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Elements of budgeting

by | Nov 5, 2021 | SELF-PUBLISHED

First steps to financial literacy

For most people, “budget” is the ultimate financial six-character four-letter word. It’s viewed as a distasteful chore, and something to be avoided. And often, even if an attempt at budgeting is made, it’s soon set aside as something that imposes an unwanted strait-jacket on an otherwise trouble-free lifestyle. That’s all wrong, of course. The basic building block of financial literacy is the personal budget. And, in fact, a true, working budget is more of a roadmap, a bird’s-eye view of your income and expenses that can highlight areas of possible trouble and help you avoid financial difficulty. Here’s how to go about making a personal budget that doesn’t feel like prison.

How to create a budget

Here’s some strange advice. Don’t start your budget with an actual budget! Instead, think about your goals, both short-term and long-term. What do you most want to achieve financially in the next couple of years? Pay off credit cards and other loans; reduce spending and expenses; set aside money for an emergency fund? What about in the next five years? Do you want to save for a new car, a down payment on a home, tuition for children, that dream vacation? 

Next, distinguish between “needs” and “wants.” A “need” is a necessary expense, for example, food, housing, clothing. A “want” is discretionary, for example, a daily expensive latté or eating out a couple of times a week, expensive designer clothes, short Uber trips when transit will do, and so on.

Once you’ve made these initial decisions, you can begin making a budget to see how you can attain those goals. 

Income and outgo

First, assemble as much of your financial paperwork as you have for the month. This will include pay stubs, bank statements, and investment statements for income, and utility, credit card, and other bills, as well as mortgage and loan statements for expenses. If you haven’t kept your debit or credit receipts for groceries and other household spending, check your banking history online and print out the last 60 or 90 days’ worth.

Now try to get a handle on your income, expenses, and savings. Determine how much income you have. If you receive pay from an employer, use the “net” amount, that is after taxes and withholding. If self-employed or have variable income as a gig worker, use the net income for the lowest-earning month over the past year to give you a margin of safety. 

Next, pin down your monthly expenses, divided into “fixed” and “variable” categories. “Fixed” expenses include rent or mortgage payments, credit card payments, car loan or lease, utilities (don’t forget Internet and cable connections), childcare, forced savings (such as RRSP contributions through group plans), and so on. “Variable” expenses are those that fluctuate from month to month, such as groceries, entertainment, clothing, eating out, auto and home maintenance, and so on. perhaps again by consulting your bank statements, determine how much debt you paid off over the past year. Mortgages and credit card debt are the most important items to nail down. 

Pull it all together

Totalling your monthly income and expenses in two columns, you’ll see very quickly where you stand. 

If you have money left over at the end of the month, you are in the fortunate position of having some budgeting flexibility. You might, for instance, consider adopting the “50-30-20” budget plan. This plan allocates 50% of your budget to “needs,” another 30% to “wants,” and the remaining 20% to savings.

But if your monthly income runs out before your expenses do, you have a spending problem – no doubt about it. It may be necessary to dissect your expenses list a bit more to get to the bottom of the problem. Look at those variable expenses first as areas to cut back on – gym memberships that you’ve stopped using, for example, paid streaming services that you never watch, regular data use overages, eating out frequently, etc. 

If trimming the variables doesn’t help, look to reduce fixed expenses. The most common cash drains among fixed expenses are vehicles, consumer loans, and credit cards. Cutting back on these presents a bigger challenge than reducing variable, discretionary spending, but it can be done, with strategies like renegotiating or consolidating loans, economizing on utilities, and so forth. The big thing right now is to pinpoint the problem areas. 

Each of us seems to have one or two more areas in our life where we overspend. That’s okay – it’s your choice. The important thing is to be aware of the areas where you “overspend,” and decide if you are really getting your money’s worth. The Financial Consumer Agency of Canada has a handy budget calculator on its website to help you get started.

You can see now that a budget serves as an overview and roadmap, not a strait-jacket. It’s a good way to get a clear picture of your immediate cash flow situation and help you make a plan to achieve those short- and long-term financial goals.

© 2022 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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