How To Be An Adult Part 2: Simple Budgeting Guidelines
How to be an adult part 2: Simple Budgeting Guidelines
Now that you understand how your pay cheques work let’s talk about budgeting that money.
What is a budget?
So what exactly is a budget? Well according to the smart people over at Merriam Webster(the dictionary people) Budget as a noun is defined as:
a : a statement of the financial position of an administration for a definite period of time based on estimates of expenditures during the period and proposals for financing them
b : a plan for the coordination of resources and expenditures
c : the amount of money that is available for, required for, or assigned to a particular purpose
And as a Verb:
1a : to put or allow for in a budget
b : to require to adhere to a budget
2a : to allocate funds for in a budget <budget a new hospital>
b : to plan or provide for the use of in detail <budgeting manpower>
So basically, for our purposes of personal finance a budget is the plan you give yourself on how you’re going to allocate your money. It doesn’t have to be spending, if you’re budgeting your pay cheque it should certainly have savings in it. Also you may want to include something towards an emergency fund.
How does one go about making a budget?
This one is a lot more difficult than explaining just what a budget is. Budgeting will work differently for many people. First you need to identify WHAT it is your budgeting for? Are you budgeting your pay cheques? Are you planning a trip and developing a budget so you can save that amount of money from your pay cheque budget? Are you budgeting your gift giving? Are you budgeting for a vehicle? Post secondary education? Obviously by now you can see that you need to identify your budget constraints before you start to plan your budget.
Budgeting for living/general expenses
Let’s start with the most important thing you should budget for, living. You can budget for any period of time but I feel budgeting for a year is too large of a time frame and you may not hold yourself accountable to keep it on track with that much time. I prefer to budget for a month. It’s a manageable amount of time that I think is easy enough to keep focused on.
Once you decide on your time frame, you need to structure your budget with different categories. A lot of people will go nuts here and break it down into food, shelter, automotive, entertainment, etc. While all of this data would be great to see where all of your money is going, it can also be a little overwhelming. The easiest budgeting structure to follow in my opinion is to break your budget into three main categories. Each of these can then be broken down into your own sub-categories, but the three main are a solid start.
1. Fixed Monthly Requirements
Your fixed monthly requirements are going to be your constant expenses on the basics. They’re the same every month so they make it very easy to budget for. Fixed expenses should cover your rent, car payments, insurance and savings. Make sure to include your savings in your fixed expenses as you should ALWAYS PAY YOURSELF FIRST.
One note on savings, if you currently have debt like credit card debt or student loans(really anything that isn’t a low interest car payment or mortgage) you might want to either switch “savings” for debt repayment or break it into two categories and contribute to both. I can’t give an all-encompassing rule for these situations because each is different but if you’re paying interest over 5% certainly consider putting the savings on hold and getting rid of that debt.
2. Variable Necessities
Variable Necessities are the critical payments you need to make each month. For the most part these are consumable items/products that you’ll use throughout the month. Items that fall into this category are food, gas, utilities (gas, electric, water), clothing, telephone bills and your emergency fund contribution.
3. Variable Extras
Variable Extras are the non-necessities. These are nice to have budget items. You’ll want to include things in here like memberships, entertainment, cable tv/internet, vacations, etc. Things that you can certainly live without.
So why do I like budgeting in this format?
Budgeting like this forces you to give yourself a hierarchy with your expenses. If you’re looking at cutting down your budget it’s very easy to know where to look first. Everything in #3 can be cut back or even eliminated completely. If you need to squeeze your budget some more and have eliminated everything in #3, look into #2. That’s a very easy method to help reduce your monthly expenditures.
If you want a copy of my Simplest Monthly Budget you can download a copy by clicking on the link.
Generally, it’s not recommended that you plan your budget around variable income. I’d leave out of the income side anything that isn’t guaranteed; Bonuses, commissions, gambling, tips, etc. Anything variable you should try to avoid factoring into your budget. If you’re in an industry where the majority of your income is generated through one of these sources, you should make sure you average several months worth to ensure you’re not over estimating your budget income.