Budgeting
At Construct Your Finances (CYF) we believe budgeting is the foundation of personal finance. Herein, CYF describes what a budget is and why it should be taken seriously for personal and financial purposes. We share how to create a budget from scratch and how to manage it regularly.
What is a budget?
Budgeting is a tool used to track and evaluate personal/family finances. A budget measures the income versus expenses to ensure your income is allocated to things that matter to you. The intent is to assign every dollar earned into one of three areas: expenses, savings and investments. A sound budget gives every dollar a job and purpose which aligns with your personal lifestyle and lifetime goals. The most common budget is the 50/30/20 plan. This budget allocates 50% of income into necessities (rent/mortgage, food, insurance, etc), 30% into wants (restaurants/bars, vacations) and 20% towards savings, investments and/or debt repayment. Contrary to popular belief, a budget is not meant to be limiting. It is created to allow you to enjoy your hard-earned money and not worry about affordability.
Why should you budget?
Understanding where your money is going has numerous benefits. Knowledge of your income and expenses provides insight to whether or not you are living within your means. A well-maintained budget will ensure your income is spent on things you enjoy and not lost on incidentals (such as monthly subscriptions you no longer use). It encourages you to stay accountable to achieve any larger financial goals.
Since a budget provides clarity to where our money is allocated, it helps alleviate stress for larger unanticipated purchases. With monthly or quarterly budget reviews, you will know where funds are coming from in any situation. For couples, money is one of the most controversial topics. If both individuals understand the budget, it encourages open communication when there is financial confrontation.
How do you budget?
To start a budget, you will need to know your total monthly income and expenses.
Income (for most people) should be straight froward. Review your employer paystubs and add any additional reliable sources of income to calculate income.
Expenses become a little more taxing. We recommend reviewing all spending for the past 3 months to get a more accurate representation of your expenses. We understand a budget can be fluid and expenses will vary month-to-month. For a high-level overview of expenses, add all expenses over the past 3 months and divide that by 3. If this number is less than your monthly income, congratulations! You are living within your means and spending less than you earn.
To track expenses going forward, each dollar is categorized into an expense or savings group. Some category examples are:
- House Expenses (rent, utilities, insurance, etc)
- Reoccurring Expenses (phone bill, subscriptions, gym membership)
- Auto Expenses (gas, insurance, maintenance, public transit cards)
- Food & Entertainment (groceries, restaurants, movies)
To track your income and expenses there are manual and automatic tools. A basic manual tool would be a spreadsheet (either on paper or excel). If you can keep up with the expenses on a monthly basis, this is a great option. Automatic options include Mint, You Need A Budget and some institutions will categorize expenses automatically. The automatic tools do most of the work for you, however some tinkering may be needed based on your person situation and the result of the autocategorization expenses.
The budget is not meant to be rigid. It is a baseline that can be adjusted as aspects of your life changes. Monthly or quarterly reviews of your budget ensure that values assigned to each category are accurate and are true to your personal and financial goals. Open conversation is encouraged to discuss larger purchases before they occur to makes sure funds are re-allocated to accommodate. Therefore, budgeting is a strong foundation to person wealth building and ensuring you are on track to achieve your financial goals.