Having a solid household budget is an essential part of managing your money responsibly and keeping debt to a minimum. However, it isn’t enough to make a budget and hope for the best. You must create a budget that works for you in the long term, and adopt habits and practices that will make your budget successful.
“It’s great if you’ve got a good budget on paper, but you need to use tools and behaviour around budgeting to ensure that you can translate your budget from theory into action on a daily basis,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
Make a Budget: Step by Step
Do you have a budget that works? Making a budget is the best way to ensure that you spend within your means, keep your debt low and build up savings at the same time.
Want to be successful with your budget? Here is our advice:
1: Track your spending
When you make your budget, it is important to categorize your income to cover your expenses. Track what you’re spending to see if you are on track with your budget.
“You may think that you are following your budget, but can never seem to gain ground towards your financial goals,” says Schwartz. “Tracking your spending lets you know if your budget is realistic and/or detailed enough. It also lets you know where you need to improve and cut back if you are having trouble staying on budget.”
2: Create it before the start of the month
If you make your budget mid-month, you are playing catch up until the following month. You are better off spending time in advance to plan your budget before you get paid, so you can execute your plan most effectively when you have income in hand.
3: Place priority on the budget
For your budget to be successful, you need to value it as the absolute financial priority in your household. That means not making purchases until you’ve consulted the budget, and living a cash lifestyle as best you can.
Consulting the budget before a purchase will eliminate impulse purchases that can derail your budget and cause you to go into debt.
4: Be financially literate
Learning about your finances makes you more aware of your money, and helps you connect the dots between your behaviour and your financial success. It can be very motivating to understand how your sacrifices will improve your financial situation. Conversely, you’ll understand the negative impact and overall cost of debt on your finances if you spend beyond your means.
5: Be vigilant with variables
Budget accurately for variable costs. Always be mindful of how you can cut costs for things like groceries, utilities and transportation. The more you can trim from these variable costs, the more cash flow you’ll have in your monthly budget.
6: Focus on the non-material
If you feel pressured by friends or family (or even society at large) to measure your success by having a big house, a fancy car or other material things, you may be doomed to eternally spend beyond your means, and you’ll always be shouldering debt.
Adjust your attitude towards spending and material things. Simplify your life and learn to find joy and satisfaction from free (or low cost) things and experiences. Don’t try to keep up with the Joneses.
7: Check in with your goals
Make a point of revisiting your budget every quarter to see if it’s working. Measure your progress toward your goals. If there’s a disconnect between your goals and your budget, it’s a good idea to tweak them to ensure your success.
8: Include savings
Does your budget have a line item for savings? If your goal is to pay down debt, it may not make sense on the surface to direct money towards savings, but building up savings is actually one of the smartest ways to keep your debt down.
Take advantage of automatic savings tools, like payroll deduction or automatic savings through your financial institution.
9: Find a system that works for you
As you establish a budget, identify a system that works for your personality and preferences. You’ll execute your budget plans on a daily basis more easily.
There are numerous free (or low cost) apps that let you set a budget and monitor your spending. If you prefer something low tech, there is nothing wrong with an old-fashioned accounts book. Some people like to use the envelope method to divvy up cash for expenses; just make sure you tally receipts to balance the books.
10: Be frugal
Adopt frugality as a way of life to ensure that you’ve always got the cash flow to stick to your budget. Wherever possible, buy something second-hand, which will cut your costs. Be prepared to shop around for every purchase.
Do things yourself wherever you can, and don’t pay a premium for convenience. Get rid of expensive habits (i.e. smoking, drinking, playing the lottery). Avoid eating out, except on special occasions.
11: Be smart about inflation
Many people receive a cost of living raise each year, to match inflation. The reality is that in many cities, the cost of living outpaces income, even with these increases.
Don’t increase your spending to match your modest increase in income. Instead, keep your spending low and use the additional income either to increase the cash flow in your household, put into savings or pay down extra on debt.