When you first engage a financial professional, many grow concerned that they will be placed on some kind of a budget. As an adult, no one wants to be told when and where they can spend their hard earned money. This is why we believe in an entirely different framework around money absent budgeting. It is based around controlling your savings rate, yes, the all important savings rate. Many would ask, are you not still budgeting? Yes, and no. Here's why...
A budget is designed to outline what you are spending in each separate category. Budgeting can be very time consuming, however, there are plenty of banking and accounting software that provides these tools. The issue you may run into with most of these softwares is mainly categorizing each cash outflow as it leaves your account. This can be time consuming as well and become a headache with misclassifcations, however it is better than doing nothing.
As I previously mentioned, a budget may feel off-putting to most and very intrusive, but some may indeed want a budget and bold constraints on their spending to reach a level of control on their finances. With a budget, you will start to notice where you are over-spending and it may lead to serious conversations involving couples. These conversations can become contentious and uncomfortable, however, when you are dealing with money flows it typically is that way.
What I have found, I am less concerned about budgeting per se, but more concerned about savings. If you can control and montior your savings rate on a monhtly basis, it frees you up to spend what you want and where you want. For example, if you bring in $10,000 /month, we want to effectively save 15%/20% of your gross income. What that means, $2,000 a month needs to be going towards a savings bucket. That savings bucket can be combination of qualified and non-qualified accounts that helps increase liquidity and retirement savings.
So given the fact pattern above, that leaves a person free to spend $8,000/month on whatever they enjoy (absent taxes, etc). It does not enage in long tasks of budgeting and ignominious conversations between couples due to a simplified goal of what we want to save each month, and being provided what is left to spend. Providing a simple target savings approach allows for individuals and couples to safely spend money without having to fixate on how money is inevitably coming out.
Now I hear you, what if you are not able to save 20% of your gross income. By the way, that 20% number is based on where you are in life, and I feel it should be a minimum savings target. Back to the question, what if you cannot afford to save that amount? That is where you we need to build in a base savings rate. Whether it be 5%, 10%, or 20%, we must begin with a target percentage and build up. Budgets work, do not get me wrong, I just feel that starting with a savings rate will be more effective use of time and strategy.
Budgets will be necessary for those looking to increase their savings rate. For those currently saving 5% looking to move up the ladder, a budget will be useful to find ways to limit spending in certain areas. It brings me back to the beginning, if I know my savings rate, then I know what I can spend. A budget may be able to increase that rate from 5% to 10%, however, it still began with the savings rate. So start with the savings rate and see how the increased savings can help offset insurance cost, maintenance cost, and possibly help you sleep at night. If you have questions, contact 9innings@9icapgroup.com
9I Capital Group LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.