Why create a budget in the first place?
It began about the time we graduated from university. I was researching methods to track my income and expenses with the intent of paying off my $30K student loan as quickly as possible. I read about this hot new start-up that was making waves for its ability to gather information from various financial institutions and display trends and based on transactions. It was a great idea but at the time, Mint.com was only available in the US so I took to spreadsheets to calculate my numbers.
My budget tracking started out strong but eventually the tedium of entering receipts ate away at my resolve. My ad hoc tracking resulted in an inaccurate representation my financial status. At the end of the day, I was satisfied with my financial situation as long as my expenses didn’t exceed my income. Shortly after Emily and I wed, Mint finally made its debut in Canada. We eagerly signed up and set off to meticulously track our joint expenses. We were much more successful this time around since the tracking was directly linked to our accounts. After a few months, we learned that we were spending more than expected on seemly small things, like an astonishing $300 on eating out each month! Obviously, some changes were in order.
I currently make my living implementing reporting tools for industrial settings. These solutions allow information to be gathered from various sources and consolidated for trending, analytics, and reporting. Now I’m not trying to bore you— Emily glazes over whenever I try to explain my day job— the bottom line: knowledge is power. With historical data, we have the ability to make better informed decisions to optimize operational efficiency. Through the industrial solutions, companies can predict equipment failure and execute preventive maintenance resulting in some serious savings. How does that apply to our everyday financial well being? If you keep track of your budget, you can identify your own good and/or bad trends and use that information to plan for a financially sound future.
The Purpose of Budgeting
If it’s so tedious to keep track of everything, why would anyone want to put together a budget? I’m glad you asked. Through budgeting, you:
- Understand your spending habits. You want the truth? Maybe you can’t handle the truth.
- Build discipline, control spending and retire outstanding debt. Once you know how much it takes for you to live, whatever is left can be allocated towards paying off any loans.
- Define and prioritize financial goals. Save for a that trip you’ve always wanted to that down payment on a place to call home.
- Plan for the future, improving on what works and avoiding past mistakes.
How to Create a Budget
Getting Started
Our monthly budget was created with a traditional top-down approach. This means figuring out the monthly income and assigning each dollar to an expense ahead of time. The idea is for income minus expenses to equal money left over. To start:
- List out all income streams anticipated for a given month. Our income streams consist of our regular pay cheques from our jobs. That was easy.
- Add up fixed recurring expenses. For us that’s our tithe, mortgage, property taxes, condo fees, and internet and phone bills. This could also include property/car insurance and any regular debt repayments.
- Add up discretionary spending: food, gas, entertainment, gifts, grooming and personal/kid stuff.
- Include all the anticipated one time expenses for the month: wedding gifts, Christmas, car registration, as well as potential expenditures such as car maintenance.
- Take the number calculated in Step 1 and subtract the expenses from Steps 2, 3 and 4. Anything left over can be allocated towards savings goals.
There we have it, a monthly budget!
Budgeting in Three Simple Steps
Once we had everything written down, we use the following three steps to maintain and improve on our budget.
Track: Use a tool to track the expenses. We use Mint.com and our own spreadsheets. We’re also currently giving You Need A Budget (YNAB) a try.
Analyze: As we recognized patterns in our spending habits, it was easier to identify and mutually decide on areas in which we could stop the gravy train. Actually tracking and understanding where the money went has helped us realize the true value of what we bought.
Rebalance: Revisit the budget to make adjustments. Circumstances are always changing and life has the tendency to get in the way of our plans. Each month is different, so plan accordingly.
Budgeting is an ongoing process and it takes some tweaking to get it working just right. Give it some time and it will work out in your favour.
Do you have any tips to help make budgeting easier?
I think everyone should track every penny of their spending and income at least for a few months every so often to get the whole picture as you say.
However, the time it took to budget eventually seemed like wasted time to me because my wife and I both are pretty good with money so we don’t typically overspend although we have definitely gone through some lifestyle inflation in the past few years where I’m getting to the point that I think doing a budget again might help.
Ultimately, I’d rather spend my time on income generation and big picture thinking than budgeting. I’ll avoid it as long as I can and go back to it every so often as necessary.
I can see how budgeting can become a chore if you have your spending under control. Maybe at that point you work a different kind of budget where all your savings are automatically deducted and then you can spend the rest guilt free.
Interesting that you spend your time on income generation since your budget is under control. Sounds like a good idea for those who don’t know what would come next!