Budgeting Goals Made (Somewhat) Simple

Budgeting is very important for setting yourself up for longer term financial success. I personally prefer monitoring three separate equations for main spending goals including retirement savings, home mortgage costs, and overall debt servicing costs.
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While budgeting is very important for setting yourself up for longer term financial success, I personally get no pleasure out of scrutinizing every minor detail of my personal expenses. Establishing buckets for expenses like travel, food, utilities, gifts etc. and then trying to live within a set amount for each category each month feels like way too much work and for me it makes spending money stressful. I personally prefer monitoring three separate equations for main spending goals including retirement savings, home mortgage costs, and overall debt servicing costs. Then as long as I stay within those three guidelines then I can spend whatever money is left however I please. No more worrying about how much I spent on restaurants in any one month as long as the overall spending goals are still in good order!

The first equation revolves around retirement savings. Almost everyone wants to stop working at some point, and even if you are one of those people who claims to want to work until you die you still need to be prepared to retire based on a physical or mental inability to continue working. My young professional investor education website www.youngandnotbroke.com, which is sponsored by Parsec Financial, outlines a projection of how saving 15% of your pre-tax income for retirement, and investing those savings wisely, will get you to a strong retirement position after about 36 years. If you want to hang it up before then you should shoot for a higher savings rate, but keeping 15% as a minimum savings goal is a good starting point. For more millennial advice, download our whitepaper on eight saving and investing principles for young investors.

Second is maintaining a sustainable cost for your home relative to your income. Take your monthly mortgage payment and add to that property taxes and insurance (if these are not being paid through escrow) as well as any homeowners or condo association fees. Altogether, these amounts should be below 28% of your monthly pretax income. If you are looking at moving and the new home will push this figure above the 28% level then you should reconsider making that move or look for a lower cost home.

Last is looking at your overall debt service. Add any monthly student loan or car payments etc. to the monthly housing cost figure we just calculated. Make sure to keep this overall amount less than 36% of your monthly pre-tax income. If you want a new car but the new loan payment will push you above the 36% level then you should keep your current ride, pay off your student loans before upgrading, or go for a lower cost vehicle.

If all three of the above figures are satisfied then you can calculate the dollars that you should have in take home pay after retirement savings and debt service. That amount is your lifestyle spending budget – so spend it as you would like! But, you will need to plan in advance for any bulk expenses so you can satisfy those as needed and your normal monthly spending habits can continue.

If you have added goals like college savings for a little one then you will need to siphon off say $500/month from your lifestyle spending amount so that goal is covered. If one or all of the above metrics are not satisfied then it is time to go deeper into your spending habits to start making tough spending decisions. Can you brew your coffee at home or take lunch to work? Do you need to go to that additional happy hour this week? Do you really need to go to your third bachelor/bachelorette party in one year? Or potentially look to obtain a graduate degree or professional certification that can help boost your income opportunity to help get the equations back in line over time.

Travis Boyer, CFA, CFP®
Senior Financial Advisor


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