David John MarottaDavid John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com
What does it mean to keep a budget?
David John Marotta: Keeping a budget really is keeping a spending log. So, you keep track of everything that you spend for a month, for a year, and then you get an idea of where your money goes. Most people who have budgetary problems, have budgetary problems because they actually dont know where their money is going, and just like keeping track of your calories ends up making you eat less. Keeping track of what you spend will end up making you spend less frivolous purchases? So, you keep a spending log and some of your purchases will be month to month, but other purchases will only come up once a year, and then you can plan for those as they come up and budget for them a little bit each month.
What is the key to living within a budget?
David John Marotta: The key to living within a budget is making sure that as your paycheck comes in you only spend 65% of it. Most people think, well, why cant I spend a 100%? Many people are very proud of the fact that they dont get into financial debt because they dont run up their credit cards, and they live within a 100% of their budget. The key to a budget is living within 65% that leaves 35% for other things and heres where it goes. 10% goes into retirement savings, and you are not going to see that again for a while, 5% is going to go into taxable savings because although retirement savings is good, taxable savings is what you are going to need to live off of, if you lose your job or you need to buy a house or other purchases like that, and that leaves another 20%, 10% goes into charity, giving money away and the last 10% goes into big purchase and this is the category that most people run into problems with. Big purchases are the kinds of thing that will swamp your budget if you dont budget for them. So, thy are things like the car brakes, the roof leaks, you need a new carpet and most people who are living off a 100% of their take home pay, then when they have some emergency like that, they end up paying for it, and then everything else starts backing up on your credit cards.