What is a budget and why should you have one?

According to mymoneycoach.ca budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do.

Budgeting is a great tool to allocate monies aside for having fun in life while making sure the bills are being paid and your debt is being reduced. Budgets are flexible in that every person or family will have a unique one; one size does not fit all.

We’ve seen how costly debt can be and having a game plan in place will allow you to tackle your debt effectively while letting you have some fun along the way.

Illustrative example: how to budget

John and Jane Smith together earn $70,000 of after-tax income from their employers. The Smiths would then multiply the percentage allocations per expense category listed below by their after-tax income in order to determine how much they are able to spend in each category for the year. Divide the annual budget amount by twelve and the Smiths have determined how much per month they are able to spend in each category.

Expense % of after tax income Annual budget amount ($) Monthly budget amount ($)
Housing (mortgage/rent, property taxes, etc.) 25 17,500 1,459
Savings 5 3,500 292
Investing 5 3,500 292
Utilities 5 3,500 292
Cable/internet/phone 5 3,500 292
Food 10 7,000 582
Transportation (parking, fuel, insurance) 10 7,000 582
Recreation 5 3,500 292
Debt 5 3,500 292
Clothing 5 3,500 292
Medical/health/gym 5 3,500 292
Personal 5 3,500 292
Cushion 10 7,000 582

Figuring out your after-tax income for most people takes little time; take a look at the payroll cheques you receive in the month to determine how much you receive each month and multiply by twelve.

Flexibility of your budget

Your budget is YOUR budget, not your neighbours, not your co-workers, it’s YOURS. The budget is flexible to adapt to where you are in live and what your goals are!

What if John and Jane Smith are retired and no longer have a mortgage? Well that expense allocation decreases a lot and can be allocated to other areas such as recreation or personal to feed their travel bugs!

What if John and Jane are a newly married couple that enjoy renting in a nice neighbour where they can walk to work? Their transportation expense allocation should be lowered and be moved to clothing as they like to dine out and head to the latest art exhibitions.

The what ifs are endless because the budget is designed for your life. No matter what stage you are at this tool is adaptable.

Another flexibility feature is the cushion expense. This item can be used to donate some needed money to a charity of your choice and also provide some emergency money each month you can add to your emergency fund or use for an unexpected spike in an expenditure category. Maybe you and the family scooted away for the weekend because you are adventurous; the cushion expense may be just what was needed that month to let you be the people you are.

Reasons to love budgeting

  1. Budgeting is fun. We spend a lot of time planning out our months, weeks and days ahead of time, allocating our time between family, friends, travel, hobbies and work. Use this time to create your budget, see how much money should be allocated to each category.
  2. Budgeting involves dealing with people. We are social creatures and making your budget can be a social activity. Sit down with your loved ones and hash out the budget for the upcoming month.
  3. Budgets can be revised. You are not expected to build the master of all budgets; your budget is built for your life and life changes and so should the budget. There is no right answer and if you put an honest effort into making your budget with the right help you can achieve success and set yourself up for success.

Real world tips for creating your budget

  1. Determine what your needs and wants are. Needs and wants are very much different. You need a roof over your head and food in your stomach. You need to keep your debt at manageable levels so you can achieve financial success. Wants are items you can forgo if you really needed to.
  2. Plan ahead. Budgets are great tools for planning ahead. You are cheating yourself if you make your budget halfway through a month or at the end. Take a look to see what’s happening this month. Are any holidays upcoming? Is there a birthday for a special person in your life? Do you plan on ending your credit card debt?
  3. Enlist the help of your family. Your spouse should be involved in this process, finances are to be handled together. That other person can help simplify the process and help bring up questions that should be answered.

Thank you for following Simple Money Living, a ten article series to achieve financial freedom. We’ve made in half-way from learning how to setup our emergency funds, living debt free as much as possible, learning what is SMART debt and how to use to it to not overpaying for a home. Building your budget is a fantastic tool to taking those steps towards your financial freedom.