While financial planning and wealth management are about a lot more than how you spend your day to day dollars, tracking your spending and budgeting for your goals is an important part of making sure your financial plan is aligned to your particular needs – and to your long term plan.
Here are a few of the key ways that budgeting plays a role in wealth management:
Increased Clarity
Tracking your everyday spending – as well as your big purchases – can help bring clarity to how you build your financial plan for the future. You may think you know where your money is going but until you sit down and map your expenditure over a period of time (we recommend 6-12 months to start!), you won’t know for sure how much is going towards every day expenses versus debt versus savings. Getting a feel for the general breakdown of where your dollars go can help to identify any concerns and help you build a more realistic long term plan.
Support for Cost Cutting
Once you know where your dollars are going, you may be able to change your behavior. It’s notoriously easy to spend money but if you’re tracking that spending, you may find that you begin cutting some of your purchases. The same logic that applies in dieting applies to finances – tracking makes you more aware of your actions and more able to change them. Tracking your expenses may also alert you to costs that you weren’t aware of or no longer want to pay.
Help Meeting Your Financial Goals
Each of us has different priorities when it comes to short-term and long-term financial goals. You may need to save extra money for an upcoming trip, a down payment, a wedding, etc. but without a budget it can be difficult to manifest that extra money. By tracking and then planning your spending, you can make a conscious decision to forego near term expenses to support your financial goals and prioritize things like savings or retirement. Budgeting also helps by letting you know what’s realistic when it comes to goal setting. For instance, if your financial goal requires a 75% cut in your housing expenses, it will likely not be feasible.
Added Control
In addition to helping you manage your actual expenditures, budgeting has a much valued emotional benefit. People that track their spending and budget for their expenses tend to feel more invested in their overall financial health and more in control of meeting their goals. In a world where a lot of financial impact is outside of our control, emotional stability can be an incredible benefit.
Planning for the Future
And lastly, budgeting helps you to plan for the future. You can factor in the need for an emergency fund or other safety net expenses that will help to increase your stability long-term. Additionally, each current budget serves as the basis for increases in your income. With each promotion or salary increase you can decide how to allocate your new funds and have backup data to support those decisions.
When constructing your overall financial plan it’s important to understand the value of your assets – both monetary and otherwise. Budgeting helps put you in touch with your financial habits, build realistic financial goals, and keep tabs on where your money is going. All of these are important to the overall success of your financial plan. If you need help starting the budgeting process, be sure to reach out to your financial planner or accounting professional to guide you.