If you think budgeting is a necessary evil, think again. What if I told you that budgeting is the secret to true financial freedom?

Don’t believe me? Consider this: nearly half of Americans¹ consider themselves as living paycheck to paycheck, and close to 30% of households collectively spend 90% of their household income on necessary spending. Not surprisingly, the highest share of those living paycheck to paycheck are lower-income households; however, of households making $125,000 and more, 20% of these households are spending 95% of their income on necessities.

What’s more, according to a Motley Fool survey of 2,000 American adults², 87% say they experience financial stress at least once per week.

These numbers are staggering, to say the least and may be a reality check for some. To be clear, finances can be hard to manage as we face financial decisions daily, whether it’s commuting to work or turning on your computer, purchasing groceries, or watching kids by cutting hours or depending on childcare. The old economic saying lives on: “There is no such thing as a free lunch.” Life bears a cost, and there is no way to avoid it.

However, it’s not all bad news. In fact, we have the power to steward our time and resources to help us live more financially free and take control of our financial lives. To do this, we need to incorporate sound money management principles.

Budgeting can help set the foundation for accomplishing this.

Budgeting:

There’s a saying I learned from an estate planning attorney that has stuck with me: “People don’t plan to fail; they fail to plan.” Oh, how true this is, especially in the case of our spending habits. Too many financial decisions are made flippantly and outside of a plan. The result: not enough money remains to fund our financial goals.

Clearly, planning can help us avoid financial failure, so budgeting is a must. However, the process of budgeting can often deter us from making one. So, to simplify this, I am going to reference Fidelity’s 50/15/5 spending rule.

This rule divides spending into three specific categories: Essential Spending, Essential Savings, and Emergencies. Using this rule, you will allocate 50% of your take-home pay to essential spending, 15% of pay to essential savings, and 5% to Emergencies. Let’s break this down a little:

Essential Spending: This includes all your non-discretionary spending. Such as:

• Housing

• Groceries

• Utilities

• Personal Care

• Dependent Care

• Life insurance

• Transportation

• Clothing

• Health care

This list is not all-inclusive. Depending on the situation, there may be certain other expenses that may be defined as a need such as pet food/insurance.

Essential Saving: These are dollars you want to have earmarked for retirement. According to NerdWallet³, financial advisors generally recommend saving between 10-15% of salary for retirement – this includes all contributions to employer retirement plans (401(k)s, 403(b)s, ESPPs, etc.) and IRA accounts. Note, that this is a benchmark for all ages and incomes. Consider your personal situation as certain situations may warrant a greater or lesser savings amount.

Emergencies: Emergency funds are an important safety net to self-insure your finances in the event of unforeseen expenses or losses of income (see more below). Fidelity suggests setting aside 5% of your income regularly to help build up this account over time, and it should be separated from your checking and savings accounts.

So far, we have accounted for 70% of dollars (50% + 15% + 5% = 70%). These are not hard and fast rules – essential expenses may make up more than 50%, or an emergency fund may already be established. Simply use these rules as guidelines and at least make a plan for your money.

How the remaining 30% is allocated is up to you! Fidelity would classify this category as “other wants and goals”. This could be saving for a car, wedding, college expenses, charitable giving, and others. Wherever these extra funds get allocated, be sure to make a plan like everything else and avoid overspending.

Some final thoughts related to budgeting:

1. Be as detailed as possible. The more precise you are in tracking dollars, the more likely you are to stick to your plan. Being too general could lead to dollars going unaccounted for which may negatively impact your path towards financial goal achievement.

2. Use tools and resources. There are several budgeting software applications, worksheets, or spreadsheets out there. You can even use pen and paper! Use whichever option is easiest for you that will hold you accountable is what will work best. Consider this worksheet from Fidelity or visiting http://www.fidelity.com/savingsandspendingcheckup to get started on your budgeting journey.

3. Have fun! Budgeting not only helps you to live within your means; it frees you up to make plans for what you enjoy. Make sure to outline what’s most important to you – be it traveling, volunteering, eating out, or hobbies – and have line-items with specific dollar amounts that support these priorities. Having a plan in place will allow you to enjoy your interests with greater peace of mind.

• ¹ Bank of America Institute, “Paycheck to paycheck: What, who, where and why?”, 22 October 2024

• ² 2024 Financial Stress, Anxiety, and Mental Health Survey

• ³ nerdwallet: How Much Should You Save for Retirement? Here’s How to Find Out

Disclosures:

This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. Newfront Retirement Services cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in these materials does not constitute any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice.

Newfront Retirement Services, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration as an investment adviser does not imply any level of skill or training, and does not constitute an endorsement by the SEC. For a copy of Newfront Retirement Services disclosure brochure, which includes a description of the firm’s services and fees, please access www.investor.gov.