Effective Budgeting in 3 Easy Steps

Budgeting: Focus on What's Important

Focus Your Budget on the Things You Love

Minor Changes = Major Results

Developing balanced spending and saving habits is vital to achieving a long, comfortable retirement. This process can be hard to initiate, so to help get you started we have divided the budgeting process into three simple steps with links to the tools and resources you need to establish a goal-focused personal budget.

Awareness:

Create Your Personal Budget

“The budget is not just a collection of numbers, but an expression of our values and aspirations.”-Jack Lew

Before you can consciously change your spending habits, you need to know what your spending habits are. Listing out all of the things you spend money on each month establishes a baseline upon which you can make intentional changes. 

Download the CRA Budget WorksheetTo help get you started, we’ve already created a Budget Worksheet that categorizes your expenses into groups and then organizes those purchases into “essential” and “discretionary.” Keep in mind, not all expenses are monthly, account for annual and semi-annual costs like car registration, insurance payments, and holidays, as well.

Review your discretionary costs, start by determining which of these expenses you don’t need at all. Maybe you’re subscribed to several streaming services, but really you only use one or two on a regular basis. Drop the others, they’ll still be there when you have time for them.

Next, look at your remaining flex costs and consider if you can find an acceptable, more cost-effective alternative. This may be a change of quality or brand, such as opting for generic goods or settling for whatever cereal is on sale. Change the quantity of a product can impact your budget as well, buy a medium coffee instead of a large or bulk purchase non-perishables to lower the per unit price over time.

Don’t forget to review you essential expenses. For example, shopping your insurance periodically  result in significant savings.

Acknowledgement:

Prioritize Expenses in Your Budget

“Keep only those things that speak to your heart. Then take the plunge and discard all the rest. By doing this, you can reset your life and embark on a new lifestyle.”

-Marie Kondo

Once you have completed the budget worksheet, identify where changes can be made. You will have fixed costs, expenses that are non-negotiable, like rent/mortgage, utilities, and car payments as well as flex costs, expenses that can be adjusted, like food, entertainment, and personal care expenses.

Review your flex costs, start by determining which of these expenses you don’t need at all. Maybe you’re subscribed to several streaming services, but really only use one or two on a regular basis. Drop the others, they’ll still be there when you have time for them. Next, look at your remaining flex costs and consider if can you find an acceptable, more cost-effective alternative? This may be a change of quality or brand, such as opting for generic goods or settling for whatever cereal is on sale, as well as a change of quantity, like getting a medium coffee instead of a large or bulk purchasing non-perishables.

Allocation:

Reduce Debts, Save for the Future,
& Treat Yourself

“I don’t believe in spending money lavishly, now that I’m making money”

-Ansel Elgort

After creating your budget, reviewing it, and making changes, you hopefully see an increase in available income. So, what should you do with it? One budget allocation strategy is to split available funds across all three of these options. If you receive a pay increase or pay off a debt, take the new money and put 50% towards paying off your existing debts faster, 25% towards future savings, and 25% towards rewarding yourself for a job well done.

Reduce Debts: If you have outstanding debts, especially any with high interest rates, you should probably concentrate on paying those down first. This Debt Payoff Calculator can be used to establish a payment plan.

Save for the Future: Prepare for the unexpected, use this Emergency Savings Calculator to determine how much to put away. But also, prepare for the expected, create a savings plan for anticipated future purchases like a computer, car, or house.

As the Colorado Retirement Association, it’s important for us to remind you that experts recommend saving 15% – 20% of your annual pay for retirement. This includes you and your employer’s contributions. You can use the following calculators to visualize your retirement timeline. Next week, we will dive further into reaching your “Point of Choice” or the minimum amount you need to have saved for retirement.

  • Growing Your Investment: Use this calculator to estimate how much you will have saved for retirement. For a conservative estimate, use a 6% rate of return.
  • Withdrawals in Retirement: After determining your savings at retirement using the Growing Your Investment calculator, use this calculator to see how long your savings will last.
  • 457(b) Paycheck Contribution Election Form: If you want to save more for retirement, complete this form and return it to your employer.

Treat Yourself: Don’t forget to enjoy life. Plan for fun expenses like a massage, a Rockies game, or something shiny. What’s the point of being an adult with a job and a retirement plan if you don’t occasionally take the time to do something nice for yourself?

Regardless of how you choose to allocate your newly reclaimed wealth, stay motivated, take care of yourself, and periodically re-examine your budget.

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