Save Budgeting

How Budgeting Forms the Basis of Your Financial Plan

Julie Fox  |  June 14, 2022

Budgeting isn’t just about tracking expenses – it forms the basis for helping to achieve your financial goals.


Budgeting isn’t all about allocating a certain amount of money towards different expenses.

It’s important to look at budgeting in a broader sense. Budgeting is about determining a proper allocation of capital across your entire financial situation. That includes expenditures like housing, automobiles, clothing, and restaurants, but also investments and saving for retirement. 

At UBS, we believe it’s 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 ‘must-haves’ like groceries, rent, gasoline, clothing, car insurance, or other expenses that you can’t live without – these are necessities 

– 30% goes to discretionary spending like entertainment or shopping

– 20% goes to savings and investments

These percentages are not set in stone, but they provide a benchmark to compare your spending to. 

Notice how this framework extends beyond any one particular expense category, like restaurants or travel, and accounts for broader areas of your financial picture. 

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

Following this framework may require the assistance of a financial advisor, who can analyze your spending and tabulate how much money you are spending on necessities, discretionary spending and 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 the most important for your long-term financial wellness. 

For this category, you may already contribute to a retirement plan through your employer. The contributions to your retirement plan are automatically deducted from your paycheck and directed into that account. 

During your expense review, you may find that your retirement contributions account for less than 20% of your income. In that case, you may want to contribute more money to your retirement in order to meet the 20% savings and investments budgeting threshold. 

You may also find that you’re able to allocate even more than 20% of your income towards savings and investments. Because 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 being removed from your paycheck and directed into it, investing money outside of this may not be so simple.  

A financial advisor can help guide you through the investing landscape and manage your investments by selecting stocks, bonds and other investments that are in-line with your financial risk tolerance. 

While the stock market was relatively smooth throughout 2021, 2022 is off to a volatile start. In actively managing your investment portfolio, a financial advisor can take steps to help ensure that your portfolio is able to withstand volatility and navigate the challenges markets face today, which include 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 summarize, just 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. 

Regardless of how much money you earn or how close you are to achieving your financial goals, knowing where your money is going each month may just be the most important part of financial planning.

Editor’s note: We maintain a strict editorial policy and a judgment-free zone for our community, and we also strive to remain transparent in everything we do. Posts may contain references and links to products from our partners. Learn more about how we make money.

Next Article: