Financial Focus: How To Make a Proper Budget ( Part 3)

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By Professor Anthony Rivieccio MBA PFA

In Part 1, we talked about clearing up some misconceptions when it comes to budgeting. We clarified that Budgeting is and should be used to achieve short term & long term goals. 

In Part 2, we classified the structure of a budget by simply being 

 After Tax Income 

  • Expenses ( Fixed Varible Needs Wants)

= What’s Left or what’s not! 

Why do we count after tax income? That’s the money we use everyday. The important part is to ” catorize” your expenses: From Fixed to Varible to Needs and Wants. 

Fixed , are the expenses you know are coming in every month without fail: Rent, Con Ed, Cable Bill

Varible, are the expenses that are not fixed and unexpected, like a birthday, like a home emergency, like family entertainment.

Need expenses, are the expenses you “need”.

Want expenses are the expenses you ” want”. 

So Rent, is a need, Food is a need, if you eat food in a restaurant, that’s a ” want”.

So classify your expenses as : Fixed, Varible, Needs & Wants. 

So at the end of Part 2, using my budget for example:

You’ll see that I used after after tax income, subtracted by all my expenses, showed me $97 a month , left!. A closer look at the classification shows that I have 75%needs, 21%wants , 4%, what’s left, savings  or $97. 

Yay! Now, I can spend it, save it or use it for a short term goal- and I got one:

Buying a car in 6 months, I will need $3,000 as a down payment. If I look at my $97 and stick to my budget for 6 months, I will have $582. It’s a start. But 3 questions come up:

1- Do I just use my savings to put in the rest? 

2- Can I squeeze any more savings out of my current budget? 

3- Am I even using the right budgeting method?

Types

Now, let me be a but frank. The above are all ” scientific” methods . So in that respect I will go over most. Personally speaking, some are ridiculous. We will briefly go over most and then I will make a suggestion

  • No Budget

What is the “No Budget” Method? This is a way to manage and move your money around every month without actually sitting down to budget and reconcile on a regular basis. With this method, you do not operate on a budget! You don’t track your spending.

You will have zero idea where your money is really going and are more likely to blow your spending money faster.

  • Spending First

‘Pay yourself first’ is a reverse budgeting strategy where you build your spending plan around savings goals, such as retirement, instead of focusing on fixed and variable expenses. This prioritizes savings, but not at the expense of necessary expenses like housing, utilities and insurance

  • Anti Budget

The anti-budget was made famous by fellow personal finance blogger Paula Pant of Afford Anything. The idea behind the anti-budget is that you pay yourself first, pay your bills, and whatever is left is yours to use any way you want.

  • 50-30-20 Budget 

The rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must-have or must-do. The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want.

The 50/30/20 rule budget only requires you to track and divide your expenses into three main categories: needs, wants, and savings or debt. This reduces the amount of time you have to spend detailing your finances and allows you to focus more on the big picture instead.

  • Zero Based

Zero-based budgeting  is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history. As opposed to traditional budgeting, no item is automatically included in the next budget.

Zero-based budgeting ensures that managers think about how every dollar is spent, every budgeting period. This process also forces them to justify all operating expenses and consider which areas of the company are generating revenue.

  • Spending Ceiling

In its simplest form, a budget ceiling is a cap on spending. For example, a small-business owner might set a limit of $10,000 on all company spending for a month, or set caps on all types of spending for the year.

So, that’s a whole lot of scientific knowledge, don’t you think 😳😳😳?.

But the Number 1 reason why people do not budget properly:

You’re using a budgeting method that doesn’t work for you

Like most aspects to personal finance, budgeting is not one-size-fits-all. The budgeting method that works best for your co-worker may not work best for you. It’ll depend on your individual circumstances and your personal comfort level

So since I like to think of budgeting as putting together a financial plan for the future, then the best objective should be , after subtracting expenses, is to make sure I have something left. 

And let’s not forget, now I have a goal: to get a car in 6 months, which means I have to see if I can find more savings in my raw budget. Maybe you want to do the same too.

Some ” short term” solutions: 

  • Try prioritizing one or two of your favorite things to include in your budget so you feel like you have a more balanced spending plan while also creating some savings for yourself
  • writing down and adding up all your barebone expenses. These are your necessary expenses that you owe every month, like rent, food and transportation. The sum of all these costs represents the minimum amount of money you’ll need to earn
  • adjust your budget to account for those daily coffees because it’s a more realistic spending decision for you and better to allocate for it in advance.

A Long Term Solution: 

The 50-30-20 Budget 

The 50/30/20 budget, which is one of the most commonly used budgeting methods, provides some numerical guidelines for how you should aim to divide your money: 50% of your paycheck goes toward essentials like food and rent, 30% goes toward discretionary expenses like dining out with friends and shopping, and the remaining 20% goes toward savings goals like buying a home or investing. The 50/30/20 budgeting method can be useful for beginners who need some boundaries, but also want to create balance between needs, wants and future goals. If you don’t maximize each category, such as spending less than 30% of your paycheck on discretionary expenses, this also leaves room for you to carry some money into the following month.

In Chapter 4 ( next week) , we will talk about using this method correctly to make your budget more efficient and save even more money .

( If you would like copies of slides for Part 1, Part 2 & Parts 3 and 4, please feel free to email below. If you would like to watch Part 1 or 2 and the future lessons on Financial Focus University, every Friday Live at 5 PM,  just go to the media NY Parrot Facebook & YouTube internet channels below).

Professor Anthony Rivieccio, MBA PFA, is the founder of The Financial Advisors Group, celebrating its 25th year as a full service  investment planning & management firm . Anthony is also owner of Rivieccio Financial Advisors, a virtual only financial planning & advisory firm, opened in 2021. 

Mr. Rivieccio pens a financial article called “Money Talk” along with ” Financial Focus”. Mr. Rivieccio, a recognized financial expert since 1986, has been featured by many national and local media including: Kiplinger’s Personal Finance, The New York Post, News 12 The Bronx, Bloomberg News Radio, BronxNet Television, the Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Co-Op City News, The New York Parrot, The Bronx News, thisisthebronX.info ,  The Bronx Chronicle & The Parkchester Times. 

Anthony is also currently an Adjunct Professor of Business, Finance & Accounting for both, City University of New York & Monroe College, a Private University. 

Financial Focus University TV can be seen every Friday , Live 5PM, on The NY Parrot Facebook & YouTube page channels .

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For financial assistance, Anthony can be reached at (347) 575-5045. Have Facebook? My email is a_rivieccio@yahoo.com My personal page is www.facebook.com/anthonyfromthebronx

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