Advanced Budgeting: How to Take Your Budgeting Skills to the Next Level
So, you’ve been adhering to your budget, but perhaps life circumstances have shifted. Maybe you need to relocate due to a new job, or you’ve decided to return to school. Life is in a perpetual state of fluctuation, and your budget will continually reflect this reality. Therefore, it’s wise to review your current budget to ensure it fits your lifestyle as well as your financial goals and objectives.
It’s true that future financial projections are challenging to pinpoint precisely, and that can make achieving financial security difficult. After all, economic predictions aren’t completely accurate—no matter what tools experts may use to make those forecasts. This doesn’t mean you should take a defeatist position and throw in the towel. There are steps you can take to fortify your current financial perspective, whether you want to plan for a large purchase or simply develop more financial stability.
Your emergency fund is your go-to account should a large expense arise suddenly. Job loss, health issues, or other circumstances can quickly turn one’s life upside down. As such, the rule of thumb for your emergency fund is three- to six-month’s salary stashed away, preferably in a high yield savings account. If your expenses have increased, the challenge here is deciding if you can still comfortably contribute to the emergency fund. Realistically, if you’ve taken on additional debt or other financial obligations without an increase in income, then squeezing out more for the emergency fund presents a challenge.
But, is there anywhere else in your budget that can be decreased to offset the new financial responsibility? First, examine the lifestyle area of your budget; if you have a certain amount budgeted for the “fun stuff” such as dinner out with friends and family or that daily frothy coffee drink from your favorite coffee shop, then analyze where you can temporarily cut back on spending.
The next section to review is your monthly grocery budget. Though coupons may seem oh-so-20th century, you could save $300 per month or more depending on how aggressive you are about “couponing.” If you go this route, make sure to move that savings into your emergency fund. You’ll be surprised how fast that money can add up. However, your emergency fund is not your retirement fund—though some of the money can be shuttled into a retirement account. After you’ve reviewed your emergency fund and are satisfied with the changes, it’s time to move onto your retirement fund.
As you are probably well aware, retirement funds are a long-term investment strategy. In fact, the IRS places restrictions on pulling money out of your retirement account prior to reaching a minimum age. These restrictions include some hefty tax penalties. If you’re currently contributing through your employer and you want to either increase or decrease the contribution, take some time to research the minimum and maximum allowed. Increasing the fund is the primary goal, but if your budget demands some priority adjustments, then temporarily downshifting the contribution is doable.
There's some debate over whether it's better to invest or plan to pay down debts, but both options are financially viable in the right circumstances. When you're ready, private investments can include opening your own retirement account. Regardless of the type of account you choose, having both an emergency fund and an investment account can yield a larger return within a shorter period of time. Of course, this largely depends on your risk threshold. Investment accounts have varying restrictions on when and how you can withdraw funds. And you should continue to be mindful about IRS regulations regarding taxation on withdrawals. There are also various fees associated with investing (e.g. brokerage fees, commissions, costs per trade, etc.).
The minimum amount to open an account ranges from $250 to $2500. So, depending on your current budget and emergency fund balance, it may take some adjustments elsewhere in your budget. Also consider whether you have the time to manage a self-directed account as opposed to paying someone to manage the account for you. The latter is costlier in the short term, whereas the former might prove to be more trouble if you’re not keen on learning the various trading mechanisms and studying the assets you’re investing in.
However, if your budget allows, then seriously consider opening an investment account so you can begin to build long-term wealth. Even the highest yielding savings account does not, at the current time, provide a higher ROI than an investment account. This isn’t to suggest that investment accounts are wholly superior; they are dependent on how the financial market is performing. So, covering both bases by having an emergency fund and an investment account provides a dual strategy for increasing your financial freedom.
Budgeting is a lifelong process, and it's one that has to be tackled whether you're doing it alone or navigating finances with a partner. But, if you overestimate or underestimate, it’s not the end of the world, even if your credit score fluctuates. Roll up your sleeves, take an hour, and adjust your financial health accordingly.