Budgeting 101 – Making it work

In light of the recent recession, it is not surprising to see so many people becoming more and more interested in Budgeting / Cash Flow Management.  

While budgeting is one of the first steps in the Financial Planning process, it is one of the hardest as it is so personal. It is also continually changing as our lives evolve and something even we "financial professionals" often struggle with in our own personal lives.  Some of the questions that are hard to find answers to are:

-          What do I do with any extra money that I have at the end of the month?

-          What do I do if there is too much month at the end of my money?

           (Read that again if it didn't make sense!)

-          How do I know how much to save?

-          How do I budget and save for big-ticket items like vacations, cars, furniture, etc?

-          I'm spending all of my money, how can I adjust so I can save some?

-          How can I pay off my debt while living through the month?

First of all, accept that you won't be able to do everything you want to with your money.  This will help with any frustrations that you may feel in the process. It's impossible to save for a house down-payment, pay off student loans, save for that dream vacation to the Bahamas, new couch, save for your retirement, pay your kid's college tuition and live all at the same time!

Sit down one evening, with your spouse if married, and start discussing your money.  Whether you earn $2,000 a month or $20,000, this has to be the first step. In this first session, you will start to develop the ugly "B" word - the BUDGET!!

Now I know some of you may be put off by that word - feeling your chest tighten and palms sweat. But a budget can be a liberating thing to do - trust me, give it a go.

The second step would be to establish how much you earn after you pay taxes. Do not put any money into pre-tax retirement plans in your budget just yet; just bring all of the money home for the time being. You'll want to split your expenses into fixed and variable expenses. Your numbers will change be different depending on your income, housing expenses, area of the country/world you live in, etc. but you should get the idea - TAKE CARE OF THE ESSENTIALS FIRST.

Pay your mortgage; keep the lights and heat on; put some food on table; put gas in your car so you can get to work; buy clothes when yours get worn out. Maybe your budget won't have any payments as you're debt free, or maybe your budget will be full of them as you try and pay off your debt - wherever you are on that spectrum, make a budget that fits you. When it's all put on paper, it starts to feel more manageable.

Ok, so you've made a budget. Odds are, it won't land perfectly on "$0 left at the end of the month." Maybe it looks tight and you don't know if you'll be able to stick to it. Give it time, as it is a hard adjustment to live within your means when you're not used to.

Also, your budget is meant to be a guide. Every month won't work out like the one you have on paper. Maybe one month, you'll have a big car gas bill as you took a road trip, you may have had a lot of gifts to buy one month and your "other expenses" section went over the budgeted amount. Is that your excuse to forget the budget, as you didn't stick to it? No, go back to it and adjust it so you finish the month without going into debt. Maybe you don't buy any clothes that month, or you don't go out as much so you stay in the black.

 TAKE CONTROL OF YOUR MONEY. BE ACCOUNTABLE TO YOURSELF.

Your budget most likely won't work for the first few months as you tweak certain categories and get it to balance. Stick with it and it will eventually work. The sense of control you receive when you have a budget that works will be well worth it!