Creating a budget that works for you

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Oaken Financial

November 13, 2020

Saving strategies

Budgets are almost a cliché of the personal finance world. Experts tend to overuse the word “budget” to the point where they obscure and complicate what a budget is and how it can help you. That’s why when most people think of a budget, they think of confusing spreadsheets, counting cash out of envelopes, and being forced to eat pasta all month long! But a budget doesn’t have to be stressful.

Instead, think of a budget as something freeing instead of limiting. A budget, done properly, allows you to get what you want out of life: to be debt-free; to have cash in case of an emergency; to go on vacations; and to rest easy at night knowing that you have your finances under control.

Ultimately, a budget is nothing more than deciding where to allocate your income and having the discipline to stick to it. If you create a budget that works with your lifestyle instead of against it, it will never be overly complex or too difficult to follow.

Here’s how you can create a budget that works for you:

Know what you make and spend

The first rule of budgeting is to know where your money is coming from and where it’s going. It’s best to avoid budgeting for a few months before you create your budget. Instead, just write your expenditures down in a spreadsheet (they do come in handy sometimes!) or sign up for an app that does it for you.

Only by understanding how much you’re spending on each category will you even be able to make a budget. Otherwise, you run the risk of making a budget that’s unrealistic for you that you’ll never stick to. Plus, it’s a lot easier to cut back on ordering in once you see in black and white how much you spent on Uber Eats last month!

Aim for the 50/30/20 rule

Once you understand your spending habits you’ll be able to examine your expenses and see if they’re appropriate for your income. A good rule of thumb to follow is the 50/30/20 rule. Proposed in All Your Worth: The Ultimate Lifetime Money Plan, this 2005 book co-written by U.S. Senator Elizabeth Warren and her financial analyst daughter breaks down a budget distribution system that prioritizes savings and paying down debt.

In short, half your income should be directed towards your necessities such as rent, groceries and debt repayment. One-third of your income should be spent on “wants” such as clothes, entertainment, vacations and other short-term spending goals, while 20% of your income should be reserved for long-term savings, such as an emergency fund or retirement.

So, for example, if you earn $2,000 a month after taxes then $1,000 (50%) should be enough to pay your rent, buy groceries, and pay a fixed amount toward any outstanding loans every month. $600 (30%) can be used for non-essentials such as dining out, entertainment, or even putting money towards your next all-inclusive vacation. And finally, $400 (20%) should be placed right into a savings or investment account for a long-term goal, whether that’s a down payment, retirement, or an emergency fund.

To help ensure you achieve the goal of committing 20% of your monthly income to your savings, consider paying yourself first. This means that before spending on your fixed monthly expenses and the things you’ve identified as “wants”, set aside the money earmarked for your savings first.

How to enjoy spending without guilt

So you’ve paid yourself first, you’ve cut down on your fixed expenses and now you’re trying to cram in all your other spending to fall within 30% of your income. This should be the category you get to have fun with and because you’ve already taken care of your needs and savings, your reward is that you get to spend on whatever you like.

If you want to spend half your fun money this month on a $400 sweater then go for it! If you want to put money into a “future spending” fund each month for an upcoming holiday, then go for that too! You’ve already covered your necessities and savings so you can enjoy these little luxuries guilt-free.

Make more money

One last thing is that sometimes, no matter how carefully you try to implement your budget, it may not be possible to cover all your expenses and savings requirements on your current income. Cutting your spending has its limits and at a certain point, you simply can’t cut anymore without going into debt or lowering your standard of living to an unacceptable point.

The cost of necessities has risen dramatically in the last 10 years in Canada’s major cities and with the cost of housing taking an ever-growing share of take home pay. This leaves little room for other necessities like grocery and debt repayment. Some ideas to earn more cash are asking for a raise, getting a part-time job or taking in boarders. You could also retrain for a higher-paying position, freelance on the side or join the gig economy.