Budgeting is the cornerstone of any good financial plan. Whether you are looking to pay off debt, save for a home, trip or retirement, starting off with a good budget it critical.
Before 4 years ago, I don’t think I ever had a written budget for my personal finances. I mean, yah sure I might have jotted down some financial goals on paper and maybe scribbled some calculations, but nothing ever concrete, systematic and detailed. This is how I felt..
Now, that a budget is in place, it takes the guess work out of figuring out where my money went and stops me from getting into debt.
Every year for the past 3 years my husband and I would prepare our family budget in December of the previous year for the full 12 months of the coming year. So far, this system has worked for us and even though we tweak our budget month to month to accommodate changes that come up, having a budget written well in advance has helped us look at the long term prize…financial independence.
So here are some helpful tips that I would like to share with you when preparing a budget:
- Be conservative with income estimates. If you are salaried, then this is not an issue as your income will be relatively consistent each paycheque. However, if you are an hourly employee, or work based on commission, use the lowest amount you think you will be paid when calculating income. Although my husband and I are both salaried, he also earns bonuses & overtime sporadically throughout the year. We never include these amounts in our budget until they are paid because we don’t know how much to expect. This has generally worked out for us as it has allowed us to be more conscious with our spending, while saving windfall income when it comes. If you get paid mostly by commission or the numbers of hours you work vary month to month, taking the average income over the last 6 months of employment is a good estimate to use for income.
- If you combine your income as a couple when budgeting but get paid at different times, track the date you get paid above each income. This is the approach that we use because my husband gets paid bi-weekly (every other Friday- 26 times a year) and I get paid semi-monthly (on the 15th and 30th-24 times a year), our pay cheques hardly ever sink up. By placing the date of each payday above the income amount, this helps with tracking. This also means that 2 months out of the year, we get paid 5 times (2 pay cheques from me and 3 from him). To manage our expenses year round, we always make sure to:
- Have most of our monthly bills paid for within the first 4 pay cheques. I would say 90% of our expenses are paid for this way.
- Use the 5th paycheque as windfall income where we cover any unpaid variable expenses and pocket the rest to savings.
- Divide your monthly bills by the number of pay periods in your household each month. If you prepare a budget separately or are single then you would divide your bills by the number of times you get paid a month (this is normally 2 for most people). Because more than 80% of the year (1o months out of 12), we can expect only 4 pay cheques a month (2 from me and 2 from my husband), we divide all of our expenses by 4 and pay our bills that way. In order for this approach to work for us, however, we had to “over pay” most of our bills by one pay cheque (not one bill amount) so that we were never late on paying our bills and never have to time our payments.
Here is an example of some of our expenses divided over 4 pay cheques:
Rent $1,269.00/ month $317.25/pay cheque
Electricity $65/month $16.25/ pay cheque
Cell Phone (2 plans) $130/month $32.50/paycheque
TOTAL $1,464.00 $366/paycheque
In the brief example about, we would overpay these 3 expenses by $366 or 1/4 of the bill payment from previous windfall income. We would do this just once to make sure that we were always in the black. Doing it this way has its benefits (if you can find some windfall income) because:
- You don’t have to focus on when the bill is due. By overpaying your bill by one fourth of a bill payment (based on this example), and then making regular payments as if you never paid it, it will provide you with the cushion in case your bill is more than your expected one month (i.e. cell phone) and will ensure you are always in the black.
- By breaking down your expenses into pay periods, you reduce your costs each month and leave more room for savings and paying off debt.
- For bills that require a pre-authorized debit (where the company takes out money directly from your account each month to pay the bill) set up a separate account and transfer your smaller payments each pay cheque to this account. My husband and I always prefer to pay the bills ourselves, then to have the company we receive service from take out the money directly from our accounts. I try to avoid setting up pre-authorized debit unless I absolutely have to, here is why:
- I am more likely to track my spending and review my bill if I am required to make the payments myself.
- I am more likely to cut back on my usage for certain bills if I have to review the bill each month
Even with that said, there are certain services that will not be provided unless you set up pre-authorized debit (or pay the one time annual expense in full- which is expensive). For us, it would be our insurance products. To get around this, we use our online bank account Tangerine to have all of the pre-authorized bills comes out.
Here is an example of our pre-authorized debit expenses divided by 4 pay cheques:
Renters Insurance $43/month $10.75/ paycheque
Auto Insurance $80/month $20.00/paycheque
Term to 65 Life & Critical Illness Insurance $250/month $62.50/paycheque
TOTAL $373/month $93.25/paycheque
As mentioned in point #3, we divide all of our expenses & saving amounts into 4 equal payments when preparing our budget. This creates a unique challenge when looking at bills that require pre-authorized withdrawals, because there is one withdrawal done a month, not 4 eqaul payments. To get around this issue and still maintain dividing our expenses this way we:
- Set up a separate account with Tangerine to have our pre-authorized withdrawals come from this account (i.e. the 3 expenses above).
- We make sure we have a month’s worth of bill payment for these preauthorized debit expenses to start (i.e. $373). This ensures we are always in the black. Because our insurance expenses remain the same amount each month for the entire year, we don’t have to worry about not having enough money in the account.
- We link this account to the account where our pay cheques come each month. Our everyday bank account
- When we get paid we transfer $93.25/paycheque from our everyday bank account to our Tangerine account that has the pre-authorized bill payments
- At the end of the month the bills payments are withdrawn from the Tangerine account without having to disturb our everyday bank account or budget
- If you’ve paid off your consumer debt, strive to save at least 15% of your take home pay each month. Even though we spend a lot more now on leisure spending & recreational activities then we did when we got out of debt, we still strive to save money for the future on every single pay cheque in addition to retirement savings that gets deducted directly from our employer before the money hits our account. When we were getting rid of our $120k student loan debt, 50% of our income went towards the debt and we lived off of the other 50%. We left no room for savings and minimal room for spending on leisure activities or buying “stuff”. Now that we are debt free and building our wealth, we still live off of 50% of our income (our standard or living has not really changed), but allocate about 35% of our take home pay towards savings and the other 15% towards vacations, recreational activities and whatever we choose to do. For now this works for us, but the percentages may change in the future as our life circumstances change. The thing to remember is to always save something each paycheque towards building your savings. Strive for no less than 10%.
What budgeting tips do you use? Which have worked for you and which have not?
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