How to Create a Budget in 3 Easy Steps

November 09, 2015
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Over the course of my career as an advisor, I’ve found that clients who have a budget have greater financial success because a good budget enables them to make great planning decisions.  For example, I met a couple a few years ago who made a good income (over $250k a year), had over $100k in the bank, but unfortunately had no idea where all of their money was going.  This couple didn’t know where their money was going because they did not have a budget, and by the end of our meeting, they were unable to arrive at an effective number that they could dedicate towards their savings goals.  In contrast, around that same time, I met a couple a few years younger than the first couple who made closer to $150k a year, barely had 3 months of fixed expenses in the bank, and diligently worked on their budget.  As a result, this couple was able to determine how much money they could save AND they were able to commit to saving more for retirement than the first couple.  In running retirement calculations and assuming they were able to continue on this track, this second couple would accumulate more money for retirement than the first because 1) they had more time than the first couple (albeit only 4 years) and 2) they were able to save more towards retirement.  All of this would result from being able to put together a budget! 

Here are my three steps to creating a budget in its simplest form.  I suggest listing each of these expenses out on paper or on a spread sheet to give you a visual of what you will spend your money on each month. 

  1. Incorporate the necessities.  A necessity is something that MUST be spent each and every month.  They include food, housing (rent, mortgage, property tax), transportation (gas for your vehicle), debts (credit card interest, student loans), and insurance (car, health, life).  While this may sound simple, I’ve seen the biggest challenges here due to how people interpret what a necessity is.  For example, do you REALLY need to go out to eat 5 times a week?  I’m not saying that you can’t go out to eat, but most people don’t even realize how often they’re dining out!  If your situation is one where you really do need to eat out frequently, can you cut the cost of this expense in any way?  What if I were to tell you that cutting back $50 a month on your food bill and being able to save it for 25 years at 8%* would result in over $45,000 (not accounting for taxes)?  Who wouldn’t want to have an additional $45,000?
  2. Incorporate your savings goals.  Now that you’ve accounted for all the necessities, you now need to account for your savings goals.  The savings goals I cover with clients include unexpected/irregular expenses (such as gifts, car maintenance, etc), an emergency fund (to account for a layoff or being unable to work), a house, retirement, and college if you have children.  In general, I recommend aiming for 15% of your pre-tax income for retirement and then setting goals for what you want to save for your children’s college funds.  If these numbers sound too high initially, don’t get discouraged!  Start out smaller and work your way up – but the point is start now and do something rather than nothing.
  3. Allocate the remaining monies towards the rest of your expenses.  We’ve now accounted for our necessities and our savings goals.  Whatever remains can now go towards your discretionary expenses.  Do you want to go to a nice dinner a few times a month?  Do you want to go on a mini weekend getaway here and there?  Is that large screen tv calling your name?  They may or may not be affordable at this point depending on your situation, but if it is not, then it may be time to go back to step one and see if everything was truly a necessity. 

Doing a budget and sticking with it isn’t easy, but the results are well worth the effort.  If you would like to receive a copy of how I break down categories within a budget, send me an email or give me a call at (949) 221-8105 ext 2128. 

*This is a hypothetical example and is not representative of any specific situation or investment. Your results will vary. The hypothetical rate of return used does not reflect
the deduction of fees and charges inherent to investing.

About Mike Loo


Mike Loo is an independent financial advisor with more than 20 years of experience in the financial services industry. His mission is to provide a meaningful impact on the lives of clients and the people they care most about, help them make educated decisions with their money, and build a strong financial foundation for both themselves and their next generation. Mike is committed to meeting a high standard of excellence, taking the time to listen to clients’ needs, and designing strategies that aim to help clients save money and reduce debt. He seeks to fit a client’s investments into their life and educate them so they’ll understand their investments. To learn more about how Mike may be able to help, connect with him on LinkedIn, call his office at (949) 221-8105 x 2128, or email him at michael.loo@lpl.com.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Trilogy Capital, a registered investment advisor. Trilogy Capital and Trilogy Financial are separate entities from LPL Financial.