First things first
A lot of people find it difficult setting a budget and sticking to it. In fact, many people believe they have a good grasp of their incoming and outgoing without necessarily taking the time to review their spending on a month to month basis.
The art of budgeting is a very important one in the journey to building your financial wealth. If you have not done this exercise before, this can feel very daunting and perhaps uncomfortable.
However, with the right resources, this can be a fun activity to do by yourself or with your significant other.
In this blog post, we will go over some options and resources for creating a budget and give some guidance on how to go about creating a budget.
One thing to bear in mind through this process is that although there are very many ways of creating a budget, the important thing is to identify the budget method that works for you and to commit to holding yourself accountable to your budget.
Now lets dive right in!
Choose a budgeting method
There are a number of budgeting methods, all of which work really well and deliver the same end result, but it is important to find the one that works best for your style.
My personal favourite is the 50/20/30 method, so let’s start by looking at this method.
50/20/30 budgeting method
With this method you allocate 50% of your income to essential needs like your mortgage/rent, utility bills, credit card payments and everything else that you have to pay in order to maintain a good credit score.
The next 20% of your income is allocated to funding your financial goals. This could be setting aside money to put in your RRSP, RESP, or other registered savings vehicles.
And the last 30% of your income can be spent on anything you want. This can include dining out, fashion, TV subscriptions etc.
I love this budgeting method because it makes it easier to bring your spending in line when you have a target to work with, while also giving a decent allocation to the things that bring you joy.
Zero Based Budget
This budgeting method is perfect for people who have very high self control and are very good at sticking to a plan.
With this method, every dollar is accounted for and allocated to specific things. At the end of each month, there should be no money left over, and there should also be no excess spending above what the income was for the month.
Envelop budget method
This method is great for people who find it difficult to stick to a budget, particularly when they are in the shops.
This is a tricky one to follow because it requires that almost everything be paid for in cash.
First you would need to decide how much you can spend on each category, then label it appropriately and put the allocated cash in an envelop
Once the cash in a particular envelop is finished, you are not allowed to spend any more money till the income level is reset. e.g. new month.
The exception for these will be for utilities and investments which are not paid for in cash.
Steps to Budgeting
- Make a note of how much you make from all your income sources.
- Identify all your expenses and the frequency of spend. e.g. mortgage payments can either be monthly, biweekly, or weekly; and your car insurance may be an annual or monthly payment.
- Set your financial goal. e.g. Would you like to save for a down payment on a house, do you want to start saving for retirement.
4. Determine if you have a shortfall from your expenses or a surplus
5. If you have a shortfall – go through all your expenses and adjust your expenses to match your income. This is usually the hardest part of the process because it requires giving up on a number of amenities or services that you have got accustomed to.
If you have a surplus – determine how you want to invest your surplus funds and what avenue you want to use to invest the surplus.
7. The last step of the budget process in my mind is the most critical. You need to diligently take the time to check how your are doing periodically against your budget.
There are a number of resources that make this process easy, some of which do not require any excel knowledge. See a few of my favourite ones here
Keeping yourself accountable
I hope that you will challenge yourself to setting a budget and see if you can keep to it.
Let me share one trick with you that I have used to keep myself accountable to my budget.
As you may already have guessed, I use the 50/30/20 budget method, and within my 30% want budget, I allocate about $200 a month for a new fashion item or luxury experience, but each month is conditional on me meeting the budget for the previous month.
This has really helped to keep me accountable to my budget month after month.
And I derive a lot of satisfaction every time I meet my budget for the month.
Leave a comment and share what budget method is working for you and how you are keeping your self accountable!
I would love to hear from you.
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