Thursday, December 3, 2009

Spending Plans

If I titled this posting as Joys of Budgeting, I wonder how many people would have read on. Most people I've talked to, aren't big fans of budgeting. I think it's because most of us look at budgeting as restricting our spending. However, it's income that restricts our spending, not the budgets. At least we should be restricted by our income. Spending more than we make is a recipe for disaster.

A budget is just a tool to help us to ensure that our money goes where we want it to go. It doesn't mean the end of all fun shopping. You determine what you want to spend the money on. Whether it's movies, clothes, a new car, etc. It's a plan on how to spend the money the way you want and it's only as restrictive as you want it to be, or your income allows. That's why I used the term spending plan, as I think budgets make everyone immediately think of "tightening the belt".

In fact I personally find it quite freeing and not restrictive at all. When money is tight we have a tendency to avoid spending all together and when we do spend we feel guilty. At least I do! With a spending plan in place, I know what I have money set aside for. So if I have a video game budget of $50/month, I don't feel guilty about buying a $40 game with an otherwise tight budget. The savings and the debt repayment were already included when I added the video game budget.

Also, I think it helps to have a little bit of flexibility built into your plan. Wiggle Room, Fudge Factor, Mad Money, or whatever you want to call it. Just some unaccounted extra money, so that if you eat out a little more one month, or spend a little extra on clothes you don't feel guilty. If you start resenting the plan you're not going to want to use it.

Making your plan unrealistic or too restrictive is just going to make you hate it as well. Maybe you'd like to pay off your house in 10 years, but if that means no fun at all, it's not going to last. I've kept a very tight budget for several years while my wife was in school and we both started to go a little bonkers. It just can't last.

If you've tried budgeting before, you probably noticed that the money you planned to put into savings, after all your expenses, never seems to be there. You tell yourself it's just this month and next month will be different, but it never is. I think the reason this happens is because wants often become needs (or feel like needs) and when the money is there you spend it. Therefore, it's important that you pay yourself first.

This doesn't mean that you don't pay your bills, as I think your personal credit is your second most valuable asset beside financial knowledge. What it means is that you put some money aside for your savings automatically. Whether that is off of each pay cheque or at a certain date is up to you. The key is that money is moved so that you don't see it. Out of sight, out of mind. If you're building your RRSPs you're probably already doing this.

So after you pay yourself and you pay your bills, you're free to spend the rest of the money however you want. So if you end up not following the budget exactly, you're still OK. If you eat out more month you don't buy the video game that month for example. As long as you don't exceed your income you're fine.

If you find that your expenses are greater than your income, you are left with two options. You either need to make more money, or you need to reduce the expenses. Either way, the spending plan will be a useful tool in identifying these areas and allowing you to choose what is the most important to you.

If you don't already have a budget in place and you're not sure what things cost, just record your expenses for a month or two with no changes. You might be surprised at how much money is going to different things. Eating out always seems to catch people by surprise. Then decide if that's really the best way for you to spend your money. Keep in mind this is how YOU think you should spend your money, not how anyone else thinks you should. It's your choices and your money!


  1. good thoughts on this! We used to do a budget, but found it very difficult. Not to stick to it...although, I guess in the end it was...but it was difficult for us to guage properly on how much to put aside for each thing. But we are going to try again! We need to! Thanks for giving me some thoughts towards it... :)

  2. I had to tweak our budget for quite some time until I got everything straightened out. When you get started you'll find that you forgot certain items, but eventually it stays pretty consistent. If you do go over on something just remember the money has to come from somewhere so you need to cut out something else.

    Good luck on your budget and let me know how it works for you!