“Budget” is a cringe-worthy word. It reeks of responsibility, discipline, and effort but as we move into our mid-twenties and thirties, reality sinks in: ” I am an adult; I have a job that pays me. But where does my money go each month?”
Through my work at a financial planning firm for the last 3 years, I have learned the intricacies of designing a solid plan to help young adults meet their financial goals. These plans include everything from debt management to complex investment strategies for retirement. I discovered early on that every plan we designed for clients began with an analysis of their personal cash flow: what’s coming in and what’s going out. Why? Because to lay the groundwork for a successful financial plan, you need to know how you’re spending your money. This knowledge will help you understand how much money you have available for saving, paying down debt and pursuing your passions. After hundreds of meetings with new clients, what I found most surprising is that most people have no idea where they spend their money. Based on my observations, I categorize spenders into one of 4 cash-flow personalities:
1. “I Spend What I Make.” You deposit your entire paycheck into your bank account after taxes, insurance, and maybe a 401(k) contribution and spend whatever is left. Your next paycheck deposits and the cycle repeats itself.
2. “I Put Everything On My Credit Cards.” You put everything on your credit cards and hope you have enough to pay them off every month. You may do this successfully for a few months, but then get ahead of yourself and begin spending more than you earn, hindering your ability to pay off the balance in full. When I ask clients how they get themselves into so much credit card debt, their answers are usually something like: “It just kinda snuck up on me” or “I didn’t pay enough attention” or “I have no idea.”
3. “I Have No Plan.” You spend below your means and have money left in your account at the end of the month. The extra money accumulates in your bank account with no purpose or plan. This often happens because you don’t know what to do with your extra cash. Common questions I get include “Should I invest it?” “How much should I keep for emergencies?” “What are my options?”
4. “I Got It Covered.” You’re a rare breed. You know your cash flow and you run a successful budget for yourself each month. Kudos to you! Question though: When was the last time you reviewed your budget? What are your goals for the money you’re saving? Are you saving enough? Even the best budgets should be reviewed routinely, so I challenge you to audit yourself at least once a year or each time your income changes.
Understanding your cash-flow personality and creating a budget for yourself is the first step to building your overall financial plan. This kind of self-awareness will help you cater your own budget to complement or combat your current spending habits. The goal is to build a budget you can stick to because after all, what good is a budget if you don’t follow it? So where do you start? This may seem overwhelming at first, but once you identify your cash-flow personality and understand where your money goes each month, you will feel much better saying “goodbye” to the “where is my money” guessing game.
Meagan Landress, CSLP®
Certified Student Loan Professional™
Financial Coach Meagan