Set Up a Budget in 7 Steps, Ep #137

Podcast Intro:

Scott starts the podcast by discussing the recent roller coaster ride that has happened in the global financial markets over the past couple of weeks and how the ups and downs can make many people feel out of control. Feeling out of control is often how people feel when they have a lot of debt. Scott mentions that he is teaching Dave Ramsey’s Financial Peace University (FPU) at his church and his job is to help motivate and provide encouragement to people that have a lot of debt so that soon enough these people will feel in control of their finances.

Podcast Topic of the Day:

How to do a Budget

The topic of the day is How to do a Budget. During the podcast, Scott covers 7 easy steps to create a budget, or a “spending plan” as Scott prefers to call it. According to Scott, all people need a spending plan. 

Step #1 for building a spending plan is to acknowledge that both people in the relationship must participate in the development of the spending plan (or budget). If you are single, then you can skip Step #1. Scott discusses how it is likely that one person may be the budget “nerd” and their partner may be the “free spirit”, but it is critical that both participate in the development of the spending plan.  

Step #2 for building a spending plan is to acknowledge that you are going to make a zero-dollar budget. In other words, you are going to assign every dollar you make to a budget entry.

Step #3 for building a spending plan is to list out all monthly expenses by category. Everything that you spend money on during a month needs to be listed. This list should also include your monthly saving and your monthly giving, and it should cover every dollar of your household take home pay. Scott reviews Dave Ramsey’s basic guidelines that Dave recommends for various expense categories; however, he cautions that these are just basic guidelines and may vary by an individual’s unique situation. The first category Dave recommends placing at the top of your monthly expenses is giving, and Dave recommends starting with 10% of your take home pay be allocated to giving. Even though you may be in debt, it is important to start giving now so that when you are out of debt later in life you can give more. The second category is saving, with a recommended allocation of 10-15%. Depending on how you are saving, you may already be saving 10-15% in a 401(k), therefore, you may not need to save anymore out of your take home pay. The third category is food with a recommended 10-15% allocation. Mortgage or rent is the 4th category with a recommended allocation of 25%. Those that are spending more than 25% on their mortgage or rent often find that there is not a lot of money left to spend in the other budget categories. Your utilities are the 5th category with a 5-10% allocation. Vehicle expenses such as gas, maintenance and oil changes should be allocated at 10% and are the 6th category. Note, this 10% does not typically include car payments. Fun money, or as Scott categorizes in his spending plan, a “flex fund” category should be included next. The fun money or flex fund should be allocated at 5-10% depending on your overall spending plan. The final categories are clothing 5-10%, entertainment 5-10% and a miscellaneous category that is 5-10%. The miscellaneous category is a great category to cover items that are missed or not known at the beginning of the month, such as a birthday party gift for a kid’s birthday that you or your child was invited to.

Step #4 is to add up all the irregular expenses that do not occur on a monthly basis. Examples of these irregular expenses are annual car insurance payments, water bills, property tax bills, family birthday gifts, etc. Once you have identified and added up all of these expenses, divide the total by 12 and add a line item to your spending plan called escrow. This escrow budget line item will be used to pay irregular expenses as they occur throughout the year. When budgeting is done correctly, this escrow line item should be zero at the end of the year. Scott points out that this particular line item can often be where a budget fails because these irregular expenses were not properly accounted for. Additionally, the timing of these irregular expenses may require that this escrow budget line be funded at the beginning of the year in order to pay for expenses that occur at the beginning of the year before the escrow account has a chance to build up.

Step #5 is to make budget adjustments as needed. In other words, has every dollar been accounted for? Are there dollars left over that need to be allocated or do adjustments need to be made because there are not enough dollars to cover all the expenses. Scott discusses debt and the need to make sure that all debt payments are included in the budget. He references Chris Hogan’s analogy that debt is a budget thief. Debt payments “steal from” or take money away from the budget categories that we want such as giving, saving and entertainment. During Step #5, you need to make all the necessary spending plan adjustments to make sure that you have all your take home dollars allocated in order to have zero dollars left over at the end of the month.

Step #6 is to be proactive and track the budget throughout the month. You cannot wait until the end of the month to see how you did, but rather you need to track spending throughout the month. Scott references an app he uses called the EveryDollar Budget app. Whether you use the EveryDollar app, another app or a spreadsheet, it is critical that you be proactive and that you are tracking your expenses as they occur throughout the month.

Step #7 is to have a monthly budget meeting or as Scott calls it at his house, a monthly spending plan summit. Scott recommends that you set this meeting up on your calendars so that it re-occurs on the first of the month, every month of the year. He also recommends that you have “mini” summit meetings throughout the month to make sure you are staying on track to your spending plan.

Podcast Closing Words:

In closing out the podcast, Scott shares 5 things that having a spending plan has accomplished for his family. 

1.    Out of debt

2.    He and his spouse do not fight about money

3.    Allocating every dollar has enabled him to start his own business

4.    Has more time with his family (result of flexibility from owning own business)

5.    Give like no one else

Show Links:

Learn more about the EveryDollar budget app

Learn more about Fortress Planning Group

Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.

About the author, Scott Wellens

Scott Wellens, CFP® is an investment advisor and founder of Fortress Planning Group. After earning his Bachelor of Science degree from the University of Wisconsin-Oshkosh, Scott quickly ascended to become a Vice President of North American Sales at a major regional provider of telecommunications infrastructure. While financially successful in this role, Scott searched for ways to pursue his passion related to financial literacy and providing financial freedom for both his own family and others. During his search, Scott became curious about the significant gap he found in the financial services sector: he was unable to find a comprehensive financial planner that maintained a family stewardship lens without being attached to financial products. Scott decided to fill that gap by creating his own planning firm that maintains a strong passion for comprehensive, unbiased wealth planning that is genuinely client-centered.

Scott resides in Menomonee Falls, WI with his family. He is the father of three active and independent daughters who keep him on his toes. Scott is an active community member, serving on the Hamilton Education Foundation Board, serves as a Dave Ramsey Financial Peace facilitator and leads the All Pro Dad’s group at their local elementary school. Scott enjoys spending his free time visiting state parks with his family, reading, and watching the Milwaukee Bucks and the Green Bay Packers win ball games.

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