How budgeting forms the basis of your financial plan


Budgeting isn’t just about tracking expenses – it’s the foundation to help you achieve your financial goals.

Budgeting is not just about allocating a certain amount of money to different expenses.

It is important to look at budgeting in a broader sense. Budgeting is all about determining an appropriate allocation of capital across your overall financial picture. This includes expenses such as housing, automobiles, clothing and restaurants, but also investments and savings for retirement.

At UBS, we believe it is important to budget using a specific framework – the 50-30-20 rule.

Here’s how it works:

– 50% of your monthly income is allocated to “essentials” like groceries, rent, gas, clothes, car insurance or other expenses you cannot live without – these are necessities

– 30% goes to discretionary spending like entertainment or shopping

– 20% goes to savings and investments

These percentages aren’t set in stone, but they do provide a benchmark against which to compare your spending.

Notice how this framework extends beyond a particular expense category, such as restaurants or travel, and considers broader areas of your financial situation.

Regardless of income level, following a framework to categorize your capital allocation into the three aforementioned categories can help you achieve your short- and long-term financial goals.

Following this framework may require the help of a financial advisor, who can analyze your expenses and calculate how much money you spend on necessities, discretionary spending, savings, and investments. Categorizing spending data on your own can be time consuming.

During this analysis, if you determine that 50% of your income is spent on discretionary spending and not 30%, you probably have some adjustments to make.

The savings and investments component is most important to your long-term financial well-being.

For this category, you may already be contributing to a pension plan through your employer. Contributions to your retirement plan are automatically deducted from your paycheque and directed to this account.

When reviewing expenses, you may find that your retirement contributions are less than 20% of your income. In this case, you may want to contribute more in your retirement to meet the 20% budgeting threshold for savings and investments.

You may also find that you are able to allocate even more than 20% of your income to savings and investments. Since there are annual contribution limits to retirement accounts, you may need to look beyond your retirement account to deploy this capital.

There are a variety of ways to invest in stocks beyond a retirement account. But while your retirement account is likely on autopilot with money taken out of your paycheck and directed into it, investing money outside of it may not be so simple.

A financial advisor can guide you through the investment landscape and manage your investments by selecting stocks, bonds, and other investments that match your financial risk tolerance.

While the stock market has been relatively fluid throughout 2021, 2022 is off to a volatile start. By actively managing your investment portfolio, a financial advisor can take steps to ensure that your portfolio is able to withstand volatility and meet the challenges facing markets today, including inflation, geopolitical tensions and the possibility of less stimulus from the Federal Reserve.

In addition to investment management, the advisor can also act as a sounding board to address your financial fears and help you formulate goals.

To sum up, simply thinking about budgeting in a broader sense and in three categories (necessities, discretionary spending, and investments) can give you a much more accurate pulse on the state of your finances.

No matter how much money you make or how close you are to reaching your financial goals, knowing where your money is going each month can be the most important part of financial planning.


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