Budgeting 101 – Starting a Budget for the First Time

Establishing a personal budget is a cornerstone of prudent financial health, yet many Canadians don’t actively budget. You don’t have to be one of them. Here are some simple budgeting 101 suggestions for starting a budget for the first time.

Budgeting Wants and Needs

When creating your budget, take the time to separate your wants from your needs. It’s common to confuse the two — everybody needs food, but you want a chocolate bar. You need transportation, but you want a new car. Being honest with yourself is crucial — differentiate and assess what you need, and where it crosses the line into a want.

Here are some examples you can use to determine which category an expense belongs in:

Needs                                      Wants

Housing                                              Vacation

Food                                                    Dining Out

Transportation                                  Entertainment

Insurance                                           Hobbies

Automobile repairs                          Automobile accessories

Reviewing your expenses (from bank and credit card statements), and labeling each as a need or want is a good starting point. Build your budget from past spending to prioritize your needs, setting the wants aside into a discretionary bucket. Depending on your surplus income (the difference between your net income and required spending), you can slot your wants into your budget, prioritizing them until you run out of your surplus income.

Short-term, Mid-term, and Long-term Thinking in Budgeting

In the corporate world, the controlling department analyzes and tests budgets for variances based on changes — short-term, mid-term and long term. You can do the same. Grocery spending week-to-week is short-term decision making, as is whether to go to the movies. Mid-term decisions include items with annual renewals, such as internet service or insurance terms.

Examples of short-term decision making which can save you money:

  • Purchasing generic, bulk, or raw ingredients for groceries
  • Maximizing points to purchase gas
  • Going to the movies on cheap night
  • Taking advantage of takeout specials

Mid-term decision making could include:

  • Changing deductible limits on insurance at renewal
  • Moving closer to work to save on transportation
  • Converting to a variable rate mortgage at renewal
  • Moving to a more affordable apartment at end of the lease

What about long-term decisions? In the long-term, all decisions are up for discussion. Nothing is off limits.

The Most Powerful Phrase When Starting a Budget for the First Time

Once you’ve set your budget, you can make rational decisions about your spending on a day-to-day basis. Arm yourself with the most powerful phrase, “It’s not in my budget.” People have a hard time saying “No” because they have a fear of being left out or don’t want people to think less of them. However, taking control of your finances and making sensible decisions about how to spend your money is an essential skill.

Within your discretionary budget — your wants — you can make short-term decisions. If you choose to engage in an activity not in your budget, then you will have to do without something else to make up for it. If there are no discretionary funds left to offset your purchases, the answer should be an absolute, “No, it’s not in my budget.” Don’t dip into your needs budget to satisfy a short-term want.

What about Savings?

Putting money aside for short-term, mid-term and long-term goals is another essential of a budgeting plan. Treat your savings goals as a need as well, and never forgo your savings contribution to satisfy a want. Look for an upcoming article on developing savings targets while paying down debt.

Starting a budget for the first time doesn’t have to be difficult. If you need help starting a budget and paying off debt, book your free consultation now.