young professionals. It is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and families. Dennis LaVoy, CFP®, CLU® founded Telos in his tenth year as an advisor and uses his experience, knowledge, and expertise to help families and individuals in Ann Arbor, Detroit, surrounding areas, and across the country achieve their financial objectives.
The views expressed are my own opinions and do not apply to every situation. Your situation may vary so make sure to consult a professional for advice prior to making any decisions.