Daniel Orfin & Associates Explains How To Start Budgeting
As any financial expert would tell you, budgeting is the best way to take control of your money. Instead of meandering through the month like a ship lost at sea, with a solid budget, you know exactly where every penny is going and have a backup plan for any emergencies.
Daniel Orfin & Associates, the financial planning firm operating out of Troy, Michigan, that over the years has helped clients eliminate as much confusion as possible in planning their financial future, stresses the importance of budgeting to avoid economic troubles and personal financial worries. At its heart, creating a budget is as simple as knowing your after-tax net income, defining your expenses and making sure the spending doesn’t exceed the income. But how do you start? And what budget types best suit your financial needs? The following steps will help you to start a budget that works for you.
1. Know Your Reasons for Budgeting
Starting a budget is good and dandy, but without knowing your real reasons for creating one, the success of such a personalized budget is limited. Daniel Orfin & Associates estimates that only about 33 percent of people with a known income follows a fixed budget. One of the main reasons why you’d want to give up your financial carefree ways and stick to a budget is that you’re tired of living paycheck-to-paycheck. Budgeting helps you save money, gets those overspending problems under control, sets a financial goal to aim for, and gets you out of debt. So, if one or more of those reasons apply to you, then a budget is the right solution for your financial woes.
2. Identify Your Net Income
Before you set out to investigate where your money goes and which black holes sucks up your income on the third day of the month, you must find out how much is your net income. Your net income means how much you take home after tax, Social Security, and other mandatory deductions. That income should also include any side cash you earn from a hobby, talent, or freelance work. Be realistic in your estimation especially with fluctuating incomes and don’t go overboard with expectations.
3. List Your Expenses
While identifying your net income is as easy as checking your last paycheck, knowing where you spend your money isn’t that straightforward. Daniel Orfin & Associates suggests using a spreadsheet or notebook to keep track of your spending. Your bank and credit card statements give you a full list of your monthly bills. These include rent, utilities, mortgage, and car payments among others. You can also use apps such as PocketGuard, DollarBird, and Mint to get a good idea of all the money you’re frittering away.
4. Set Your Financial Goals
When you take the less trodden path of following a budget, you obviously do so because you have long-range financial goals that go beyond keeping track of your spending habits. Whatever your goal, be it buying a house, saving for retirement, or even just buying a new car, having that goal gives you the motivation to stick to your financial plans. Financial experts, such as Daniel Orfin & Associates, recommend that your goal should be specific and have a deadline. Saying you want to save to buy a house soon isn’t as motivating as setting a goal to save $60,000 in the next three years for a down payment.
5. Settle on the Right Budget
In general, there are two types of financial budgets. The first is the zero-sum budget. You calculate your income, subtract your spending and get a total of zero. If you get a negative outcome, it means you’re spending more than what you earn. The second type of budget is the 50–30–20 budget. In this budget, 50 percent of your net income goes toward your needs which cover paying for bills, groceries, and rent. Next, 30 percent of your income pays for your wants. Wants are defined as trips, vacations, and entertainment. The last 20 percent should go straight into your saving box. Whichever budget type you choose, and as Daniel Orfin & Associates suggests, your budget should always reflect realistic expectations and accommodate for big changes in life.
Daniel Orfin & Associates concludes that while the methods that you utilize are not the most important thing, what is important is starting to budget so that you can ensure that your funds are being utilized in the way that is best for you.