“I just need a little bit more money,”
You’ve likely heard yourself say this more than a few times throughout your life. It’s a universally shared belief – among folks of all income levels – that making ‘just a bit more money’ will instantly transform our finances, freeing us from all financial worries.
However, more money does not equal financial freedom. In fact, despite our relative affluence, Canadians are going deeper in debt each year.
According to the latest number from Statistics Canada, the average debt to disposable income ratio was 171% – meaning Canadians owed $1.71 for every dollar of disposable income they had.
The real key to a less stressful financial situation isn’t more money, it’s matching income and expenditures, commonly known as a budget.
Redefining what it means to budget
Over the years, budgeting has garnered a bad reputation. Tied too often with efforts to ‘tighten our belts’, even the thought of budgeting can cause some to visibly flinch.
So, before we get into how to budget, it’s important to redefine what budgeting actually is, in order to have a greater understanding – even respect – for it.
Bayview’s definition of a ‘Budget’
Simply put, a budget is crafting a personal plan for financial success.
When we think about it this way, a budget sheds its negative reputation of lengthy sacrifice and becomes a tool we can use to attain our own, personal success.
To help you build a unique plan for your own financial success, we’ve broken down the art of building a budget into six simple steps.
Six Steps to Build a Better Budget
#1 Set priority goals
One of the best parts of a budget is that you build it around your needs and wants. So, the first step to creating a unique budget that is right for you is to sit down and define what you need and want from your money.
This can be as simple as wanting to purchase a motorcycle in the next few months, or as complex as wishing to retire comfortably in ten years, debt-free.
Start your planning process by defining what is most important to you, then set goals to get there.
#2 Identify income and expenses
Finding and tracking your income is usually pretty simple – you have to do it each year to pay taxes. But it’s the second part of this step that usually causes people to stop in their tracks, i.e. tracking expenses.
However, to create a robust plan for financial success, you need to know where you’re starting from. The good news is, today it’s easier than ever to track your spending.
Apps like Mint can be integrated with your bank account and track every dollar arriving and departing from your account. The best part is, most of these applications are free – which is great for your fledgling budgeting efforts.
You need to see where your money is going in order to adjust your spending toward your priority financial goals.
#3 Separate needs from wants
Needs and wants seem so clear-cut, but when you get down to it, the line between the two is blurry.
For example, just a couple of decades ago having an internet connection fell into the want category. These days, an internet connection is considered a basic human need. A similar sentiment is true regarding cell phones.
So, take a look at your tracked expenses and (painful as it may be) separate them into needs and wants categories.
Remember, this is your budget, so you get to dictate what is most important, and personally considered a need.
Needs are non-negotiable, while wants can be put off. Just remember, you need more than food – you also need to enjoy your life.
#4 Plan out your financial success
Now that you have an idea of where you are and where you’re heading, the next step is to determine:
What you can bring with you
What you should leave behind
This information will create a solid foundation for your financial success
Start with those needs, and balance them against your income. Then, add some room for savings – both emergency savings and long-term savings. Now, all that money you have leftover can be divided up among your various wants – just remember that your spending shouldn’t exceed your income.
Also, remember to leave some room for a few impulse purchases, like that impromptu coffee with a friend you haven’t seen forever.
Build a budget that works for you. That way, you’ll be more likely to keep it.
#5 Put your plan into action
Whether you’ve decided to pull out a certain amount of cash to live from each month, or plan to rely on a budgeting app to help you keep track (or both!), it’s time to ‘greenlight’ your action plan.
It’s more important to get going than to have the perfect plan. Budgets can be adjusted down the road, but it will have a larger effect the sooner you start it.
#6 Manage seasonal and irregular expenses
Some months will be more expensive than others.
January, for example, requires more heat, and thus more electricity – it may even push the mileage lower on your car, which will raise your fuel bill.
April too, since it’s tax season, where tons of unforeseen expenses can crop up.
To make sure your budget is nimble enough to manage these fluctuations, be sure to keep an eye on those expenditures, and even create a rainy day fund to account for them.
Life is rarely simple. Make sure to keep your budget flexible to deal with everything life throws at you.
Adjusting to major life changes (like COVID-19)
After a year, your budget should become a habit, causing it to nearly disappear from your mind. That’s a great feeling, but it can also create a blind spot.
No matter how great your budget is, there are going to be major life changes that can upset it drastically – such as the most recent COVID-19 Pandemic.
When and if your expenses or income changes drastically, it’s time to go back to step one. The good news is, each time you go through the process, it should become easier, allowing you to move through each step with ease, and even instinct.
As you train yourself to live with and modify your budget, your stress around money should lower drastically – and that’s always a great feeling.
For more financial advice, please don’t hesitate to contact us here at Bayview Financial. We’d love to chat with you about how to make the best financial decisions for your life.