Friday, April 15, 2016

Here's Why Your Budget Isn't Working. (Hint: You Need To Know Why You're Saving In the First Place.)

As an accountant, I live by numbers. I spend a lot of time counting and tracking money for other people—global companies, investment firms, stock market exchanges. 

For most Americans, the holy grail of tracking and counting money is personal budgeting. So many of us want to create a budget and stick to it. There’s a wealth of budgeting how to’s and personal-finance literature in books or on the web, but many would-be savers are still unsure about how to actually put the advice into action.

Simply put, budgeting is something that many Americans just don’t do. A 2013 Gallup poll revealed that “only one in three Americans prepare a detailed household budget.”

Typically, there's one goal at the heart of every budget: Saving. 

But a budget not only shows you how much money is coming in and how much money is going out, but it also helps you pinpoint the when, where and how of where you can spend less and save more. 

Thing is, there's a lot of expert advice for that when, where and how to save. But there’s a lot less information out there that helps us understand the why of saving money. 

So, why do we save money?

The answer to that question might vary for everyone. Typical responses to the question “Why am I saving money?” might include:

Living well in retirement. For some of us, retirement seems far, far away. We see it as a life destination that’s 20, 30 or 40 years in the distance. We tell ourselves that we’ll start saving for our golden years next year. Then, when next year comes, we say, “OK. I didn’t save a dime this year. But I’m really, really going to start saving next year. I promise.” And we mean it, too. But our sincerity gets us nowhere if we don’t actually ignite a retirement savings plan. For years, we can keep telling ourselves next year, next year, next year with all the sincerity and good intentions in the world. But, soon enough, retirement is right around the corner. If we put it off too long, waiting until our retirement is 5 or 10 years away, it’s easy to feel paralyzed by the fear of not having enough time to shore up all the savings that we’ll need. 

Paying for college educations. Rising tuition costs are a huge financial worry for many Americans of all ages. It’s a worry for parents who are preparing to send their kids to college school. It’s a worry for 18-24-year-olds who are struggling to foot the bill on their own or with the help of student loans that will eventually need to be repaid.

Building an emergency fund. Life is nothing if not a whirlwind of surprises. Whether that surprise comes through an unexpected job layoff or an pricey repairs to your bathroom plumbing. The emergency fund is your little slice of stability in an unstable world. The cushier it is (experts suggest a minimum of at least 6-9 months worth of living expenses), the easier you can rest when something goes wrong. And it will. It always does.

Planning a splurge for a trip or a special occasion.  That’s right: You can plan for a splurge. Splurges have earned an unfairly bad reputation for being spontaneous purchases that you may or may not be able to afford because, well, you didn’t think about them before you bought them. But splurges can be part of your well-thought-out savings goals and plans. 

Identifying your own savings why, will help motivate you when the time comes to stick with your own when, where and how  system for preparing and maintaining an actual budget. When the time comes for that, you might look to the 50/20/30 Rule as a benchmark

Briefly explained, the 50/20/30 Rule is a  three-point guideline for divvying up your income. For every paycheck you receive, allot 50 percent of it to fixed costs (mortgage, gym memberships, daycare), 20 percent to your financial goals (this is the “why” savings bucket that might include retirement and your emergency fund), and then the 30 percent that’s leftover is for your day-to-day expenses (which include groceries, gas, eating out, entertainment). 

But remember: When it comes to saving money, the when/where/how of the number crunching is more likely to succeed when nail down your why

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