MONEY Budgeting System® Clients ask me all the time, “How much money do I need?” and “How much money should I be saving?” My answer is always the same: it depends on what you want your lifestyle to look like. People can be happy with all different levels of income and expenses, and the job of a CFP® professional is not to tell them what that lifestyle should look like, but rather to help them put the plans in place to achieve that lifestyle. The first step in our DBT360 Financial Plan® process is to look at a client’s budget: how much income they have, and where their money goes. Without that analysis, there’s no foundation to build upon. To assist clients and anyone in getting started, we created the MONEY Budgeting System.M = MAKE MONEYM stands for "Make Money." We all make money, and each household makes different amounts from different sources. The first part of creating a budget is to know exactly how much money comes to you in the form of income. In this category, we analyze anything that you would use to pay for your lifestyle: paycheck, income from running a business, Social Security, pension, rental income, and income or distributions from investments if you use it to pay expenses (as opposed to reinvesting). Some income is predictable (such as a paycheck), and some comes irregularly (such as commissions from sales jobs). Some may be an uncertain windfall in the future, such as an inheritance. Noting all details of your income is essential so that in the next steps you can plan your expenses according to when you have money available.In the budgeting process, step M can lead to significant lifestyle decisions for both the present and future. If your current path won’t lead to the desired future, one opportunity for large changes involves your job. You may need to change jobs, ask for a raise, pursue more training/education, or plan to work longer in life in order to reach your goals. A thorough analysis of your income from all sources is an obvious, but often ignored, step in forming a budget. Your monthly budget, and thus your savings/retirement goals, depend upon it.O = ObligationsO stands for “Obligations.” An obligation is something you are committed to, so think of this category as large expenses that you must make each month to avoid significant negative consequences. The major categories that fall under Obligation are the expenses of where you live, of a car, debt, and major savings goals. If you think about these expenses, you probably went through some sort of analysis before you committed to them. Even if it was just a cursory review of “can I afford this car payment?” – you still decided at some point that you would be obligated to the expense. Failing to make payments to this category leads to a surrender of the benefits you have built up by paying for them previously.While you are committed to the Obligations, you also have the greatest amount of leverage to make changes in this area, as these do tend to be the largest expenses in your budget. Let’s say you decide you need to build a bigger emergency fund, but your rent uses up most of your cash each month. You may decide to move to a lower rent apartment when your lease is up so you can direct $250 each month to a savings account and shore yourself up quickly.Debt expenses can be high for recent graduates (student loans) and for those who don’t monitor their spending levels efficiently (credit cards). While some debt is not negotiable, credit card debt is in your control. Eliminating credit card debt through controlling expenses and focusing solely on this goal for a certain period of time can free up future monthly funds and reduce stress.Even with investing, you can create flexibility for your personal goals. You might be maxing out your retirement plan at work (good for you!), but is that the most pressing Obligation in your financial plan? Investing in a retirement plan while paying enormous percentages on credit card debt does not advance the ball. The point is to view your Obligations from both a short and long-term lens in order to make the best use of your income.We also include in this category the expenses that go with the Obligations. For example, if you own a home, we would include the taxes, insurance, utilities, and upkeep of the property. If you rent, it will include the cost of your renter’s insurance. For those of you who don’t own a car, we will address this in a future category.When working with DBT360 Financial Plan® clients to formulate their budget, this level of analysis generally doesn’t lead to “surprise” costs, as most people remember the big checks they write each month. But by viewing Obligations as part of the MONEY process, and then leveraging short and long term changes to have large effects on a financial plan, the “O” may better be described as “opportunity” for new budgeters.N = NeedsThis category will vary somewhat by person, but most of us feel like we need to pay for our food, phone, basic clothing and personal care, and any costs associated with medical health, including annual check-ups and insurance. Keep these in mind as we progress through the remaining letters in our MONEY analysis, as there is definitely a gray area between needs and wants. For example, I need clothing to wear to work that is presentable and suitable for my job. However, I don’t need a designer version of that clothing. (Hold on to your questions about designer clothes and similar choices – we’ll get there.) Food is another area that gets even murkier even sooner. I need to satisfy my hunger, which can be done pretty inexpensively with a glass of milk, some almonds, and an orange – all costing me maybe $3. But it would be quicker and more delicious to go grab a salad with a friend, which will cost $13. If I make that choice every day, I would spend an extra $50 per week, which adds up to $2,600 over the course of a year. To help you see where you can make spending changes, I suggest that your groceries fall into the Need category, and we will address eating out in a future category.While it may seem like there is not a lot of flexibility in the N category, since you need all of these items, there are still lots of ways to consider reducing these expenses. If you only shop at gourmet or organic grocery stores, consider buying some of your food at less expensive stores. And if your cell phone is a need, as it seems to be for most of us these days, review your plan at least once a year with your provider to find out if you can change your plan and save money.Our DBT360 Financial Plan® clients tend to know their “N” expenses almost as well as they know their “O” expenses when we walk them through their budget. However, they don’t always see how to reduce the “N” expenses until we help them see where they currently spend their money vs. where they want to spend their money, such as shoring up emergency funds.E = ExperiencesNever fear, we understand that life is for living, and E is where you get to do just that. E stands for Experiences: those things that make life meaningful or joyful for you. Rather than taking care of a basic need, achieving a financial goal, or buying an asset, you choose to spend this money because you want to have the experience. Maybe it’s for fun, for personal growth, for a challenge, or to improve your physical and mental health. This experience means something to you. It may come in the form of buying books, going to concerts, golfing, being a foodie, fashion, yoga, photography, travel, bowling, you name it.These expenses will be totally specific to you, and we encourage you to choose one of two ways to manage these expenses. The first is to pick the ONE experience or hobby that makes life worth living, and only spend money on that one. Maybe you ski once a year just because you did when you were a kid, but your heart really sings when you get to ride your bike around the lake a few times a week. Consider eliminating the ski trip, and instead spend your money on keeping your bike well-maintained.The other choice is to set a dollar limit to spend on experiences monthly. Maybe you really love to eat at the newest restaurant in town, and you also benefit from yoga, and you also want to travel. Instead of doing all of those things every month, set a budget for how much you can spend, and plan out when you will eat out vs. when you will travel vs. when you will attend a local yoga retreat.E is where a lot of impulse money is spent, so you should really consider this money before you spend it. E is also where creative spending - such as sharing the expenses of vacation with a group of friends or another family - can be a problem solver. It almost always sounds exciting to spend money in the Experience category, so you may need to hone in your skills on saying no to spontaneous experiences that come your way, like when your friend asks you to join him on a birthday trip to Costa Rica. Just remember that you have already made choices here to make you happy, so any other experience that you decline means more money available for you to do what you want in other parts of your life.Y = Why Are You Spending This Money?“Y” is both a category and a question. You must ask yourself this question for all expenses in order to prioritize them. As a category, this is the area where we can all find expenses to reduce or eliminate, even if it’s for a short period of time. We will ALL spend money in this category, more or less in different ways, and more or less at different times of the year, even if we wish we didn't. This will include eating and drinking in restaurants, first class plane tickets, expensive self-care, pricey clothes and shoes, etc. We also find meaningful and healthy expenses like charitable donations, gifts for friends, and a daily smoothie habit here. This is money that is absolutely NOT necessary, but we may still choose to spend it. The point is that we should consciously decide whether we want to keep spending this money, and to decide whether it is more important to keep these expenses, or to forego them so we can direct the money towards a long-term goal. The good news is that nearly everyone can find some of these expenses that can be pared back to allow something like an education, retirement, or debt reduction goal to be funded.Looking at all of your expenses through a Y lens can help you prioritize where you want to direct your money throughout your life, and it is a useful habit to get into daily and monthly. For example, a friend might ask you to go out to breakfast to talk over a business challenge she has. You agree, with the “Y” since she is a good friend, and you would hope she would do the same for you. Sounds legitimate. If that friend really likes your advice and asks you to do the same a few more times, you might look back at your monthly eating out tally and realize that your well-intended expense is now eating into your Experience budget that you have this month. Then you decide: is it more important to help your friend in this way, or is your Experience more important?Almost everyone can think of something they would like to spend money on, or buy, that is just not in the budget. Interestingly, most people have “Y” expenses that they can afford, but not in addition to all of the other expenses they have. Maybe a family can afford a short cruise to the Caribbean, but should they when they already carry a balance on their credit card and don’t have a solid level of emergency reserves? What if they went camping instead – which may be as much fun and far less expensive – and socked the rest of the vacation budget into shoring up savings and paying off debt? Maybe a recent college grad can afford an apartment in a downtown high-rise, but should she? What if instead she lives someplace ‘safe and comfortable’ instead of ‘cool’ and splits the leftover funds between saving money and paying off school loans?One word of advice: it is significantly easier to make decisions using the “Y” lens if you have focused financial goals and a concrete plan to reach them, giving you the “big picture” that reveals the importance of each step. For example, “maxing out my 401(K)” is not much of an inspirational goal. However, “maxing out my 401(k) now so I can retire from this job at age 55 and transition into a fun job to allow more travel and less stress” is a very inspirational goal. It is much easier to forego a new car for a few years when the goal at the end signifies a reduction in stress and an increase in happiness.When we launch clients into the DBT360 Financial Plan® process, we first help them define their goals and then create the plan to help achieve those goals. That’s where the MONEY budgeting system first comes into play – you must take a deep dive into monthly and yearly spending in order to project future needs and goals, and find a clear path to the desired financial future. Contact our office to get started.DBT360 is a marketing name for the proprietary financial planning process designed by Debra Brennan Tagg.