That one tip that seems to be in every personal finance article? Budgeting: the unsung hero and quiet champion of financial advice. Sure, on the surface, budgeting may seem as exciting as watching paint dry. However, beneath its mundane appearance lies an incredibly important tool that can transform your financial position. Budgeting isn’t just about limiting spending or tracking every penny spent; it’s about gaining control, creating a plan, and working toward financial peace.

In this article we’ll cover:

• How budgeting can lead to financial freedom
• Assessing your current financial situation
• Categorizing your income sources
• Setting clear goals
• Building your budget
• Tracking your spending
• How to review, adjust, and stay flexible

How Can Budgeting Lead to Financial Freedom?

Budgeting allows you to zoom out and get a clear picture of your finances as a whole—including how one individual part affects the other. It unveils where your money comes from and where it goes, providing you with the knowledge needed to make necessary changes and informed decisions. Without a budget, it’s easy to fall into a cycle of overspending, as you’re never fully understanding the effects those expenses have. Getting organized helps you allocate funds purposefully, reducing the likelihood of impulse purchases and common financial mistakes. By setting goals within your budget, you’re actively working toward your dreams. Whether it’s buying a home, traveling, or saving for retirement, budgeting helps you turn aspirations into achievable milestones. And when life throws you the occasional (or frequent) curveball, a well-crafted budget has your back. Here’s a guide to unleashing your ultimate financial sidekick: the budget.

Assess Your Current Financial Situation

Embarking on a journey toward financial stability through budgeting begins with taking a thorough look at the battle scars of your financial past. Think of this as an opportunity to learn from your own mistakes and set yourself up for a new chapter in your financial life! Start with a meticulous evaluation of your assets (your cherished financial holdings), and your liabilities (the obligations that constantly knock on your financial door). Take a look into your cash flow (the movement of money into and out of your finances) and subtract your income against your expenses. This allows you to gain invaluable insights into where your money streams in and out, making way for informed decision-making when forming your budget.

Your Current Financial Situation = income (assets) – expenses (liabilities)

Categorize Income Sources

The next crucial step is to categorize your income sources. This means not only recognizing where your money is coming from, but also distinguishing between various types of income streams. A huge help in this process is identifying the difference between passive and active income. Passive income, earned with little to no effort, can include investments, rental properties, and CDs (Certificate of Deposits) while active income involves direct work and participation, such as salaries. Establishing a balance between the two is a great way to increase financial stability. It’s a good idea to look for ways to diversify your income streams and explore opportunities for passive income, which can provide a solid foundation for meeting both your short-term and long-term financial goals.

Set Clear Goals

Setting clear financial goals is key when it comes to effective budgeting. Distinguishing between short-term and long-term goals allows you to make a sustainable plan. Short-term goals could be something like building an emergency fund or paying off credit card debt, while long-term goals are things like buying a home or a retirement fund. When prioritizing goals, consider their impact and urgency. Allocate resources toward short-term objectives that require immediate attention, while also consistently investing in long-term aspirations. This holistic approach ensures that you’re not only achieving immediate financial stability, but also laying the groundwork for your future needs.

“When it comes to setting clear financial goals, my advice would be to start by taking a look into what truly matters to you and understand your financial well-being,” says Justin Wentz, Personal Banker at Cornerstone Bank. “Then, prioritize your goals based on what’s most urgent or impactful. For example, paying off high-interest debt might come before saving for a vacation.”

A helpful way to go about this is to create measurable milestones along the way. This not only makes each goal more manageable, but it also gives you that sense of accomplishment and validation we all need—like the grown-up version of getting a gold star! Another helpful touch when finding a balance between short- and long-term goals is to automate your savings. This ensures that you consistently allocate funds towards your goals without even having to think about it. We can barely remember where we put our keys most days, so the less thinking the better!

Build Your Budget

Now you’re ready to construct your budget! “A reliable framework that we suggest is the 50/20/30 rule”, says Justin. “50% of your income goes toward essentials like housing, groceries, and gas, 30% to wants like vacations and dining out, and 20%  to debt repayment and savings. This helps keep your immediate needs on track while also building towards your long-term goals, like retirement or buying a home.”

To help you get an idea of what this looks like, here’s an outline: Personal Monthly Budget Template. If you are an existing customer, please take advantage of the budgeting tool offered on our online banking platform.

Track Your Spending

Do not underestimate the importance of tracking your spending. Whether your preferred tracking tool is pencil and paper or the finest expense-monitoring software, consistency is key. By regularly monitoring your spending, you gain insights into your financial habits and priorities, allowing you to make informed decisions. Your budget is subject to change, whether because of seasonal expenses, unexpected costs, or shifts in your goals.

Review, Adjust, and Stay Flexible

Use periodic reviews and adjustments to fine-tune your financial plan. Be sure to admire your progress and achievements (remember that adult gold star) and identify areas for improvement. Being prepared for life’s changes and willing to adapt is crucial. Whether it’s a career shift, a medical expense, or a new family member, flexibility is your best friend. Your budget can remain effective and relevant, even when your circumstances change.

“I recall one couple who wanted to buy their first home but felt they couldn’t with their current finances,” Justin shares. “We worked on a budget that covered their current monthly expenses and also allocated a small amount of money each month to their savings account. When they realized that home ownership was a real possibility for them, they stuck to their budget, making changes when needed, and within a couple of years of budgeting and working on their credit scores, they were able to qualify to purchase a home. Small changes to your spending habits and setting goals can make a huge impact over time.”

And, when life does throw a curveball, Cornerstone Bank is just down the street and ready to help.

Take the Next Step Towards Financial Freedom

Ready to take control of your finances and start your budgeting journey? Contact us today to speak with one of our personal bankers, like Justin Wentz, who can guide you every step of the way. Whether you need help setting clear financial goals, building your budget, or reviewing your spending habits, we’re here to support you.

Justin Wentz
VP Senior Personal Banker
Direct: 701-751-4643
NMLS: 997665