What Balancing Your Budget Really Means
by Kevin Sun
What do you imagine when you think about a balanced budget? Do you see your budget as a solid scale, with your income weighing down one end and your expenses the other? Or do you see your budget tiptoeing across a tightrope, its arms laden with all the stuff you get for your hard-earned cash? However you visualize it, the idea of losing your budget’s balance can be scary. However, reaching harmony in your spending plan isn’t as hard or complicated as you might think. Here are 3 steps that you can take right now to help achieve a balanced personal budget:
Step 1: Organize Your Income and Budget Rhythm with a Pay Cheque Plan
Let’s start with the easier part: organizing your income. Unless you’re paid irregularly, you probably already know how much you make and when you make it. Of course, income can also include other sources like GST credits, child tax benefits, or support from a loved one. The question is how you want to organize all this for your budget – weekly, biweekly, semi-monthly, or monthly. Having a set plan for how you use your pay cheques and other income will help you get into the groove of spending wisely.
You may find it easiest to match your budget rhythm to when you get your pay cheque. For example, if you get paid every two weeks, then you can make a biweekly budget and just use one paycheque as your income for that budget period. However, you probably also get monthly bills for stuff like your rent/mortgage and utilities; you can fit those bills with your biweekly budget by simply splitting them in half. Of course, you can’t just pay half your rent in advance, so this would mean thinking 1 month ahead for those monthly bills and saving until they’re fully due. Also keep in mind that when you’re paid biweekly, there are 2 months every year that you’ll get 3 pay cheques. If you’re already used to budgeting for the month with 2 pay cheques, then that extra one can be a bonus to put towards your savings or another financial goal.
How Do You Think About Money?
If you’re having trouble deciding how to organize your paycheque plan, reflect on how you think about money. Do you treat every weekly or biweekly paycheque as a wallet reload, or do you like to start clean with a new budget period every month? There’s no one magical way to time your budget that works best for everybody. Just go with whatever you’re most comfortable with to start, and if that doesn’t work out, then you can always switch to something else. The only catch is that it’s better not to create more than a monthly budget unless you have a very good reason for it.
Step 2: Make a Categorized List of Your Expenses
Once you’ve gotten your income and pay cheque plan sorted out, it’s time to think about the dark side of the balance: your expenses. Just like with your income, you’ll need to match your expenses with your budget rhythm. If you’re someone who always spends the exact same amount of money on the exact same things, then that’s as simple as writing down all your expenses in your last budget period (i.e. weekly, biweekly, semi-monthly, or monthly) and then categorizing those expenses. While there are general budget categories that work for most people, feel free to use whatever makes sense for your spending habits. Just don’t forget about your savings, irregular/seasonal expenses, and debt payments you have to make!
Average Out Your Spending Habits
Unfortunately, most of us don’t have perfectly predictable spending patterns. The trick is to get a general idea of what you “normally” spend in each period. To do this, add up your last 3 months of spending in each category and then divide to match your budget period. For example, let’s say I’m using a monthly budget. If I spent $250 on groceries three months ago, $290 two months ago, and then $300 last month, then my 3-month total is $840. I’d then divide that by 3, making my monthly average $280. If I wanted to go biweekly instead, I’d just divide that $840 by 6 to get $140.
What Do Bad Habits Really Cost You?
Don’t Forget About Seasonal Expenses
Vacations, car maintenance, and other seasonal and annual expenses also need to be included. A common mistake many make is to not think about how they’ll afford those until it’s time to break out their wallets. So long as you have a good estimate of your seasonal expenses, you can fit them into your budget by dividing the cost to match your budget plan. For example, if you take one vacation or staycation a year and use monthly budgets, then just divide the cost of that by 12. Set that money aside in your savings account until you need it. If you use biweekly budgets, then divide by 26. For weekly, divide by 52. Affording that fun time off will be much easier if you save up for it gradually rather than all at once.
After doing all of the above, you should have in front of you a full, categorized list of your average expenses in the budget period you’ve chosen (if you’d like more specific examples of expense categories, check out a monthly expense tracker). Now you’re ready to take the final step to balancing your budget.
Step 3: Balance Your Budget According to Your Needs
Now that you know both your income and expenses, its time to make sure they balance each other out. Before going further, compare those 3 months of expenses you added up with your last 3 months of income. Are you spending more than you’re bringing in? If so, then your #1 goal is to make your expenses either match or be lower than your income. After all, those extra funds must be coming from somewhere, and chances are that they won’t be coming forever.
How to Lower Your Expenses
While getting a new job or side hustle that increases your pay is one way to achieve this goal, spending less is often the much easier path to balancing your budget. First, take a close look at each of your expense categories and see if you spot any easy wins. For example, do you have subscriptions or entertainment costs that you don’t really need? Are there ways you could save money on your energy bill? Could you order less takeout and do more meal planning?
If you run out of easy wins but still need to lower your spending, then order your categories by importance, trim down the cost of your least important one as much as possible, and work your way up. But avoid eliminating a whole category. If that’s the direction you want to go, start by decreasing your spending in that category by 50% to see if you can handle it. Reducing your spending may mean that you’ll have to make some difficult decisions, but only you can decide what’s important to you, and only you can follow through with the decisions you make for your budget.
Strike the Budget Balance that You Want
Achieving a balanced budget isn’t just about having your expenses match your income. It’s also about making sure that the order of your spending matches the order of what you care about. For example, if you decide that getting a new phone every year is worth staying frugal with your meals, then your budget should reflect that decision. Matching what you spend with what you care about will help you get the most personal value out of your money, which is in the end what it’s there for. Just remember to think about your long-term goals too!
If striking the right budget balance sounds like an overwhelming task, then know that you don’t have to aim for perfection. In fact, it usually takes 3-4 months to create a realistic budget that works for you. The point is to do the best you can to make a spending plan that follows your needs. Of course, people’s needs change all the time, and if that happens to you, then just go back and rebalance. Like most things in life, the more you budget, the better you’ll get at it.
How to Get More Help with Building a Budget That Works
Building a budget that works is an important part of working to achieve financial wellbeing, but you don’t have to do it alone. If you want an experienced expert to walk you through this process and answer your questions, then contact a non-profit credit counselling organization in your area. A professional counsellor can go over your finances with you and may even provide solutions to your budget issues that you didn’t know about. If you’d rather keep working on your own and want more in-depth resources, then check out this comprehensive, interactive budgeting guide, a simple, alternative way to budget, a free webinar, an online course, and these 7 steps to building a household budget.