In this article we’ll talk about:
• Budgeting Basics
• Why we need to budget
• How to use a budget calculator
• The Different budgeting tools
• How to motivate yourself to keep your budget
• How budgeting will help your reach financial freedom
Budgeting is the foundation of personal finance. And in all honesty, budgeting is a chore and isn’t fun at all. While I budget myself, I struggled to write this article as it definitely isn’t the rosiest part of financial planning. However, it’s a necessity and that’s why not only do we need to do it, we need to ensure that we can stay motivated to stick to polish the budget that we create. There are a variety of tools and apps that you can use and it’s best that you try different things out to see what works for you. And finally, by having a budget and sticking to it, it will help you reach financial freedom.
What is budgeting?
Budgeting allows you to stay on track of your daily expenses so that you know exactly how much you should be spending on different types of expenses. As you punch in your numbers to see what your budget should look like, you’ll know going forward how much you should be spending on things like groceries, entertainment, coffee breaks, hobbies, and more.
Budgeting will also allow you to start saving money for the short, mid, and long term. These goals will be set separately from budgeting but with budgeting you should be able to set aside some amount of money to be allocated to different goals.
Budgeting is an art as much as it is a science. That’s because while you can systematically put money away to pay for expenses (science) determining how much you put in things that don’t have a set amount (ex. Rent, hydro, car payments, etc.) is entirely up to you making it an art. I make it sound complicated but it really isn’t as you can just decide what you think is best.
I should also point out that budgets aren’t set and forget, you should review your budget on a regular basis especially if you have any sort of life event such a marriage, child birth, change of job, etc.
Spend less than you earn, it’s that simple but…
We all know that we should be spending less than we earn or do we? With the advent of credit cards, saving came after buying, which has led to insurmountable amounts of debt and as we become immune to the idea that debt is a scary thing, we keep piling on more debt thinking that one day we’ll pay it off. That “one day” only gets pushed further back as we have to pay interest just to stay afloat.
Once we have a realistic budget in place, your spending habits will hopefully change and if you have debt, you’ll be able to come up with a systematic plan to pay that debt down slowly but surely. Instead of being on the never-never plan, you’ll be switching to the yes-eventually plan!
Why we need to budget
Regardless of your income level, budgeting allows you to know exactly how much you are capable to spend on every expense. This reduces overspending and impulse purchases making you more conscious of the money you spend and what you shouldn’t be spending money on.
Create emergency savings
By budgeting you’ll be able to set aside money for emergency savings or a rainy day fund. The term “rainy day fund” is thrown around a lot but is not to be taken too lightly. You might have read that I’m not a huge fan of having 3-6 months worth of expenses sitting around in a savings account, but I do think having some cash available when something happens (ex. car breaks down or you lose your job). I think that having access to funds is important and a line of credit is perfect for this. But line of credit is debt and is a dangerous credit tool in the wrong hands.
If you’re going to have a line of credit as emergency funds you have to be super disciplined. Otherwise, having 3-6 months in liquid form (savings account, money market funds) with the highest interest rate is a good idea. When I say liquid form, I’m referring to the funds being accessible at any time without being locked up.
When you setup your budget, you can set aside $100 a month or even a smaller amount, overtime this will grow to the determined amount and this is what you need to determine in the planning stage. If you think 3 months expenses is plenty for your rainy day account, and that’s $5,000, once you hit that amount you can stop putting the $100 a month into that account and put that money elsewhere. They key is to contribute it to investments or something that grows instead of spending more.
Become more responsible with your money
By planning your budget, keeping track of every expense and reviewing your budget you become a lot more responsible with money. You also begin to appreciate every dollar that you earn because you realize where all your hard earned money is going. As a result it will help you think twice about purchases and reduce impulse purchases. It also helps you distinguish between the needs and wants in life.
You might think you need a Starbucks Grande white mocha for every coffee break but that $6 x 30 = $180 could be much better spent or saved in your rainy day savings account. Or better yet invested. Did you know that by saving $180 per month for 10 years at 5% annual return would amount to $27,950.81? Hopefully that white mocha doesn’t seem as attractive now.
Forces you to think about your future
Having a budget not only helps you think about your future as you plan and add to your financial plan but also acts as a reality check. As you go through your receipts and credit card bills you start to realize how much money you’ve been spending. For most this will be a depressing endeavour. Why on Earth did you buy a $400 Purple coat in July even though it was 70% off? The past is the past and you can’t go back and rectify it, unless of course you can return that $400 coat…But what you can do is think about your future and this is where it all becomes fun and interesting!
Having complete control of your finances is something that most people cannot achieve. The numbers are honestly the easy part. Yes it’s a chore to go through all the receipts understand how much you can spend on each portion of your budget. But the hardest part is staying motivated to keep your budget and to stick to it. You’ll be faced with daily challenges when you visit the coffee shop, supermarket, or when there are annual sales at your favorite clothing store.
Once you have your budget in place, you’ll start to appreciate that you’re building something that will lead to a happier financial future. With every paycheck you won’t be mindlessly spending money, you’ll systematically be putting money exactly where it belongs hopefully with a heavier emphasis to investing!
Helps you stop living paycheck to paycheck
Many people live paycheck to paycheck. For some this is unavoidable but for others it’s a lifestyle gone bad. When I was a banker, I had clients that would come in on payday with a list of bill payments thinking that they’re doing an amazing job with their budget. While I think it’s great they’re paying bills, the sad part of this was that they were only making the minimum payments on each bill just to stay afloat. That isn’t budgeting, that’s doing everything you can to delay financial disaster.
Budgeting should be done on a monthly basis and not paycheck to paycheck. If you get paid monthly then it’s a little easier since a month is equivalent to your paycheck. But many people get paid bi-weekly or semi-monthly and have no idea how to manage their money. That’s why having a budget is so important as it will allow you to stretch funds across the month and you’ll have money in the bank account for bigger payments such as rent when you need it.
Having a budget will help you reduce debt. That’s because if you’ve done the whole budgeting thing correctly, you’ll set aside money on a monthly basis to pay down debt. Don’t know what debt to tackle first? Simple, always pay the one with the highest interest first. It might be tempting to pay a $1,000 loan with 5% interest over the $5,000 credit card debt with 15% interest. But if we do an apples to apples comparison, you’re paying $50 a year for the 5% loan and $150 a year for the same $1,000 portion of credit card deb (it’s $750/year for the full $5,000). That $100 difference could be used to pay down more debt. Always pay down debt with the highest interest rate, this is a no-brainer!
How to use a Budget Calculator
Now let’s get into how to actually come up with your budget and using some of the many tools that are available to us! Budget calculators are tools that you can punch in your own numbers to help you develop a budget. The easiest way to use a budget calculator is to visit either of these websites one is Australian and other from New Zealand, and they do the job perfectly!
2 Budget Calculator Choices:
From the Australian government website:
From the Commissions for Financial Capacity website in New Zealand:
Different budgeting tools
Pen and paper
Yup believe it or not, the old school pen and paper is still a very viable option
to take care of your budgeting needs. If spreadsheets and software isn’t your thing use a pen and paper is a great option. The greatest advantage of using a pen and paper is that you feel more committed as you go through the numbers. They do say that writing it down makes a huge difference.
This is how I do most of my budgeting. I have one spreadsheet that I have determined beforehand that I do my absolute best to stick to on a monthly basis. I then have another spreadsheet to track all of my daily expenses. For each day of the month I write out what I spent the money on (not just where you spent money but the specifics as well. Ex. Starbucks – Grande white mocha). This way if you go to say Costco, you can determine if you bought necessities or wasted money on something.
If you are opting to use software or an app try different kinds to see what works for your. Each have their own features and you’ll likely find different platforms suit your style more than others. I do recommend that you stick to one once you decide on one because that will allow you to stick to it and keep you on track.
The two best budgeting software/apps out there seem to be Mint and You Need a Budget (YNAB). Rather than me babbling on about what I think is better, you’re much better off reading this article by Lifehacker titled, “Five Best Personal Finance Tools”
YNAB: You Need a Budget Software https://www.youneedabudget.com/
The Freedom Nova Financial Freedom Simulator
I created the Freedom Nova simulator in hopes to help show individuals what it takes to reach financial freedom. You can try the 3-step simulator out for yourself here. It’ll take around 20-30 minutes of your time and the best part is, the first step helps you determine your budget! I’ve made it a pretty detailed budget calculator so give it a shot!
How to motivate yourself to keep your budget
As I said earlier, motivating yourself to keep your budget may be the toughest part. Using a budget calculator and coming up with a baseline budget is one thing, but sticking to it on a monthly basis is whole different animal. Here are some tips to stick to your budget and stay motivated in the process.
Give yourself breathing room
When you’re setting up your budget don’t make it unrealistic. If you’re spending $150 on groceries, don’t make it $100, unless you’re buying ridiculous products, keep the $150 where possible. You don’t want to make budgeting stressful, you want to make it a part of your everyday life. That means it needs to be almost effortless. Sure the budget should make you a lot more conscious as to how you are spending your money, but it shouldn’t be putting you out of your comfort zone.
Did you keep your budget for the first time? Did you manage to hit the 3 months mark? A year? That’s amazing, now it’s time to reward yourself! Yes you heard me, it’s time to pat yourself on the back and give yourself a part of the budget (one-time only!) and splurge on a dinner or
Think Long Term
Budgeting is only one piece of the puzzle of financial planning. As you come up with a budget and think about your financial future, you’ll begin to realize that by budgeting and taking control of your finances you’re helping yourself in so many ways to a healthier and more successful financial wellbeing! And yes the end goal is financial freedom, a goal definitely worth making some sacrifices for!
How budgeting will help your reach financial freedom
• Putting money aside regularly
• Increasing the contributions as your income increases while limiting your expenses
How budgeting will help your reach financial freedom
The main goal of Freedom Nova is to help you reach financial freedom. I think I’ve already mentioned it at least 3 times in this article but I’ll say it again, repeat it with me! Budgeting is the foundation to reach financial freedom, without it you won’t be able to limit your expenses, save money, or think about your future. At least none of this will happen systematically. Let’s talk about a couple ways how budgeting will help you reach financial freedom.
Budget to put money aside regularly
Whatever budget calculator you use, you’ll see spots to put in money for savings or investments. What used to be an afterthought is now a necessity and by committing to put money aside on a regular basis, you’ve now paved the path to financial freedom. Remember, Rome wasn’t built in one day!
Increase your contributions as you have more breathing room
No life is a standstill, we’re all moving, learning and hopefully moving forward. One part of life is that we get raises if we’re in a regular job, which means that your budget will change. If you can control your output and hopefully leave it unchanged, that means you have more money to put towards your investment portfolio, accelerating the pace that you reach financial freedom.
Many people don’t have a budget or a plan, so once they get a raise they recklessly spend this money thinking they have much more money to burn which in turns leads their debt to increase, pushing financial freedom further and further away. Don’t make this mistake!
I hope this article brings awareness to why budgeting is really important. There is no “right” way to budget, it’s what works for you. Just experiment with a few different tools, I personally think free tools are plenty but if paid tools are often better and easier to use and if you think it saves you time and the headache of having to go through your receipts and whatnot then go for it! Good luck!