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February 26, 2013
A budget, or spending plan as it is also called these days, is a very basic foundation for personal finance. And yet so many people struggle with budgeting. As someone who has 40 years of experience in banking and credit counselling, I have learned some key principles to budgeting that I would like to share with you.
Budgeting Key #1
One of the biggest reasons why people struggle is that they do not really know where their money is going. In order to create a budget that works you must track your spending. And here is the shocking truth: a budget takes a full year to establish correctly. A year of firsts – birthday and Christmas presents and parties, insurance renewals, heating in the winter and entertainment in the summer, etc. – need to be tracked in order to establish a truly accurate budget.
Many people make a budget by writing down their paycheque income, then making a list of expenses. The expense numbers are based on previous bill statements, and guesstimates or ideals on discretionary spending. Then they stop. They pat themselves on the back, they have made a budget, and then, they wonder why it doesn’t work.
The problem is that this is only half of the process required to make a budget work. There are inevitable costs that people forget about or underestimate, so it really takes a year of thorough tracking of your money to understand where it goes. That doesn’t mean it won’t benefit you from the very first month, it just means the budget won’t be accurate enough to really work overtime.
Budgeting Key #2
On top of tracking your pennies to see where the dollars go, you need to think about where you really want your dollars to be going. This is the second key principle: a budget is not just a list of expenses — a budget is a life plan. Where is your money going now? Where do you want your money to be going now, and in the future? A budget is a roadmap to take your finances (and life for that matter) from point A to point B.
Start with a list of goals, and decide which goals are short term, intermediate, and long term. Then get really specific by putting an exact target date for reaching each of those goals, and an exact cost of those goals. Now you can incorporate these goals into your budget, saving a specific amount for that specific goal each month.
You may realize that your expenses, and debt, are eating up all of your income so that you have nothing left, or not enough left, to put towards your goals. This is the eye-opener, and you now have the power to control your money rather than letting it control you. Take a look at your options: increase your income; reduce your expenses; focus on paying off your debt. (To see how we can help you pay down your debt faster, fill out our quick form.) As well, you may need to adjust your expectations for your savings goals by extending the dates, or reducing the costs of those items.
Budgeting Key #3
The last important key to remember is that a budget is a living document — one that is revisited and constantly updated to reflect your current finances. You cannot develop it for one year, incorporate your financial plans, and then put it in a drawer. There is a rising cost of living, income may increase or decrease, priorities for your goals may shift, and basically life changes — so your budget must change with it. Keep it updated and current, and watch the progress as you start to achieve those financial dreams.
To get started, download this free budget worksheet which I have developed to incorporate these principles. As a credit counsellor, helping people to save money, get out of debt, and take control of their finances is my passion, so I hope you have found this budgeting advice and budget worksheet helpful.
If you are interested in learning more about budgeting, please visit WomenandMoney.com where you’ll find seminars, online courses, and webinars on budgeting and financial education.