Resources - Guides
BUDGETING - DO'S & DON'TS
Learn the best practices for budgeting
to come out on top!
What is a Budget?
A budget is a
financial plan that you follow for a given period
of time.
There are several budget types:
Balance sheet budget:
Defines monetary target for assets and liabilities for a given future date.
Income statement budget:
Target income and expense over a given period.
Cash flow statement budget:
Target cash inflows and outflows over a given period.
Do I Even Need a Budget?
Budgeting is a good idea because it provides a guideline for achieving your financial goals.
It enables you to know whether or not you will have enough money
for the things you need and the things that are important to you.
Following a budget will keep you out of debt or help you work your way out of debt.
A good common practice to give every dollar you make an assignment. By assigning a purpose for every
dollar you earn; i.e. covering expenses listed in your cash flow statement, you are
increasing your chances of preventing arbitrary spending and ensuring that
money is allocated to the line items which are important
to you i.e. investing opportunities.
Let's look at important do's and don'ts of budgeting!
What should you be doing?
Define/Track Your Budget
Actively set up tools (e.g. a spreadsheet, notes app or mint.com) to track your budget and regularly take time to review it. We suggest you have a monthly (accounting pro-rata for non-monthly expenses) and annual budget. To cover for non-monthly items, include a miscellaneous expense line item to capture these and deposit the monthly amounts into your savings account. This way, when you go into your savings account for that vacation or maintenance expense, you can do so with the knowledge that you’ve planned for this. Learn from past discrepancies and account for them when budgeting for future periods by having an established budgeting habit leading to reliable data.
Keep a Journal
Keep a journal about how much you’re spending and how it felt when you spent it. This is probably the most difficult aspect but also the one that if followed will assist with creating a budget that you will stick to. In your note's app, write down how you felt when you spent money in different places and on different things. Write down what felt good and what is not adding positive feelings. Through this process you will develop truly conscious spending patterns and budget.
Know Your Values
Based on your spending, what does it look like you value most in life? What would you want your spending to reflect? By creating a budget you can identify the things that are truly important to you. A wise man once said: “tell me what you spend your money on, and I will tell you what you care about.” Reflect about your spending patterns so they better align with your values.
What shouldn't you be doing?
Crash Budgeting
Do not cut back on recreational spending in hopes of saving more money for an item, or to increase your emergency account, or some other goal for a short period of time. As soon as you have saved up by arbitrarily cutting out all the “fun” stuff, you engage in over-spending to compensate or reward yourself for all the saving you did.
Static Budgeting
Do not create a long list of expenses from memory and record it in excel and subtract this from your income to calculate the difference (if one exists). This lack of focus and because life does not occur in a vacuum, your budget must capture your past transactions accurately and be as flexible as to accommodate for your lived experiences. In order to avoid this mistake it is important to utilize the available tools that can account for this like Mint.coml.
Only Budgeting Monthly
By having a monthly budget you will miss the items that happen less often. For example, vacations, home and vehicle maintenance, annual gifts, and other potentially large ticket items. If these are not factored into the budget, they will be paid for from any savings that has accumulated, or you will use credit cards.
Preemptive Budgets
People are often motivated by periods of overspending to go into a spending freeze to compensate for all the overspending. This approach is generally unsuccessful because it lacks any spending data analysis, which will inevitably result in continued spending on items deemed necessary. Eventually the realization of not much money being saved at all leads to a return to previous spending levels. Without taking a concerted effort to review past spending and itemize things, the budget can not and will not be followed rendering it useless.
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