Section Review — Pull the Receipts

Check out Episode 3 of our podcast Nourish Your Worth for our conversation about using your self-investigation skills to get on top of your finances.

You've probably heard that keeping a budget is important, but have you ever wondered why? It's not just about keeping track of your spending—it's about knowing where your money is going and how to ensure it stays where it should be.

A budget is simply a spending plan for your money; it helps you control your money and not let your money control you. Having a spending plan can help remove the stress and anxiety around making financial decisions when faced with the inevitable self-dialogue, "do I need it or do I want it?"

The best way to keep a budget is to keep track of every dollar earned and spent, no matter how small. That means pulling those receipts! Before you get fancy and let tech do it for you, we encourage you to go old school by handwriting your last year of spending down in a notebook or using the illustrated budget worksheet provided in Financial Wellness.

Take notice of where you may be overspending and what changes you might want to make in the future. After all the reflective work is done, you will have calculated your total monthly expense number (aka your number). Once you have solved for your number, you can be fancy and let tech track it for you on an ongoing basis, but it will still be up to you to say “behave” and stay inline.

Most importantly― just know your number.

What's In a Number?

A budget has two primary components, money coming in―aka your income—and money coming out―aka your expenses. Your income, either earned through a job (via w2) or a side hustle (via 1099), will be taxed by Uncle Sam―aka the Government. In very simple terms, they use these funds to pay for services provided to Americans. 

On average, Americans will pay 30% of their income to Uncle Sam; that's 30 cents on every dollar you earn! Since this is something you pay, it's considered an expense. For most of my adult life, I treated this like a bill and anxiously waited for my CPA to tell me the damage. This is just one of my L's that I want to share with you; now, I take control and want to encourage you to do the same.

One of the ways you can get in control is to track your taxes in your budget. In the book, we break down expense categories into four sub-categories:

• Savings − pay yourself first

• Taxes − Uncle Sam

• Fixed − your wants

• Discretionary − your needs

I want to emphasize the importance of the discretionary bucket. Once you have created your budget and identified your number―aka your total expense number—when you track it and go over your progress, this is the first place to look.

If you've never created a budget, use the following guide below to break down each category. To be financially well, the number you see after subtracting all your expenses from your income should be zero or greater. If it's negative, be humble and go back to review your fixed and discretionary expenses.

The Wizard Behind the Expense Curtain

Income is the most straightforward category to pull the receipts for and making a holistic budget should include income on a gross basis—aka before any deductions are taken if you are getting a paycheck. Even easier! So, let's skip ahead and pull back the curtain to discuss the four expense categories.

SAVINGS − Pay Yourself First

When you set aside savings, you are actually paying yourself and looking after your future interests. We strongly advocate that you pay yourself first; you are worth it. Why is this so important? It's all about controlling your money and creating options for your future. You can do this through pre-tax contributions through your payroll via a 401K contribution, directly through an IRA, or post-tax via your piggy bank, savings account, or money market account in a bank. 

Since your expenses depend on the continuous flow of money, you need to build up an emergency fund in case life suddenly changes. It's in your power to control the cash flow and, thus, tamper any anxiety you might experience around it, by creating an emergency fund through savings. The goal is to have 3-6 months' worth of fixed and discretionary expenses in an after-tax account. Once you have saved up an emergency fund, you can move on to making investments and have your money work for you. 

TAXES − Uncle Sam

You'll need to calculate income and payroll taxes for both federal and state. For starters, you can sit down with Human Resources and have them explain the rates behind each deduction on your check. Also, clarify whether these deductions are "pre" or "post" tax. If an item is pre-tax, Uncle Sam can't put his hands on it and tax you (yet, lol). If it's post-tax, that means get ready to play Uncle Sam before he plays you.

Pre-tax items generally include medical premiums or contributions to your retirement plan, flexible spending, dependent care, or HSA accounts. These amounts lower your overall taxable income and are a fantastic way to play Uncle Sam and keep more money in your pocket. Post-tax items generally include additional life insurance, supplemental long-term disability, and Roth contributions. 

For an annual resource for federal rates and limits, Google "Putnam tax rates and contribution limits." For your state rates and limits, Google “[name of state] payroll and income tax rates." Below is a breakdown of these tax categories.

• Federal Payroll Tax − These taxes include such items as FICA (6.2%) and Medicare (1.45%) which are your Social Security and Medicare contributions for the benefits you will receive later in life when you retire (it says here in fine print). The dates and rates at which you are eligible to receive the benefits depend upon your birth year and the amount of income you have earned. 

• Federal Income Tax − Use your after-tax total income number and calculate your tax using the schedule mentioned above or search online for the many available calculator tools. 

• State Income & Payroll Tax − Every state has different rates and may have additional payroll taxes. Please review with either your HR representative, a tax professional, or using the specific guidelines from your state tax authority (i.e., for California, it's the Franchise Tax Board).

FIXED − Your Needs

These are generally necessity-based expenses that don't change from month to month. Some examples are rent, utilities, cellphone, cable, internet, and insurance (i.e., auto, rental, or homeowners, etc.).

DISCRETIONARY − Your Wants

These generally can be grouped as items where you can control spending. For instance, when it comes to food, you can eat out, use door dash, go to Whole Foods, or shop at Costco. These options have different price points, and the choice is yours, depending on the trade-off between whether you want to add more to your savings and align with your future goals or YOLO-it and visit a fine dining restaurant. Some discretionary examples are food, clothing, exercise classes, extra-curricular activities, entertainment, and subscriptions.  

It's worth repeating, but this is where most people overspend. Those spontaneous trips to Starbucks can quickly add up. In those times, you should reflect on your money mindset and ask yourself, “Do I need this, or do I want this? Is my Ego trying to buy this?” Don't get me wrong; you should treat yourself and leave room in your budget for spontaneity and luxury; I'm just suggesting the amount you spend to treat yourself aligns with your spending plan. After all, you are here to glow up and learn to treat yourself like a business. Money doesn't buy happiness, but it can buy you options, and who doesn't love options?!?

Keep It Simple

To be successful with budgeting, you need to have a way of tracking your expenses. Whether on paper or through an app, you need to know exactly how much money you're spending in each category and where it's going. 

It's easy to forget small things like groceries or gas while keeping track of your spending. But if you don't write down how much those things cost per month, how will you know how much to put in the budget for them?

Regardless of which option you use to check yourself, remember less is more. We suggest having only one account each for checking, savings, and a credit card. That makes it simple to reconcile and track your spending.

Know Your Number

We know there are many coaches with advice on managing your budget, but we simply suggest you "know your number." That’s it, only one thing to remember! It doesn’t get much easier than that. Don't play yourself by creating multiple accounts and credit cards. You only make it harder for yourself to track your money. 

Be honest, be free. There is so much power in that statement. Control your money, and keep it from controlling you by creating a spending plan. You have the power to reduce your debt, increase your savings and watch your net worth grow. Once you create your intentions (aka a budget), you manifest the life of your dreams.

Nourish your worth. You are worth it.