While the thought of budgeting may make some eyes glaze over, the reality is that budgeting is truly one of the best life hacks. It helps you to get more out of your money by having a clear understanding of your incoming funds and outgoing financial obligations. It helps you to actively move towards achieving long-term goals without sacrificing short-term enjoyment. A budget helps to identify areas where you may be spending too much and can also help to flush out where you might have opportunities to invest in and grow your savings.
“Ultimately sticking to a budget just makes life easier,” WealthCo Associate Advisor, Ryan Monahan, points out. “A budget makes it easier to pay bills on time, helps to build an emergency fund, allows you to plan for major expenditures, and assists with saving for retirement.”
And it’s easy to get started. Here is a five-step budgeting road map designed to help even those who are new to budgeting take control of their financial health.
Step 1: Establish Your Baseline
Establishing an accurate baseline is key when creating a personal budget. It doesn't have to be a huge, intimidating task - all you need is a high-level view of your income and non-discretionary expenses to give you the foundation for building your budget. This will give you a clear sense of how much money you're bringing in and how much you're spending as well as any long-term loans or commitments you're contending with.
Step 2: Track Your Spending
The baseline will establish your bigger living expenses (like mortgage or rent, vehicle payments, etc). It’s also important to have a clear understanding of those smaller and infrequent expenses – like coffee, bowling, new shoes, gas, etc. While it may seem daunting to account for every outgoing expenditure, doing so can be incredibly eye-opening and insightful.
“Tracking spending can be as easy as reviewing your bank account and credit card statements on a monthly basis and categorizing these expenditures into different categories,” Monahan suggests.
With these numbers established, it's easier to create a realistic budget that works for your lifestyle.
Step 3: Set Your Financial Goals
Merely having a budget isn’t enough in itself; what really makes it effective is setting tangible financial goals. Everyone’s ‘why’ is different, and these goals will vary. Setting specific and measurable budgeting goals sets you up for success by providing structure and purpose for your money. Examples of financial goals might include:
· Being free of high-interest credit card debt;
· Saving for a down payment for a home;
· Having sufficient money in savings to go on two vacations per year; or
· Buying a hot tub for your backyard.
Furthermore, achieving just one or two of these goals is empowering and can propel you forward in reaching your overall desired outcome – creating a perfect balance between spending and saving.
Step 4: Create Your Budget
With your income and expenditures in hand, and your short and long-term goals top of mind, now it’s time to get into the nitty gritty.
Monahan shares what is most important to keep front and center as you build your budget.
“Pay yourself first. Obviously, bills must be covered, but you should treat savings as a must-do disbursement, and not as an afterthought.”
Common budget line items include:
· Rent / Mortgage
· Food and Groceries
· Transportation
· Savings
· Emergency Fund
· Insurance
· Entertainment
· Healthcare
· Clothing
· Travel
· Gifts
· Household Maintenance
· Memberships
· Pet Expenses
· Charitable Contributions
Step 5: Adjust as Needed
No plan ever stays completely static. It's important to check in regularly and evaluate whether or not your budget is truly working for you. If you find that you are failing to stay on track each month rather than abandoning it altogether, it's important to make the necessary adjustments so that you can successfully reach your financial goals. Be honest with yourself about what works, and what doesn't, and be willing to make changes where needed in order to stay on track.
Whether you are living paycheque-to-paycheque or banking hefty bonuses each month, being able to manage your finances is important no matter what your income level may be. A good budget puts everything into perspective and helps guide you towards smarter long-term decisions and away from costly impulse buys.
Your financial planner can help you get started. If you are looking for assistance in taking the first step in gaining control of your financial health, we can help.
Ryan Monahan is an Associate Advisor with WealthCo. As a Qualified Associate Financial Planner, Ryan takes great pride in helping clients to reach their financial goals and plan for transitions into new stages of life through strong discovery and planning. A proponent of ongoing professional development, on the weekends you’ll find Ryan biking or snowboarding in the mountains.
The Integrated Advisory Community consists of a network of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.
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