How to Budget

You know that you’re a budgeting freak when you get excited about this topic like Steve Welker does.
“I really believe in the importance of budgeting.  I’ve seen it reduce stress, and help people achieve financial goals that they never thought possible” says Steve.
While few argue against budgeting, few people take the time to prepare budgets and stick to them.  If you’re interested in budgeting to pay of your debts, reduce stress, or increase your savings, learn more about the 3 step budgeting process described below.

Step 1 – Understand your spending

Understanding your current actual income and expenses is critical to a successful budgeting process.  For example, it’s not realistic to set a monthly grocery budget of $200.00 per month if your currently spending $600.00.  We recommend knowing what you’ve spent in each of the last 3 months in order to create a realistic and achievable budget.  This way, you can average your expenses so that odd anomalies such as holidays or special events don’t skew your results.
If you often use cash you can record each expense in a notebook or spreadsheet every time that you buy something or simply save every receipt and tabulate them at month end.
If you have a free bank account and use your bank card for every purchase than you can wait for your bank statement at month end. Your bank statement will serve as a summary of all of your expenses that you can allocate to different expense categories.
Once you’ve accumulated 3 months worth of data, allocate each expenditure to a category such as groceries, gas, rent, utilities, entertainment, etc.  You don’t need dozens of categories, a few will suffice.  Average each expense category based on the actual amount you spent in each of the last three months to understand what you’re spending.

Step 2 – Set Goals and Create a Budget

A budget is the map that you’ll follow to reach your goals.  A map isn’t helpful without a destination, and a budget isn’t useful without financial goals.  Set some financial goals to work towards by deciding where you’d like to be financially in one year, and in five years.  To do this, set one or two short term goals to be achieved within 12 months, and one or two long term goals to be achieved in 5 years.

Common short term goals are paying off a debt, saving an emergency fund, or saving for a vacation.  Typical long term goals are getting entirely out of debt, buying a home, or saving for retirement.

Once you know what you spend, and set your goals, you can build a realistic budget to achieve those goals.  To achieve your goals, you may have to change some of your habits.  For instance, if you’re currently earning and spending $2,000 per month, but want to start saving to buy a home, you’ll need to reduce what your spending so that you have money left over to save for your down payment.  This may involve some tough decisions such as consciously deciding to eat out less, bringing your lunch to work, or switching to a no-fee bank account.   For a list of money saving tips to free up cash, read our article here.  If you’re a senior citizen, we have listed additional money saving tips here.

Your budget can simply be written in a notebook that you refer to on a weekly or monthly basis, or in a spreadsheet on your computer.  It doesn’t matter how you document your plan, only that you have one and refer to it often.

While we recommend budgeting monthly, it can be helpful to refer to your budget and plan each pay cheque as you receive it to stay on track.  For more information on planning your pay cheque click here.

Step 3 – Monitor your spending

Unfortunately, many people who complete the first two steps fail to complete this third step.  Without monitoring your spending it is impossible to know if you’re sticking to your budget and on track to achieve your financial goals.  There are a number of ways to monitor your spending and we’ve written all about them in a separate blog post found here.  If you put your map away at the beginning of the trip there is a good chance that you’ll get lost.  Keep your budget handy, refer to it often, and you’ll be sure to stay on track and get to your financial destination.

Conclusion

We’d like to commend you for reading this post.  The only thing standing between you and your financial goals is getting started. Budgeting will get easier with each passing month.  Don’t be afraid to tailor your system to what works best for you.  The most important thing is to know what your spending and stick to your plan as best as possible to meet your financial goals.
We wish you the best of luck and are truly confident that you can achieve your financial goals whatever they may be.