To Budget or Not to Budget, That is the Question

Personal finance is just that… personal. We all have our unique characteristics that affect how we interact with money. Some people operate from a “money burns a hole in my pocket” place and others are happy little savers. Some people never seem to earn enough money and others have extra left over at the end of the month no matter how little they earn. Some people are able to create a budget and stick to it, and others just can’t. I fall somewhere in the middle, I don’t use a budget but I track my expenses weekly so that I know right away if I’m over (or under) spending compared to what I usually spend.

Which are you?

Better question, which would you like to be? The last article I wrote was about anxiety. One of the biggest topics that cause people anxiety is money.

Let’s tie it back to self-care while we’re at it. How can you effectively take good care of yourself if you are living beyond your means and stressed about money all the time?

This is an absolutely critical topic and if you haven’t considered it before, now is the time – it’s never too late to turn your finances around if you have been struggling.

WHEN YOU SHOULD USE A BUDGET

Some people live and die by their budgets and that’s great if that’s what works for them. Others are able to save and spend within their means without a budget. Also great. If you fall somewhere in the middle of these, here are three times when you absolutely should consider making a budget and following it.

You are carrying non-mortgage debt. Any type of debt besides your mortgage means that you are spending beyond your means. If this is you, you should take a few minutes to read Your Debt is an Emergency! After you read that article, build a budget… then reduce all your spending to a base level until you’ve paid off your debt.

You want to save for a large purchase. If you know that you’re going to have to replace your car next year, now is the time to start squirreling away cash for that purchase. Don’t wait until it’s too late then become a chump with a car loan. Same goes for weddings; happy couples don’t need to go into debt to get married, they can save in advance while they enjoy their engagement. Then when they’ve hit the amount they want to spend on their special day, they can enjoy it without having to worry about paying the debt off later.

You are living paycheque to paycheque. If you aren’t spending less than you earn and using the difference to fund your emergency fund, retirement or other large upcoming expenses then you definitely need to start sticking to a budget. Determine where you can cut and start saving.

FIRST FEW STEPS IF YOU WANT TO CREATE A BUDGET

I am going to approach this from the perspective of someone who earns enough to cover their expenses, give and even save a little. I know that’s not the case for everyone in every season and I’ll be sure to tackle how to earn more in future posts but we have to start somewhere.

Let’s take a bit of a dive into a few different ways that you can manage your day-to-day spending.

Create and follow a strict budget
Pay your bills, save a little – then spend the rest
Pay yourself first, then your bills – then spend the rest
Spend like there’s no tomorrow!

I’m sure you can see that these are quite different approaches and would lead to very different future outcomes. None of these is particularly better than the next, unless you have an emergency and aren’t able to cover the cost of it. Always squirrel a little away for when this happens… because life happens.

STEP ONE – TRACK YOUR EXPENSES

You can’t create a successful budget if you don’t know what things cost. Your first task will be to determine your expenses, including your annual expenses like home insurance or what you normally spend on the holidays.

Here’s a list of categories. Yours may be different and that’s ok. Not everyone spends in all of these categories and some might work better combined for you or you may want to call it something different. Go wild. Make this list yours – then do the digging to figure out what you are spending your hard earned dollars on.

Notice that credit card payments and banking fees are missing from this list? That’s because I purposefully don’t choose bank accounts with fees and I pay my credit cards off every month so there are no interest charges or fees. If you do have to add these line items, then you should take a few minutes to read, Your Debt is an Emergency!

Now that you have a list, you can start to populate what you actually spend (see below). Some categories are easy, you probably know how much your rent and mortgage are and they don’t change from month to month. For the rest you can check your bank and credit card statements to see quite a lot of it and then I suggest that you actually track your expenses (including cash) for a few months to determine the variable categories like groceries and entertainment. I track our spending every single week and have done this for 3 years now. I can’t recommend it more, just taking this one action has changed the trajectory of our finances.

Note, this is a $55,000 annual spend (which means that if you live in BC, your gross salary would be around $76,000 unless you have extra deductions) and you’re probably looking at some of it and thinking (no way you’re only going to spend $XX on that each month, I spend twice that much). I have reduced our family spending to $25,000 per year and that’s pretty comfortable for us. It was deliberate and took a little effort but stay tuned as I will take some time going through the steps that I took to get us there in future posts.

STEP TWO – EXAMINE YOUR VALUES

Values spending is the bomb! I approach spending from an “I won’t pay a penny more than I have to for a roll of toilet paper but I’ll spend extravagantly on a trip or experience” perspective. I know what I value. I don’t like having my house cluttered with stuff so I don’t buy much. I don’t need to look like a beauty queen so I don’t spend much on clothes or makeup. But I do want effective cell service, a phone that works, good internet, a warm, comfortable home and good food in my belly. I spend on what I value.

What do you value? Take a few minutes to consider this. Then look at your spending and see if it aligns with your values. There’s a good chance that it doesn’t at least in a couple of categories. And you can do something about that…. Adjust your spending.

STEP 3 – CREATE AND FOLLOW A STRICT BUDGET

Or don’t. Remember, personal finance is personal. If you choose to create and follow a strict budget I commend you. You can use software to do this like YNAB (you need a budget) or use just a spread sheet or even track it in a notebook. I really enjoy following The Budget Mom who guides people through a budget by paycheque method. It doesn’t matter as long as you’re paying attention and doing what works for you. If you try a method and it doesn’t work, then move on to the next until you fall in love with a system and it gives you the spending control that you’re looking for. Some people really need this and it’s good to know that about yourself.

As I mentioned, I don’t follow a budget. I know how much I want to spend each year before any big extras (this year I bought a new car and furniture so it’s over and above our regular spending, last year I had over $10,000 in dental work done so I had to save for that also). By tracking weekly, I always know whether I’m over or under spending and can adjust in real time. Knowing how much you’re spending will also allow you to see how much you’ll need to save for retirement and while that might be a long way off for some of you… it’s not for me so that’s a pretty important thing to know.

WHICH TYPE OF BUDGETER ARE YOU?

Remember the list above? Which category do you fall into? Where would you like to be? At the end of the day the only thing that really matters is that you spend less than you earn so that you can save and invest for emergencies and for the future. How you do that and how long you take to do that are all up to you. Once you figure that out, you do you. You won’t have to be anxious about money and you can add this to all the wonderful ways that you’re taking good care of yourself.

Now go out, curate the life you want, and celebrate all the steps along the way.