Budgeting for beginners

Plan your spending with a budget that works for you.

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Budgeting can be a scary word. Many people approach budgets with fear, especially if they don’t have much experience with them. But budgeting does not mean you will have to start scrimping and saving and living like a miser, it just means understanding your finances and having control over them.

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So, what is a budget?

A budget is simply a detailed description of what income is coming in and what money is going out – basically, your savings and expenses.

Image of a budget, calculator, reading glasses and penBudget planning is creating a plan to help you get your finances to where you want them to be. A budget plan is the ideal way to get an understanding of the way you spend, the way you save and then identify ways to improve. It doesn’t matter what your goals are, a budget can help.

One of the main purposes of budget planning is to know where your money is going each week. When you are able to account for your spending, you can better manage bills and living expenses. It’s also much easier to pay off debt and avoid accumulating it in the first place.

Budgeting can be useful for businesses or individuals, families or single income households.

What is a budget planner?

A budget planner is a tool that enables you to itemize and document all income and expenditure, as well as list and plan for future expenses.

Budgets have been around since people first started trading cows for chickens and while it’s possible to create a budget using nothing more than a pen and paper, it’s much easier to use an automated process. Luckily, we live in a digital age and you are spoiled for choice when it comes to software programs designed for this purpose, such as Microsoft Excel.

Entering your figures and automating your budget into a software package lessens the risk of forgetting to enter bills or expenses. You will also find an electronic system less messy and easier to organize.

Budget planner

How to use a budget planner

The best way to use a budget planner is to commit to it at the beginning of a certain time period, say the beginning of a new week or month. Follow these steps in order to create your budget:

  1. Enter in all forms of income that come into your household including your salary, interest, dividends, investment income, child support payments and even income from your hobbies.

  1. Add together your bills (including debt repayments) that have to be paid each month. These are referred to as regular expenses and can include the costs below. Remember, many of these are issued quarterly so if you’re creating a monthly budget you may need to divide up your quarterly bill amount to give you an accurate monthly figure.

    • Car registration costs
    • School fees
    • Electricity, gas and hydro
    • Phone bill
  1. Look at your past statements to see your expenses for the last 3 months which are not regular, such as food, entertainment, shopping, fuel and other extras. These are referred to as irregular expenses. It is harder to budget in advance for these expenses, but over time, you’ll grow to understand your spending habits.

  1. As the month progresses, keep a track of how much you spend on items. If you use cash a lot, keep your receipts, so you remember what you’ve spent your money on and divide your purchases into categories.

When you have finished your budget you should have a figure that shows money left over at the end of the month. This is your income minus expenses.

  • If your budget shows a positive figure

If there is a positive figure, then double check it to be sure. See if the amount of money you have leftover in your bank account matches the positive figure your calculated. If it does, then you can put that money towards your savings goals or debt reduction plans. If it doesn’t, then it probably isn’t. Go over again, and subtract your expenses from your income.

  • If your budget shows a negative figure

If your budget is in the negative, then you need to have a good look at your spending habits and work out what can be cut out. A negative budget means you’ve been spending more than you earn, which likely means you’re going into debt to cover your costs. Paying interest on debt will make your budget tighter each month and may put you in an even deeper level of debt.

What are the advantages of budget planning?

There are plenty of advantages to having a budget including:

  • Spending awareness. If you don’t have a budget in place, then you’ll probably be surprised by how much you’re spending. It might not seem like a big deal to buy a few things throughout the week – like coffee or a bottle of wine or new clothes – but these things add up.
  • Limits overspending. Budgeting gives you the ability to be intentional about your spending and avoid impulsive spending. When you have a plan in place, you’ll be much more likely to have the money you need to pay for your necessities.
  • Improves financial control. When you know how much you’re spending and where you’re spending it, you can gain a lot more control over your money. Those who budget regularly don’t need to live paycheque to paycheque, because they’ve forecasted their expenses and planned their spending accordingly.
  • Makes saving easier. Budgeting makes it easier to identify ways to save. By identifying how much you want to save and listing your expenses, you can find ways to cut back and reach your financial goals.
  • Financial security. Even small savings can add up more quickly than you would expect. And saving money can help create a buffer that can be used to pay for emergency expenses that may arise.

Why business owners should have a budget

Business owner standing beside a company vanWhether you run a multinational organization or the local corner store, budgets are an excellent tool for day-to-day business operations. There are various options for business budget planning software packages and most can be customized to suit any businesses’ needs.

Business budgets can be used for:
  • More effective money management
  • Business performance monitoring
  • Identifying and meeting financial objectives
  • Improving decision making
  • Identifying potential cash flow difficulties or problems
  • Creating informed plans for the future

Why students should have a budget

Group of students studying together on a staircaseBudget planners give students the ability to learn sensible financial habits early in life and make the most out of their finances. Most students are on limited incomes, so using a budget can be a great way to help keep up with bills and manage an income.

Following a spending plan cuts down on the temptation to overspend on other things. It can also help students become far more aware of what money they have available and what areas of spending they can cut back on.

Why families should have a budget

Father and son online banking togetherHaving a family household can make saving difficult, but a budget can definitely help with that. Treating your household like a business (especially when you’ve got a large family) can be the ideal way to create financial stability and stay in control.

Far too many families don’t really have a clear idea of where their money is being spent, but they’re often aware that they never have enough left over at the end of the week. A budget planner makes it much easier to track spending habits, identify areas where spending might need be cut back and allocate funds to cover specific bills, expenses or spending needs.

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Things to avoid when planning your budget

When creating your budget planner keep in mind these things you want to avoid.

  • Not thinking long-term

Your budgets will most likely be organized for the short term, for example you budget in monthly blocks, but you need to keep in mind that improving your finances is a long term commitment. Pushing expenses over to the following month or failing to plan ahead for things such as birthdays or Christmas is not going to help you get financially stable.

  • Setting unrealistic expectations

There is no point to planning a budget that you won’t stick to. Be realistic about how much money you’re going to put aside for your spending and also about how much you plan to save. The first month your budget is in place is a good barometer of how realistic it is. If you can’t stick to it in the first month, then you may need to revise it.

  • Overspending

Negative numbers on your budget are not a good thing. If you’re spending more than you earn you’re putting yourself on a fast track to debt, so be sure to keep good track of your expenses and make sure they are lower than your income.

  • Failing to save

Building up a savings amount to act as a buffer for your finances should be a high priority in your budget. Decide on a realistic savings plan and stick to it, even if this means adjusting your spending habits.

  • Forgetting the small stuff

After budgeting, you may have money left over. But you may be making a mistake, because people often forget the small items they purchase regularly. Think about the $2 you are charged for withdrawing money or the $8 account fee you are charged for your bank account. These small amounts add up and need to be incorporated in your budget.

  • Not adjusting your budget

Review your budget regularly and account for any changes so you can stay in control of your money for the long term. Even if you don’t get a raise or a new credit card, the interest rates on your mortgage might change, your water rates or electricity charges might increase or you might have added to your credit card debt, increasing your monthly payments. You also may have reduced your credit card debts, resulting in lower monthly payments which will affect your budget.

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