Buffer Your Budget

If you were the Chief Financial Officer of a business, would you manage the company budget the same way you manage your household budget? I believe some of you would, but odds are most of you would not. I am not shaming any of you for how you handle your finances – I remember a time when I had more month than I had money. I understand how satisfying it is to not have to sit down and track every penny. However, there is no doubt that a family who budgets will have less financial stress because they are simply paying attention.

Budgeting is a key component of personal finance, and sadly, many people never learn how. It is not a difficult concept – you track how much is coming in and you track how much is going out. It is best to budget each month because the number of paychecks and the types of expenses may vary month to month. However, if you take the time to see the pattern of your pay periods and the various expenses that come throughout the year, you can easily narrow down your monthly standard of living.

In general, a budget will have two main types of expenses – fixed expenses and discretionary expenses. Fixed expenses are the repeatable expenses that you can count on every month, but they are also the most susceptible to inflation (i.e. cable bill, cell phone bill, groceries, gas, car loan payments, mortgage, insurance, etc.). Discretionary expenses are things you buy but do not need (i.e. restaurants, vacations, home décor, Pumpkin Spice lattes, etc.) Depending on your stage of life, your fixed and discretionary expenses will vary by proportion.

For many years, due to low inflation, people were able to budget their estimated expenses with a reasonable expectation of amounts throughout the year. However, inflationary pressures have made budgeting for those expenses much more difficult.

Imagine you and your spouse make $100,000 a year, and after taxes and retirement plan contributions, you bring home $72,000. This is $6,000 a month of take-home pay. After calculating your expenses, you conclude that you need $5,000/mo to maintain your standard of living, leaving $1,000 to save or spend. It would not be unreasonable to say you have enough to finance a new vehicle, boat, or RV with that remaining $1,000.

What happens if the price of groceries has increased by $250/mom, gas expenses increase by $200/mo, and energy costs for your home increase by $150/o due to inflation? Without warning, that new vehicle, boat, or RV payment is a lot less affordable than it was 1-2 years ago.

Each family must decide how they will handle this dilemma, but the problem is not going away any time soon. I recommend everyone build a budget for their household and be diligent about leaving a larger-than-normal buffer to cover rising costs before committing to a high interest mortgage or vehicle financing. Know your numbers and plan for volatility.

Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.

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