Do You Need a Budget?

It’s a conversation I find myself in often with young, high earners. They want to get extremely granular with their budget.

“Can we build out a budget for both fixed and variable expenses?”

“I only want to spend $300 per month going out to eat.”

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Going line by line in a budget is inefficient, and quite frankly is typically not effective. Instead, I typically work with individuals to help them implement what I refer to as reverse budgeting. The steps are simple, and revolve around two basic questions. (If you really want to understand monthly cashflows, get the Monarch Money app)

1.??????? What is your monthly income?

2.??????? What are your monthly overhead expenses? (rough estimate)

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For example – let’s say a someone has $10,000 of monthly income, and $5,000 of monthly expenses. Through having these conversations, I’ve found that the surplus of most peoples discretionary income typically gets funneled into a bank account. Among other things – one of the basic responsibilities as a planner is making sure that money is going into the right “buckets” for my clients to optimize their income, and ensure their money is growing. The low hanging fruit for most people are things such as:

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-Increasing company retirement plan contributions

-Contributing to an HSA Plan (if on a high deductible health plan)

-Funding a backdoor Roth IRA

-Contributing to a college savings plan

-Investing in a taxable brokerage account

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The goal with reverse budgeting is to setup automatic contributions into tax advantaged accounts that align with individuals’ personal financial lives. This creates forced savings. When you have excess discretionary income, you want to make sure that this is being contributed to accounts that benefit you, and the investments inside the accounts are allocated properly.

If you treat contributing to these tax advantaged accounts like you do paying your monthly bills, you’re rewarded substantially over long periods of time.

Jared Gagne

Private Wealth Manager

617.378.3011 | [email protected]

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