Budgeting: The Nose Game
September 1, 2020
- A budget is a tool for allocating your income; budgeting can be helpful in meeting short and long-term goals
- Get started by determining after-tax income and how income can be allocated
- Track spending and savings on an ongoing basis to determine if you are within your budget
- Review your budget periodically and/or if your situation changes
When we were kids and told do some chores around the house, we would play the nose game. Take out the trash? The last person to touch his nose is it! Clean the dishes? Nose game! Well, maybe some of us still play the nose game more often than we would like to admit, but now the nose game doesn’t do a whole lot of good. We still need to do chores, and make sure that we manage expenses and save enough for goals such as retirement. We need to create a budget.
How do we get started on a budget? Can we play the nose game?
The short answer is no but getting started may be easier than you think. The first step is to calculate the after-tax income. For W2 employees, that process could be straightforward: determine your net take-home pay figure and add back deductions such as retirement plan contributions and health insurance premiums. For people that are self-employed or independent contractors, you would also subtract deductible business expenses to arrive at take-home pay.
That wasn’t too bad…maybe we don’t need the nose game after all. What is the next step?
The next step is to determine how income should be allocated towards spending and savings. Spending should be categorized into fixed and variable expenses. Fixed expenses are pesky items that you can’t live without, such as housing, health insurance, and utilities. Variable expenses could be fun stuff such as vacations, dining out, and entertainment. Savings would be short-term savings towards an emergency fund, longer-term savings such as 401k contributions, or both. Savings could even include additional payments on a mortgage or finally knocking out revolving credit card debt. Allocating income can be as complex or as simple as you want it to be. Crank out that spreadsheet with formulas complex enough to launch a rocket ship or use a simple rule such as 50% fixed expenses/30% variable expenses/20% savings allocation. It is essentially “choose your own adventure.” Whatever way you choose, make sure you have a guideline that you can follow, and that can help you pursue your goals.
Cool, that was easy! So that’s it, right?
Not exactly, since an important step is tracking your spending and savings. This could provide some valuable insight, such as excessive variable spending or meager savings. Bringing allocations back in line with your budget could help you meet your goals. Additionally, consider setting up automatic recurring savings and automatic bill payments to stay on track. It’s also important to review your budget on a periodic basis since our lives change over time. Revisiting your budget annually is a reasonable goal. If you experience a major life change, that should also trigger a budget review.
Follow these steps and you’re on your way to creating and maintaining a budget. But what if you’re not quite ready to start? What is the next step? Nose game (kidding)!!
As always, please reach out to your trusted advisor with any questions.
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