Budgeting is like sitting in traffic; no one wants to do it, but it is an essential component to arriving at your destination. When you build a spending plan that is based on past expenses and future goals, you will be set up for success. There are several software applications available to help with these details. Forbes did a nice review of the options, their purpose, and costs.
Budgeting apps can provide a wealth of information if used appropriately. However, during that first year of use, it takes time for set-up, ensuring expenses are properly categorized, etc. Some people do not have the time to delve into budgeting in a detailed way using yet another app on their computer or iPad, just like we don’t want to spend our time in traffic.
So, how can you do this without waiting in traffic too long? Using prior year tax returns is a shortcut Apella Advisors use to help their clients generate a reasonable spending number without major headaches. It is not a perfect figure, rather an educated estimate, and a great place to start when understanding what you spend annually.
First, have your most recently filed tax return on hand. Hearing “tax return” can be daunting, but I assure you this won’t take much time. You will also need your W-2 Forms (W-2s) if you have earnings, along with your year-end investment statement. If your investments are held with more than one custodian, you will need each of them.
To determine if you spent more or less than you had available to you, you can review the change in your total cash balances:
Did your balance in these accounts go up or down? Perhaps they went down because you were saving more (see the chart for contributions to a brokerage or savings account), or alternatively, the total checking balance decreased because you spent it.
Now that you know the basics, it’s time to understand what that means. There is a bit more work to do to get there.
Let’s say your total “Net Available to Spend” at the bottom of the chart is $100,000. What are the big pieces of that puzzle? These might include:
Typically, financial advisors will break out these numbers separately for several reasons:
What remains after those items are removed is your regular monthly living expenses. This level of detail can be enlightening for understanding your overall spending. It provides a great starting point for discussing your spending plan with your advisor, without the need to meticulously track each expense throughout the year. Who doesn’t want less time in traffic? It can also highlight expenses that may be less relevant in retirement, as well as those that could be more expensive now, such as your mortgage payment.
If you are not saving enough toward your long-term goals, understanding your spending can help illuminate possible changes you can make. Your financial advisor can assist with this analysis and help you understand how your spending impacts your financial plan for the future.
Disclosures:
Apella Capital, LLC (“Apella”), DBA Apella Wealth is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment-related content made reference to directly or indirectly in this material will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Past performance does not guarantee future results. All data is from sources believed to be reliable but cannot be guaranteed or warranted.
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