Everyone loves to hate budgets – Part 1

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My friend Devon asked me to write about budgets so I thought I would put together a wee post summing up my budget theory and discussing the different approaches. There is a LOT of info out there though, so I don’t want to make it too complicated. Before we begin though, we have to tackle the elephant in the room: people hate budgets. They shouldn’t, and I am going to explain why.

People often view budgets as restrictive, like having a old school marm pointing a finger at them from the recesses of their brains saying, “THOU SHALT NOT SPEND MONEY!” This is exactly the wrong mentality to have. A budget – at its simplest – is just a plan. It’s a system you have put together to meet your goals. It is just a tool and like every tool requires an actual human to make it work – for good or bad. My budget theory is as follows (and I suggest you write this down):

A budget is a plan you put in place to free yourself from having to think about money.

Once again, for those in the back:

A BUDGET IS A PLAN TO FREE YOURSELF FROM HAVING TO THINK ABOUT MONEY

Sounds contradictory, right? It isn’t and I will tell you why. Once you set up your budget most things on it can be set-it-and-forget it. Over time you will know what to expect and know where you need to tweak. It is only when you don’t have a plan that you waste inordinate amounts of time thinking about money. Does this sound familiar? “I hope this doesn’t overdraw the account!” “I hope my pay goes in before they cash that cheque!” “I wonder if we will be able to afford to travel and visit the family this year?” When you have a budget you will know the answers to these questions because you will have it all written down. It doesn’t even have to be perfect, a road map is still good even if you have to take the occasional detour.

Budget theory

There are a million ways to budget and they all have commonalities but I don’t want to get caught up in the minutiae here because we are all different. If you are looking for something simple to start with, I recommend Elizabeth/Amelia Warren’s plan from All You’re Worth (a great read, I recommend it highly) called the Balanced Money Formula, and it looks like this:

Must Haves: such as housing, food, utilities
Savings: such as retirement, education, long term goals
Wants: pretty much everything else

It’s a pretty simple way to divvy up your money provided you have enough money coming in for your needs, have no debt, and want to retire at around 65. If so, this formula is for you.

However, if you are like me and are looking to reach big goals (such as saving almost $64k in one year) your budget will look a lot differently. With Mr. Tucker’s new job, our budget currently looks like this:

As you can see, our outgo for Must Haves and Wants are much smaller than our savings rate. That makes sense given our goals and our ability to save one salary and live off another.

Obviously, there are a myriad of ways to calculate your own personal percentages given your own personal parameters. I will say though: be honest with yourself. No one is keeping track besides you so you aren’t fooling anyone.

Budget methods

Cash system

Works well with: people who have a lot of debt or spending problems

I have always been a huge fan of Gail Vaz Oxlade and her TV shows (Til Death do us Part, Money Moron, Princess,). If you haven’t had a chance to watch them, they are still available on Slice. She recommends the cash system to help people climb out of debt and take control of their finances. Also called the envelope or jar system, you allocate your monthly cash to one of these pots and when the money is gone, it’s gone.

To be honest, I haven’t really liked this system mostly because I am a digital kind of girl. There is research saying you tend to spend more when you use cards as opposed to handing out cash as cash seemed more psychologically “real.” In recent years though, I have also seen opposing research saying electronic payments are more difficult. Who knows? For me, the question is about complication: when I pay so much online, actually putting cash in pots was inconvenient and made me give up. Having said that, I think if one were to use a mix of systems – the envelope system works perfectly for things like wants, groceries, personal care, and clothing/accessories to help you stay within budget. Anything where there is a real-world transaction is a good place to use this system – or if you have one particular expense that keeps getting away from you.

Zero-sum

Works well with: consistent income

This is closest to what I use. The idea behind it is that you budget monthly with every cent going to one category until at the end of the month you have nothing left over (or it carries over to another category). You start allocating money in order of responsibility, hoping to hit a good pie chart for your situation. Most are set up monthly but they can also be set up by pay period, or any other time you prefer. I will go through this one in more detail later because it is also the most popular of all the budget systems.

Fluctuating

Works well with: irregular income

If you are a consultant, artist, or have a job with a heavy bonus or sales kickback structure this budget is for you. Not knowing when the money is coming in can be incredibly frustrating but you can mitigate some of that stress by knowing how much your living expenses are. Review your last year and tally up how much you spent and then make an estimated guess as to how much you need every month and base your budget on that. So if your expenses are $1500 but you bring in $2000 in January but only $1000 in February you won’t panic because you know you still have $500 leftover from the previous month to cover it.

People with fluctuating income often work in feast-or-famine mode spending all the money as it comes in and then filling in the gaps with credit until the next big payday. This is stressful and confusing to manage. By creating a budget to reflect your reality I guarantee over time that you will start to see trends and account for them. If you are smart, you will also build up enough of a buffer to be able to know when you can, say, take a larger break away from work for a period of time.

So now that we’ve covered the basics, next time I will get down to the nitty-gritty of our budget.

(to read Everyone Loves to Hate Budgets – Part II click here)