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Mason City (641)423-1600 Change Location

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Mason City Change Location

2601 4th Street SW
Mason City, IA 50401

Tel. (641)423-1600

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Home Blog Create a Budget with Purpose

Create a Budget with Purpose

 
Create a Budget with Purpose

For many Americans, the idea of an unanticipated expense, like a car breaking down, is cringeworthy. If you had to come up with $5000 today to pay for a car repair, how would you feel? Are your palms sweating? What if instead of your car needing a repair, you experience an unexpected job loss? Now, do we have your attention? 

Although “Budgeting” is our topic this month we didn’t want to scare you with bringing up this dreaded word before grabbing your attention. Too often, people assume budgeting isn’t important or simply keeping an eye on spending is enough.  

The reality is creating a budget allows you to visualize how your money is spent. Once you can see where your money goes, you are able to drive your spending to align with your goals. Did you notice how many “yours” were in that last sentence? Instead of focusing on the dreaded concept of a “budget”, remember this is all about you and your ability to do what you want in life with the resources you have available. Nothing is more liberating than knowing you have a solid plan in place and an unexpected expense (although not welcome) doesn’t cause you to wonder how you will pay the bills.   

Creating a Budget
Budgets may be tough to create and follow, but they are worth it. For most people, it takes some time to get a good grasp of spending habits. Expect to take a few months to get through the process the first time. Once you do, you only need to adjust the budget once a year or if your cash flow changes. 

If you look at how you’re currently spending, you can evaluate what’s working, what’s not, and what you need to change in a future budget. Let’s get started:  

  1. Monitor your spending habits for a few months. This part sounds awfully tedious, but information is power. You need to track all of it! There are many tools, both free and paid, that can help track spending. First Citizens Bank retail customers have access to Money Management tools as part of online banking. We can also utilize excel spreadsheets or good old pen and paper. Our team also uses a tool called eMoney to develop cash flow statements with clients. The point isn’t how you do it, it’s that you do it. 
     
  2. Are you in the red? Your spending needs to be lower than your take-home income. It sounds obvious but sometimes people are surprised to learn that isn’t the case. Ideally, you’ll also have room for other goals like building up an emergency fund and paying down your debt.  
     
  3. Review and revise. Your budget, like all other planning topics we address, is a living, breathing thing, and should be adjusted from time to time. A budget isn’t intended to control you. Instead, by creating and maintaining your budget, you’re able to spend with purpose. What’s the purpose? To align and focus on what really matters to you. Let’s say one of your goals is to go on an extravagant vacation. You find when reviewing your expenditures, you are spending far more than budgeted on extra meals out. With that information in hand, you can adjust.  Hello, dream vacation!

 Simplicity is key when getting started.  Your circumstances will determine the appropriate budget that works for you; however, one option is to adopt the 50/30/20 budget.  This works well for many people.  The budget looks like this: 

  • 50% - total living expenses (mortgage or rent, utilities, groceries, meals out, etc.) 
     
  • 30% - non-essential living expenses (travel, entertainment, subscriptions, etc.) 
     
  • 20% - savings and/or debt repayment 

Building an Emergency Fund
Study after study shows us that 70% of Americans live paycheck to paycheck. Recently, a survey from Bankrate found that 35% of Americans have less in their emergency fund now than before the pandemic started, while just 13% have more. Only a quarter have enough saved to cover six months’ worth of expenses, and one-fifth (21%) have no emergency savings at all. Nonetheless, more than half (54%) of respondents said they feel at least somewhat confident in the amount they have saved. This tells us there is a disconnect between what people think about their savings and the actual reality.   

We want our clients to have peace of mind. To do so, we encourage you to build enough savings to know that in the event of an emergency you will be okay. For most people, 3-6 months of emergency savings in an accessible, cash-based savings account is preferred. The right amount of emergency funds is an individual decision. Our goal is to ensure your decision is well-informed. 


Managing Your Debt
To pay down debt, you need to track your cash flow and prioritize repayment as part of your lifestyle.  We recommend debt repayment as part of your budgeting plan until you are debt free.  

Apart from your mortgage and student loans, your goal should be to have no additional credit or personal debts. Of course, nobody is perfect, and we certainly appreciate the need and value in taking on debt in certain situations, like funding a business operation (did I mention our great lending team?) BUT when you start your budgeting journey focusing on paying off personal debt is never a bad idea.   

We are all unique individuals. What works for one person may not necessarily work for another. Here are a few concepts you can use to manage debt: 


The Debt Avalanche Method
Many people find tackling your most “toxic” debt first is a good approach. With this method, you target the highest interest rates first.  (With record low interest rates, you should also consider whether refinancing or asking for a reduced interest rate makes sense).  Here’s how it works: 

  1. Organize debts from smallest interest rate to largest.  
     
  2. Set payments to the minimum monthly payment amount for all debts except the debt with the highest interest rate.
     
  3. Use all extra funds towards the highest interest rate debt. 
     
  4. Once that debt is paid off, you “avalanche” the total amount you were paying to tackle the next-highest interest rate loan you have.   

This strategy helps you save time and interest during your debt payoff journey. For those with patience and an understanding of the numbers, this is a good method. However, it tends to take more time to see a “win”. Thus, for some a good approach is the Debt Snowball method. 


The Debt Snowball Method
The debt “snowball” was a term first coined by Dave Ramsey. Here’s how it works: 

  1. Order debts from smallest total amount to largest.  
     
  2. Set all your debt payments to the minimum monthly payment amount except for your smallest obligation.  
     
  3. Put any extra money towards your smallest debt. 
     
  4. Once that debt is paid, you “snowball” the amount allocated to the first small debt on to the next on the list.

If you haven’t heard of this concept before, it may sound counterintuitive - why pay the smallest debt off first? Wouldn’t it make more sense to knock back the larger debt amount?  Well, yes. However, the quick “wins” creating by paying off one debt after another help you stay focused and stick with your plan. 

Inspiring Financial Well-Being
Our vision at First Citizens Bank is to inspire financial well-being for everyone. We use the term “financial well-being” to refer to your comprehensive financial health. This includes your cash flow, net worth, emergency funds, debt management, and future life planning. We are passionate about helping our clients achieve financial well-being. Establishing and sticking with a budget builds a strong foundation. We would love to help you get started. Do not hesitate to reach out to us at wealth@myfcb.bank or 641-422-1600 to schedule a meeting.   

Products provided by First Citizens Wealth Management are not insured by the FDIC, are not deposits of the bank and are not guaranteed by this institution; and, are subject to investment risks, including possible loss of the principal invested. Please note that neither First Citizens Bank nor the First Citizens Wealth Management Department provide tax or legal advice.

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