So, you’ve decided it would be a good idea to put some money aside so you can let your hair down knowing you won’t have a blue January. Congratulations – now it is time to work out your budget. If, like a lot of people, you’ve never done a proper budget before, don’t worry. You know that instinct that kicks in when you’re doing the shopping or having fun in your favorite online Canadian casino and says “I’ve spent enough”? Budgeting is just taking that instinct and projecting it toward the future, so that you can see that “enough” moment before it comes. A budget is a personal expression of how you use your money – a roadmap to show you where your money goes so you can make it work smarter.
Track your spend
Apart from saving money, there are many good reasons to have a budget. Avoiding debt in the New Year is a great one to start with. Typically Americans take on up to $1000 in new debt for the festive season and half of them are still paying for it three months after the holidays have finished. Other common reasons are cutting down on problem spending, stopping fights about money, not spending what you haven’t got, getting out of debt and finding a way to stop living paycheck-to-paycheck. Just by creating a budget you are more likely to succeed because of the focus, motivation and emotional investment it creates. To create a budget with a realistic chance of success, try tracking your spending for a month. Every time you buy something, write it down in a notebook or a spreadsheet. Keep the receipts so you don’t forget what you’ve bought. If this sounds too laborious (and it is), try using a tracking app like Mint, Dollarbird, and PocketGuard. Also, go over your last two monthly statements for a bird’s-eye view so you have a good idea of what you’re spending on food, rent, transport, entertainment and all the other essentials.
Once you know the reason for budgeting, it’s time to set a specific personal goal. A lot of people have long-term financial goals like buying a house, saving for emergencies, buying a new vehicle, and saving for college, a vacation or retirement. It’s important that the goal should be specific – instead of “buy a new vehicle”, a better goal would be “save $20,000 to buy an automobile for cash” — with a deadline so that you know by when you should have saved the money. You have to use your budget to make sure you’re working toward your goals. How much do you need to save for each one? If you want that car in one year’s time, save $1,666 a month for the next twelve months. Alternatively, saving 20% of your income is a good general plan – put aside 15% for retirement and 5% for the other goals.
Make a choice
Once you’ve decided on what your goals are, you need to decide what kind of budget you are going to make. There are two main choices. The zero-based budget is based on that principle that the difference between your income and your outflow should be zero. The idea is that every dollar in this budget has a job to do. As Dave Ramsay, who popularised the zero-sum budget, writes, “If you cover all your expenses during the month and have $500 left over, you aren’t done with the budget yet. You must tell that 500 bucks where to go. If you don’t, you lose the chance to make it work for you in the areas of getting out of debt, saving for an emergency, investing, paying off the house, or growing wealth. Tell every dollar where to go.”
The zero-sum budget is great if you want to be strict on yourself to avoid overspending and meet your goals. Then there is the 50-30-20 budget. Here, you allocate 50% of your income to essential needs like rent, food and minimum debt repayments. Put aside 30% for things you want rather than absolutely need, like entertainment. Then earmark the remaining 20% for your savings. This approach is more flexible than the zero-sum budget but still has leeway for irresponsible spending unless you automate that 20% saving to lock it in. Good luck with your savings goals!