Budget, budget, budget – what exactly is a budget, which budget type is right for you, and how can you find success in using one? This article is a crash course in choosing a budget that will work for you!
DEFINITION
A budget might seem like a dirty word, one that sucks the fun out of your hard-earned paycheck and highlights your financial weaknesses. Really though, it’s a chance to enjoy that hard-earned money, in a way that will avoid further stress or financial disaster.
Simply put, a budget is a plan for your money. If you want the dictionary’s definition, Dictionary.com defines a budget as “an itemized allotment of funds, time, etc., for a given period.”
Don’t panic. Itemizing spending can come off as both tedious and exasperating, but there are many types of budget plans to choose from that don’t require a meticulous note for each cent spent. To select the right budget plan for your situation, you need to first identify exactly what it is you need.
YOUR NEEDS
We all have different needs and various financial habits. So, what works for one person, won’t necessarily work for you. Outlining the following areas of your financial status will lead you to the right decision.
- Your attitude towards money. What is your attitude towards money in general, as well as in terms of spending and saving? Like dieting and exercising, our self-control and the value we place on a goal is only as good as the mindset behind it.
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- Psychological Aspect| The psychology behind making, spending and saving money is well-studied. The average individual just isn’t always aware of the dynamic. Most of us have a mental or emotional trigger for spending and saving money. “For example, studies also show that people with low self-esteem engage in more impulse spending and buying things they don’t need.” – The Balance.com
- Habits Learned | We all grow up with the example of our parents or guardians. Some grow up in a home where every penny is pinched. Others experience the habit of placing pleasure and comfort above all else. Some have learned a very balanced view of money but might have trouble putting that into play now that they are financially independent. Whatever the case, how you were raised comes into effect when it comes to how you can successfully budget your finances.
- Future Goals | Regardless of the past, a budget is about the future. Where do you see yourself in five or ten years? What do you want to achieve? How does money play into your goals? Once you know where you are headed it is easier to choose the best way to get there.
However you were raised, no matter your psychological connections with money, and regardless of your future goals everyone can succeed with a budget plan in place. That budget plan needn’t be painful or hard to reach. In fact, the best plan of attack is one that assures some success, while offering a challenging aspect at the same time.
BUDGET TYPES
A budget plan needs to be tailored to what works for you, personally. There is no one size fits all in the world of financial health. Read the tried-and-true methods listed below. Pick out the ones that resonate with your mindset, habits, and goals. If one single plan doesn’t catch your attention, look for aspects across all plans and combine them to build a perfect budget for your personality and needs.
- Before you begin | Every budget starts out the same way. Write down the total amount you make each month and note your pay days. Also note the total amount of fixed expenses due each month and the dates that they are due. (Rent/mortgage, utilities, gas, groceries, etc.) Write down the total amount of debt you owe, as well as a breakdown of how much and to whom. You can also note how much you want to save monthly and work out how much of each paycheck that comes to. This will be the basis of what you have, what you owe, and what’s left over.
- Notebook/ledger Method | This one is old school but for some the best way to wrap their heads around their finances is to write it all out. Keep track of every amount coming in and going out. One nice thing about this method is that you become extremely aware of your everyday transactions – so long as you actually keep account of them.
- Envelope Method| A fan favourite, the envelope method is simple. Create an individual envelope for each bill or cost throughout the month. (Gas, Hydro, Rent, Groceries, etc.) On payday, withdraw the exact amounts you need for each envelope. Include the due date on each one. With the money left over, assign more envelopes for debt, savings or free spending. If you still have money left over, add it to your emergency fund. Relying on cash, especially pre-distributed cash, makes going over budget next to impossible. Once the envelope is empty, you are done spending in the category.
- 60/40 Method | The 60/40 budget uses a percentage split to guide your finances. 60% is attributed to all committed expenses, including car payments, rent/mortgage, utilities, etc. The 40% goes towards the rest, using a further breakdown.
- 10% Long-term Savings
- 10% Short-term Savings
- 10% Retirement Savings
- 10% For everything else
- 50/30/20 Method | The 50/30/20 method is a great way to make the most of your income. You can use this method straight up or incorporate its principles as a base line for your personalised budget. The idea is simple. 50% of your income is devoted to fixed expenses and necessities, 30% is allotted for flexible expenses and wants, while the final 20% is reserved for savings and/or paying off your debt. The Nerd Wallet.com offers a quick calculating tool to gauge your split.
- Budget Apps | Budget apps are great for those who have trouble with the details. The best budget apps will track your spending and categorize everything for you. To stay on track set up notifications that let you know when you’re reaching your spending cap. This app will do the calculating for you, but you still need to make sure you control your spending habits.
TIPS FOR SUCCESS
Here are the best tips for assured success when it comes to budgeting.
- Trial and Error |You need to like your budget plan for it to work. If you still have no clue which strategy will help you the best, try them all! Take it one month at a time, noting which aspects are easy, hard or frustrating. Once you’ve run through a few, or them all, you will no doubt have a good sense of how to succeed on a budget. There are no permanent mistakes when it comes to budgeting and there is always a way to recover your finances.
- Budget Buddy | Things are often more enjoyable with a social aspect and some friendly competition and support. That’s where the budget buddy idea comes into play. This can be an excellent way to stay motivated and to get advice about getting out of debt and organizing your budget.
- Get Automated | It can be difficult for those with a full plate, or for those who are not financially inclined, to keep track of payments, transfers and other aspects of budgeting. Automating your bill payments, for example, will ensure you don’t get penalised for late payments. Automatic transfers can get an allotted amount from your chequing account into a savings account, before you spend your paycheque on other things. Ask your bank which services they have available for automating your habitual processes.
- Avoid Further Credit Card Debt | Just as everything seems to be going to plan, unexpected expenses appear like clockwork. Whether it’s a car or home repair or health emergency, it can be all too easy to throw that on a credit card or drain your hard-earned savings. If you don’t have an emergency fund in place yet, consider an online loan It’s easy, quick, and won’t affect your credit rating.
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