The word “budget” is probably one of the words that people hate hearing or using the most. It could be because it gives off the semblance of a contained lifestyle or a mentality of limitation. People don’t like that. No one wants to be told how much they can spend or what they can afford. Some would rather wait until next month or next year to look at their finances.
Here’s the thing, your finances aren’t going anywhere. Just because you don’t look at where your money goes doesn’t mean that everything is taken care of on that front. This could not be further from the truth because your money is like a toddler; if you don’t keep an eye on them they tend to create chaos rather quickly, and in the case of your money it will find a way to spend itself very quickly!
So the main question people have is rather quaint: Do I need a budget?
Unless you have a few million in the bank or won Cash for Life, I hate to break it to you but you need a budget. Here’s the thing though, everyone has a budget, and whether they stick to it or not is a whole other question.
Now you might strongly disagree because it gives a mindset of limitations, but what if you changed the terminology from “budgeting” to “tracking you’re spending”? Think of it as a way to improve yourself rather than the limiting yourself. People want to bring out the best in them and try to make their situation better than the way it was the day before.
Let’s say you wanted to lose some weight, but if you are still eating everything that you see not caring about the caloric intake or your macros, odds are you probably won’t get too far. So why not take a few minutes and track your progress. You aren’t going to lose all of that weight overnight, but if you worked on removing somethings from your routine that were holding you back, you would be more focused on achieving your goal and getting to your targeted weight. It’s the same concept with your finances. If you want to get things under control, you need to know where your money is going.
Why not treat your finances as if you were running a business? Every business has a budget and they have the goal of turning a profit every month. In this case, instead of you turning a profit every month, your goal should be moving towards a position of stronger financial stability and away from a paycheck to paycheck lifestyle.
Let’s have a look at the average Canadian household and see how their money is being spent by category.
Most of the money is tied up in a combination of 4 categories. Those categories are shelter, food, transportation and taxes. Those categories account for roughly 65% of the average Canadian household’s income. Budgeting shouldn’t feel like you can’t enjoy the small things in life like a coffee from your favorite coffee shop or drinks out with friends. The issue with 90% of budgets isn’t the $5 expenses, unless they are recurring, it is often the issues are with the $500+ expenses.
There are ways to contribute to lowering all of these sections. There is always something that can be done if you think you are overspending in certain categories. Here are a few tips and tricks that I have used.
Spending too much on your housing expenses? Maybe you have too much living space or you are trying to fill the house for the family you want rather than the family you currently have. Or if you have extra rooms, why not rent some of them out to lower your living expenses and boost your own cash flow.
Spending too much on food? Most people tend to lump their eating out money into this category as well and that is likely the first part of your spending that you should be able to reduce. It has become somewhat normalized to eat out multiple times a week. What if you only ate out once a week instead of 3 or 4 times? You should be able to drop that category by a couple percentage points and free up some money for other areas.
Spending too much on transportation? There are plenty of ways around this! Maybe you have a car payment that comes out every two weeks. What if you didn’t need your car because you lived in an area of town that has good public transit? (If you live in Canada, you might find this funny because it doesn’t seem like any city has good public transit). Instead of having a car, why not bike everywhere or walk? You get the dual benefit of saving money not having to drive everywhere while paying for parking but you are also getting some exercise out of it as well.
An easy way you could do this is by combining some of your categories to try and really pear them down. What if instead of living a 30 minutes from the office, you moved to a place that was near your building, allowing you to sell your car and walk to work. It seems crazy to some to do this, however if you are intentional about minimizing some of these categories there are ways of combining them with creative lifestyles that will allow you to maximize your budget.
Flexibility is a must when you are designing your budget. Make sure that you include things in it that make you happy and that you enjoy. Don’t slash everything to the bone and try to live with a tight wallet or you may end up feeling burnt out. There has to be some flexibility in your budgeting. You have to keep in mind that you need to enjoy life a little too.
What about my Debt?
On the graph above there wasn’t no debt that was listed out on it. It is individually broken up into the categories already. Your car payment is tied to your transportation costs, credit card debt is possibly in miscellaneous, and maybe your student loan debt is in your education portion.
Debt is extremely common and it comes in all shapes and sizes. You should always try to limit and remove your debt as quickly as possible. Doing that will allow you to spend your money how you would like rather than having the obligation to pay off your debts.
If you need a new car but are barely able to scrape by with your bills, you cannot afford to lease or finance a new car. It doesn’t matter if you are offered 0% financing for 48 months, you are still making a monthly payment that will already have you strapped for cash and living paycheck to paycheck with hopes no other unforeseen expenses arise.
If you have debt, you should focus on eliminating it as quickly as possible. Debt hanging over people is what gives them the pit in their stomach, causing them to be unable to look at their finances.
If you have debt, get a piece of paper and list them all out. Include all of the information you think that you need to know including:
- Who is the debtor?
- How much is the outstanding balance?
- What is the interest rate?
- Is there a time frame on the loan?
- How much is the minimum monthly payment?
It’s important to have everything listed out so that you can see exactly where you have debt and who you owe money to. It’s going to be scary to list everything and see how much is owing. Once you have this list[BK2] , focus on your debt as fast as you can. Doesn’t matter if you are using the debt snowball technique (making minimum payments on all debt, then paying off the smallest debts first to get them out of the way before moving on to bigger ones.) or the debt avalanche technique (making minimum payments on all debt, then using any remaining money to pay off the debt with the highest interest rate.).
Once you start eliminating your outstanding debts, you will see that your budget begins to get less strenuous and the weight of debt will start to lift off of your shoulders. Once the small battles are out of the way, the game gets a lot easier.
Looking for Help?
There are apps that will help you track your spending as well. If you are looking for budgeting tools, there are plenty out there. Mint or You Need A Budget (YNAB) are two popular apps. If you don’t want to use third party applications, most of the major Canadian banks now offer their own version of tracking apps that will link to your accounts and send an alert when you are spending against your budget . These are handy tools that people use every day. If you are someone who enjoys tracking things yourself, you can always use a cloud-based spreadsheet (e.g. Google Sheets) to track your purchases on the go, a basic Excel sheet, or just a readily accessible journal to write in.
Allocate a little time at the end of each month to review your expenses for the month. Doing this will allow you to get a clear idea as to where your money is going and how it is being spent. If you don’t track it and don’t give your money a purpose, it will find a way to spend itself. This does not have to be long, even 20 minutes of either logging your info or taking a look at possible future expenses will go a long way towards getting your finances in order.
Odds are after a few months of doing this you will start to see patterns in your spending that you might feel you should pay more attention to. Take a look at your subscription services. How many of them have you used in the last month that justify the cost? This is a perfect way that companies have succeeded in getting money from people. Perfect examples are gyms – if you haven’t been to the gym in the last 3 months (possibly more with COVID-19, but this is more in general), why are you still paying for it? Go cancel that right away and stop throwing away your money. There are always categories that people can cut back on. You don’t need to have everything in life. You just need to have the elements that bring you value and happiness.
If you think you are overspending in a category, try reducing or cutting some elements out for a bit. Eating out too much? Try planning out your meals for the week or try making the meal you would typically order-in.
Reviewing my spending
I like to take about 20 minutes on the first of the month to do a brief review of my spending from the previous month. While looking ahead to my next month, I ask myself a couple questions:
- Are there any special events that I need to be aware of? (Birthdays, holidays, celebrations, etc.)
- Are there any bills due this month that aren’t normal occurrences? (Property Taxes, License Plate Registration, etc.)
- If I over spent in a category, is there a reason for it?
- Were there any outliers or is it the beginning of a new trend possibly?
I like to treat my spending like a game. My goal is always trying to grow my gap between income and spending so that I can invest the difference. The more that you can grow the gap between your spending and your income while investing the difference is the key to a life of abundance. This is the secret equation of the wealthy that has been mastered by millions.