Budgeting 101

by Roy Wiersma

Budgeting is one of the most powerful tools at your disposal when it comes to mastering your money.  When done correctly it can reduce stress, improve quality of life, and create new opportunities.  This article explains how to get started with budgeting and lays out some tips for success and warns of common pitfalls.

Simply put, budgeting is planning and tracking your expenses to ensure that they are less than your income.  This can get complicated when there isn’t enough money to go around or there is a larger surprise expense.  However, most of the time budgeting is a self control tool that helps halt bad spending habits.

Getting started

1. Determine your total monthly income.

2. Tally up your guaranteed monthly expenses and put them in order of importance.  Housing, car payments, phone bill, insurance, other required debts. 

3. Next, tally up the variable expenses, groceries, power bill, water, fuel etc(these vary slightly, but usually not much) use the highest numbers

4. Compare the values to your total monthly income and see what is left over.

5.  Allocate money to the emergency fund until you have at least $1000.  This amount will need to be updated and increased as your financial situation evolves.

6. Next start paying down debt and/or investing a portion of your extra money.

7. Budget for leisure activities, entertainment vacations, etc

8. Create a flex category of spending of about $100, this is for those spontaneous activities that cost some money but are well worth the expense. (this is sort of a miniature emergency fund).

Tracking your budget

There are dozens of ways to track your budget.  There are numerous apps you can use.  Cash tracking, separate accounts for different expenses, envelope methods.  The key to any of these systems is that it works for you and anyone else who has to stick to the budget.  Make sure anyone on the budget is in agreement that the system is enforceable.   

Here is an example.

1. Monthly income $3240

2. Car $240

Housing $1530

Phone $47

Insurance $54

Debt $200

1. Groceries $397

Fuel $124

Utilities $230

Subtotal of the essentials $2622

This leaves $418

If you don't have an emergency fund set up all this money should go to that first.  Let’s assume we have an emergency fund for this example. We will spread the money close to evenly.

1. $118 to paying down debt

$100 invested

$100 for entertainment

$100 flex

Tips:  

-Keep your system for tracking your budget very simple.  The more complicated the system gets, the harder it is to implement.

-Don’t be too hard on yourself in the beginning.  Starting a new habit is sometimes difficult and you may need to try a few things before you figure out what works.

-When making the budget don’t hesitate to try and cut out excess expenses.  This pruning is one of the benefits.

-When money comes up shy, pay things in order of the priority you set for them.

Pitfalls

-Taking on new debt.  It still counts as spending, so avoid new debt, especially credit cards

-If you have a very dynamic schedule your budget may be difficult to maintain.  This is common when traveling or working jobs that have long periods of work followed by long breaks.

-Budget stress.  Follow the budget, but if the thought of going over a few dollars on your power bill stresses you out then you are missing the point.  The goal is to have eyes on your money so you aren’t overspending on frivolous nonsense.  If an expense is larger than expected use the flex category to cover it.  If it’s bigger than that, then adjust your budget for the next month, so it doesn’t happen again.

-The emergency fund is only for real emergencies (car repair type stuff)

-If your income increases the new extra income will likely end up in leisure spending.  Try to spread out extra money before you get in the habit of spending it.