Why Should I Make a Budget?
Building a budget may seem tedious, but it can actually be your crutch. Have you ever started a project without a plan (or guideline) in place? You probably didn’t get very far. You might have even felt overwhelmed, disorganized, and frustrated. A budget is your action plan. With a budget, you can see where you sit and where to improve, while having a newfound appreciation for those dollar signs. In other words, a budget can give meaning and guidance for every cent you earn and spend. Many people even say they found “extra” money after they created a realistic budget and stuck with it!
Budgeting Tips to Consider
First, think about your short-term and long-term financial goals. Short-term goals can include paying off your credit card or building up an emergency fund. An emergency fund should provide you with enough money to cover your living expenses for 3-6 months. On the other hand, some long-term goals can include paying off student loans, saving up for a house, kids, a car or even a well-deserved vacation.
Track and understand where your money is going. Before you even make a budget, keep a log of all your purchases made for at least one month prior to your budget. However, tracking your spending for three months is best for noticing any patterns and trends you should consider.
Try this exercise:
- keep track of everything you buy, from groceries to a daily cup of coffee
- keep a copy of the bills you pay during this period
- try dividing your expenses into 2 categories: “needs” and “wants”
Small changes to spending habits can have a major impact on your budget and your ability to save.
Next, define your “wants” and “needs”.
- A “need” is something that is necessary, required or essential. For example, a roof over your head, clothing, food, or medication.
- A “want” is something that you’d like, but don’t necessarily need. For example, meals at a restaurant, a trip, a gym membership, or designer shoes.
Needs and wants aren’t the same for everyone. One person’s “want” may be another person’s “need”. For example, if you live near a bus route, a car may be a want rather than a need. However, if you don’t have access to public transit and can’t cycle to work, you may need a car.
An Example Budget Guide
Money can only be saved, spent, or shared. So, a good rule of thumb is the 70-20-10 structure. This guide splits up your income: 60% goes to expenses (both wants and needs), 30% goes into savings, and 10% is donated. These numbers are adjustable based on your monthly income, what your goals are, and how much you want to contribute to each category.
Here’s an example of a budget that follows this rule:
- rent/house payments – 25%
- Utilities – 7%
- Phone and internet – 10%
- Groceries – 10%
- Transportation – 8%
- Installment payments (e.g. credit cards, student loans) – 6%
- Clothing and self-care – 4%
- Savings – 20%
- Donation – 10%
Of course, every person’s (or household’s) budget is different. You may have things on this list that I didn’t even consider (e.g. where are pet expenses or gym memberships?). But, as long as your budget equals 100% and doesn’t go over, you’ll be in the black for that month. Brownie points if your budget is under 100% – more savings! A true budget reflects not only how you spend your money, but also requires you to be mindful of how you use it to further your goals.
How Do I Stick to My Budget?
Once you have a budget laid out, you need to stick with it to see results. Like exercising, it takes commitment and consistency.
Here are some tips to help you:
- Keep all receipts and bills
- Limit your spending as much as possible to what your budget allows
- Update your budget with any changes (e.g. pay raise or bill increase etc.). Be sure to do this as soon as you know about it (or set a reminder in your calendar) to avoid surprises.
- Compare your budget to what you actually spend every month and adjust accordingly.
Some questions to ask yourself when you adjust your budget:
- Are there large differences between your actual spending and your budget?
- Which categories have the largest differences?
- Are these differences due to an unusual situation or is this likely to happen each month?
- Can you save enough money to reach your financial goals or pay off your debts?
With these budgeting tips in mind, you’ll be well on your way to gaining control over your money!
There you have it. Solid Ground’s basic budgeting tips that everyone needs to know. Remember, everyone’s budget is different and every budget evolves over time. Don’t beat yourself up if you happen to go over one month, either. If that happens, just adjust your budget for the next month to reflect the over-spending of the previous month (just don’t make this a habit!).
Are you eager to start owning your own finances? Do you see yourself buying a home within the next chapter of your life? Solid Ground Mortgage Agents can help you do that! Reach out to our qualified experts today to find out how we can help you achieve your financial dreams.