I am often asked about budgets and budgeting. I imagine that when people have the ‘should I have a budget’ conversation in their head it goes something like this:
“Should I have one? Should I do one?”
“Yeah. Yes. Absolutely. What competent, with-it adult doesn’t have a budget?”
“But, do I really need one? Really? Things are going fine the way they are. Maybe later.”
I am torn in my response and potential prescription. To begin with, we can all agree that we need to live within our means and allocate funds towards our financial priorities. The budget is a tool to help us maintain this equilibrium.
My experience tells me that the level of detail and tracking is more related to one’s disposition rather than their underlying need. Some of us love numbers and enjoy analyzing them. Others would sooner clean their neighbour’s outside windows before sitting in front of a budget worksheet. Most of us probably fall somewhere in the middle where a budget is a necessary task that helps our peace of mind.
A budget helps us reach our financial destinations more quickly and less painfully. Yes, there can be discomfort and effort when following a budget, but it is much less than the consequences of falling off-track. Most budgets are monthly in orientation and are accurate at inventorying the routine monthly expenses – things like food, property tax, hydro, gas, a car payment and even entertainment. What folks typically miss are the one-offs. One-offs come in two shapes:
Surprises like a broken mobile phone, a new furnace or forgetting that you have a Thule on the top of your car and driving into an underground parking lot (yup, that was me).
Foreseeable but Unaccounted for Expenses like vacations, camp for the kids, Christmas presents or the new BBQ.
In most cases, people’s monthly budgets are well balanced and may even have a comfortable surplus but don’t include the one-offs.
These are the items that can derail us.
A budget provides context for making financial decisions. At a minimum, I think that individuals, couples and families should put together a 12-month budget arranged month by month.
Step 1: Add in your predictable monthly expenses and outflows
Step 2: Include your Foreseeable but Unaccounted for Expenses
Step 3: Add in a larger lump sum, perhaps of 5% of your gross family income, for Surprises
Step 4: Add in your net inflows.
You’ll quickly determine if you are balanced. If you’re not, it may or may not be signalling a long-term problem. The renovation you are planning may require you to take funds from your savings. Alternatively, you may choose to use the line of credit to extend your maternity / parental leave by a month of two. What you’ll see is whether the Foreseeable but Unaccounted for Expenses are within budget. We often hear that you can set yourself up financially by not buying your morning latte and investing what you would have spent. I suppose this is true, but it can also be hard to recover financially from a river cruise in Eastern Europe by limiting your coffee intake.
I have seen budgets in all shapes and forms that work. One client has a notebook where he and his partner write in their expenses and tally them at the end of the month. Others download transactions from their on-line banking into Quickbooks, Mint or a self-made Excel spreadsheet.
Different Ways of Keeping Track of Your Outflows
A budget will improve your confidence around financial decisions. It makes saying ‘yes’ and ‘no’ much easier. Budgeting may not be your favourite exercise but the process is part of a well-rounded financial plan.
If you would like to further discuss what budgeting approach would work best for you, please let me know.
May 09, 2018
