Financial Enlightenment Pt. 3: Budgeting Can Be a B!*¢h
I have been having real trouble getting the courage to write this post. Why? Well I am not a big fan of budgeting. Scratch that – I HATE budgeting. It’s my least favourite part of my journey to financial independence (FI). You see, I am still in the midst of getting my financial house in order and the Prairie FIRE family has only been budgeting for a year now. And it has not been a smooth journey.
What is a Budget
A budget is for tracking and understanding all the money that comes into your life (income) and the money that goes out of your life (expenses) over a period of time (usually one month). It really isn’t complicated. There are three things to keep in mind:
Income is the money that comes into your life/bank accounts. This can be in the form of employment salary, dividends through investments, passive rental income, through your business, etc.
These are the things that you spend money on. They can be the essentials that keep your household intact and functional, such as food, rent/mortgage, taxes, transportation, utilities, cell phone, clothing, etc. But it can also be things that are non-essential, like eating out, wine, vacations, etc
Savings is the money you have left over after each pay period (mostly monthly).
Creating Your Budget
In order to create your budget, you will need to track both your income and expenses. The most common approach is to track your cash flow over the past 3 months. There are three methods to tracking your cash flow:
Receipts and Pay Stubs Method: This is the old-school method. You can literally collect all your receipts in an envelope to track your expenses and get a paper copy of your bills. Then you can track your income by collecting your pay stubs and any other statements to track your income.
If you do online banking and use a debit card and credit card, you can view your statements online. Most financial institutions have a copy of your statements through your online banking. You can review your statements over the past three months and track both your income and your spending.
A lot of people in the FIRE movement like to track their spending through a cloud-based app or software. Some are really powerful and can do all the heavy lifting for you. From synching up with your financial institutions, to setting a budget, to automatically categorizing your expenses. My favourite free app is Mint.com. It works well and it has a very user friendly mobile app.
Interpreting Your Spending
It is important to collect your data when it comes to your budget, but you will need to be able to understand and interpret where exactly your money is going and why. When we create our budget we went through the following process:
You will need to create categories for your income and expenses. Some categories are pretty common (e.g., food, rent/mortgage, utilities, insurance) and some categories will reflect your unique situation (e.g., kid’s ballet class, medication.
Once you’ve categorized your spending, you will need to get a monthly average for each expense. In this case, you tracked for three months, so simply take the total for each expense and divide by three.
You will need to review all expenses over the past 3 months and get an understanding of where your money comes from (income) and where your money is going.
Tracking Your Spending
Creating a budget is not enough. You need to take action. And here’s the thing: Budgeting can be a real B!*¢h. It can be hard to stay motivated, but I cannot emphasize enough that you need to track your spending and do something about it. Achieving this will be a milestone moment for you and your journey to FI. Here are some tips that may help you on your way:
Our first draft of a budget was not perfect. In fact, it was way off. You know what? It’s ok. Budgeting is a discipline and you learn each step of the way. Just starting a budget in the first place is a big step forward.
In our journey to budgeting, we discovered some things about our spending that we did not like - this made us question our motives. It was a hard thing to face but a good thing, because it means we could now do something about it. We re-evaluated our lives and re-aligned our spending to fit with our values; this helped us prioritize our spending.
Life never goes according to plan. It is not supposed to. Instead, it is how you react and prepare for unplanned events. When you have solidified your budget, you need to make room to create an emergency fund. This is for situations when your car needs repairs or an appliance needs to be replaced.
You will need to track and review your spending. I do this in three ways.
Every Pay Period: I review my budget every pay period. In my case, this is bi-weekly. I do this to make sure we are on track to make our budget and can save.
Quarterly: I noticed something. Our budget and spending changes with the seasons. Despite what you hear about Canada and our never ending winters, we do have four seasons. January-March (Winter); April-June (Spring), July-September (Summer); October-December (Fall). Our family’s spending habits actually change with the season. For example, we are more active in spring and summer, trying to shake off the depression of our hard winters. Come winter, we hunker down and are less active, due to the constraints of the harsh weather. By looking back quarterly, you are able to see the patterns of your life and plan accordingly.
Annually: For the first time, we will be reviewing our annual spending at the end of the year. This will let us consider how much we actually spend, whether our budget is reasonable, and what future spending we need to be prepared for in the upcoming year.
The budgeting process has been an up and down process for me personally and for the Prairie FIRE family. Though difficult, there were several points of financial enlightenment that have helped us stay on track and realize its importance:
During the budgeting process, I learned a lot about myself and my relationship with money. Basically, I am a money hoarder. It makes me feel good inside to see that we have money saved for emergencies, investing, or spending. You can gauge my mood based on the balance of our savings account. Not having money makes me anxious.
As a family, our budget has made us talk about some uncomfortable topics and emotions around our finances. First, our budget has made us accountable to each other in a way that was not there before in our marriage. Second, it has forced us to reflect on whether our spending reflects our values. It inspired us to align our spending with our values and create money priorities.
When getting your financial house in order, it is important that everyone in your household is on the same page. Communication is key and sharing your thoughts, feelings, and fears will help you stay on track and deal with any conflict. This has been a challenge for our busy family and our new goal is to have weekly discussions about finances and other issues so that nothing goes unsaid.
Overall, I’ve found budgeting well worth the struggle. Whether you’re brand new to budgeting or a veteran, the simple fact is that if you don’t take control of your money, it will find its way into other people’s pockets. The best thing you can do is get started and see where it takes you.
All the best my friend and stick to it. If you need inspiration, need to talk, or simply want to commiserate, feel free to reach out to me via email at mr.prairiefire(at)gmail.com or shoot me a message via Twitter.