Budgeting is a balancing act. It’s a plan you create to make the most of your income. A budget can help you live within your means, balance needs and wants, and warn you when your debt load is hindering your goals.
But a budget isn’t a financial tool that you can set and forget. As your financial circumstances change, your budget should change too.
The good news is, creating and maintaining a budget is not as difficult, time consuming or even scary as you might think. There are lots of different budgeting methods out there to choose from to fit your own situation as well.
This episode of the BDO Financial Wellness Podcast features BDO Licensed Insolvency Trustees Jasmin Brown and Ron Gagnon, who explain why you need a budget in your life. This blog will walk you though six of those reasons.
Are budgets a downer? No.
Many people think that a budget takes away control from their spending and tells them what they can’t buy. Think of it in the opposite way though. A budget GIVES you control of your spending and tells you what you CAN afford to buy.
Don’t just track your spending though, track how much is coming in as well. Look at your pay stubs and don’t just assume you can afford to buy things without knowing your monthly income. If you don’t track both then it’s impossible to know if you’re spending beyond your means.
Creating a budget may sound stressful, but once it’s done it removes stress in the long-term. You’ll know where you stand financially and won’t have to think ‘can I afford that?’ again. Even if you discover you’re overspending, you’ll be in a position to change your habits and get on the right track.
When starting to budget, it’s a good idea to do some self-reflection. What is your financial personality? If you need help figuring this out, our budget persona quiz is a great way to get started.
When you track your spending, it gives you the ability to cut back on what you don’t need. You may discover that you’re overspending weekly, but realize that is unnecessary overspending, and you can adjust accordingly.
Budgeting makes it easy to break your spending into WANTS: things that are nice to have (a daily coffee, the premium version of streaming app, a weekly dinner out, for example) and NEEDS: the things that are essential to your life (groceries, transportation, rent or mortgage).
Adding up what it costs to fulfil your needs will show you how much money is left over for your wants.
Remember: it’s not all about your needs and wants in the now though. Make sure to put some money into savings and paying down debts – these are needs for the future.
If you’ve fallen behind on payments but it’s something you can dig yourself out of, budgeting is the key. Cutting your spending gives you more money that can be put towards bills.
It’s best to focus on paying off high interest debt first, credit cards for example. You want to limit the burden of interest payments, so always make more than the minimum payment to save money in the long run. Paying bills on time is also crucial.
The more you can cut from your spending now and put towards your bills will make a big difference in the end.
Improving your credit score is really about paying your bills on time and lowering your credit usage. But budgeting can help you do this by mapping out your spending on a monthly basis.
One of the easiest ways to stay on top of your bills is to automate your bill payments. Some bills, such as rent, mortgage or a phone bill are consistent. If you set up automated payments for these you’ll never have to remember to pay them again.
If you get paid consistently, for example, every two weeks or twice a month, you can set up the automated payments to coincide with your paydays, so you’ll know exactly how much money is left over to cover the rest of your expenses.
Developing healthy spending habits and budgeting go hand in hand. This goes back to the wants and needs point discussed earlier.
Healthy spending habits are about resisting social pressure, doing what’s right for YOU and delaying the instant gratification that comes with unhealthy spending habits.
Many of us see our friends or family post on social media about things they’ve bought or trips they’ve taken. This can lead to FOMO and make us think ‘someone else has got that, I want it too.’
If you have an important want that will bring you enjoyment, create a space for it in your monthly budget so you can save up for it. Avoid the temptation of putting it on a credit card. You’ll feel less guilty and enjoy it more.
It also leads to a more open dialogue about money. With your partner, your friends and your family.
In a household, discussing needs and wants is even more crucial. And the difference between the two isn’t always clear.
A budget helps your household realize that money is a finite resource. You have to pick and choose where to spend, make compromises and set goals TOGETHER.
It’s important to talk about each other’s debts too. If someone has a lot of debt, see if they have a plan for paying it back. If not, try to figure it out together.
Budgeting is the foundation of money management. While it may not fix every financial problem, a budget is the first place to start to solve any financial challenges you face. If you’re behind on your bills and can’t catch up, there are options.
Need help establishing a budget? A BDO Licensed Insolvency Trustee can work with you to review your situation and come up with an individualized plan to get you out of debt. Book a free consultation with us today.