Now that we have a good handle on the big picture we need to put together a plan to get us to where we want to go. Yes, we are going to talk about budgeting. I know a lot of people have a strong emotional diversion to the word budget. They equate it to a four letter word. If I go on a budget I won’t be able to do anything fun anymore. I won’t be able to go out for drinks, go shopping, or do anything except save for retirement.
A budget is not a tool for taking anything away. A proper functioning budget is a tool to help you get the things you really want in life now and in the future. The biggest thing a budget does is help you decide what you really want. Do you want to get out of debt faster, do you want to have money to go on vacations, do you want to save for retirement, do you want to renovate your home, do you want to save for a child’s education?
In order for a budget to work you have to look at your expenses ANNUALLY and then break them down into a monthly allotment. The regular every month expenses are not the things that usually mess with a budget. The things that mess up the household finances is the “surprise” expenditures. Things like school fees, vehicle expenses, holidays, and household repairs.
A simple way to put together a working, functioning is to use the three account method. The first account is simple. It is for your monthly fixed expenses. These are the expenditures that happen every month and the amount does not change. Things like mortgage or rent, loan payments, monthly investments, insurance payments, monthly property taxes and condo fee, even some utility payments. This is a flow through account. Money goes in, money goes out. Do not keep insta-broke access on this account.
The second account is for your every month expenses where the dollar amount fluctuates. Things like groceries, gas for your vehicles, toiletries and household items, eating out, pet expenses, entertainment, and the all encompassing miscellaneous category.
The third account is the “save your budget” fund. This is for all the expenses that creep up throughout the year, but are not monthly. Things like birthday, Christmas, and other holiday gifts, vehicle expenses such as oil changes, tires, repairs, and registration, clothing, school fees, home repairs, and vacations. Whatever comes up for you throughout the year.
I also suggest setting up separate savings accounts for the things we want to save for like a vacation, home renovation, or anything big we want to do. Seeing our money grow is a very positive and motivating thing. Personally I’m a big fan of ING Direct ISA accounts. No fees, they actually pay a little bit of interest, you can have and label up to five different accounts, and it separates the money just a teeny bit.
Creating a budget does not need to be complicated. But it does need to work. Keeping it simple, taking into consideration all the places your money needs to go, and making conscious decisions is where you need to start. This is the foundational piece to financial prosperity.
“The cold harsh reality is that we have to balance the budget.”