April 12, 2017

How Budgeting Can Be So Simple and Easy

Last month, we wrote about our unique way to Enjoy the Pleasures of Budgeting.

Today, we’ll continue on the same exciting subject and see how budgeting can be simple, accessible and even fun for everyone. We’ll also share some easy starting pointers. These fundamental basic budget principles should get you going in the right direction.

In our next and last article of this three-part series on budgeting (coming your way in June), we’ll continue to expose our distinctive point of view on the matter. Additional Interesting Budget Ideas will be presented to you along with more elaborate tips.

Simple Math

Many people get stopped by the supposedly complex nature of budgets.

But in fact, budgeting is only basic math. The arithmetic behind a balanced budget is far from rocket science. You only must obtain a positive result (greater than zero) when you add up your different sources of income and subtract all your expenses. No magic can get you around this basic budget equation.

When it comes to efficient budgeting, dividing and multiplying can help but adding and subtracting are sufficient. The good news is that nearly everybody can add and subtract. Even children can be experts as it. In fact, as we already mentioned, it all fun and games to them. Furthermore, they are not yet conditioned by money taboos or spoiled to consume needlessly.

Actually, most people will continue to deal with money and budgets the same way they learned at a very young age. So, make it a point to teach your children simple things about budgeting and the value of money. In the end, they should be very grateful as it will be much easier for them to keep good money habits than to get rid of poor and sloppy ones.

Because it’s possible to add and subtract using an old pencil and a simple piece of paper, there’s no practical reason for anyone to avoid keeping a budget.

No fancy app or software is necessary and the undeniable truth is that, if you choose so, budgeting can remain pretty plain and simple.

Start by accessing your actual situation and improve on it. Just keep in mind that to improve things, you can’t get around the fact you either have to increase you income and/or lower your expenses.

Our Simple Definition of Budget

We like to define the budget only as the basic computing of financial transactions that helps you realize your projects.

In that sense, knowing how much money goes in and out helps you maximize your financial decisions.  

A healthy budget should enable you to dream and embrace your choices. The budget is an extraordinary, yet simple tool that allows you to assess a financial situation and keep control over it while making possible changes along the way. 

Try it for yourself and get the nagging money monkey off you back! You’ll see that gaining and keeping control over your finances can be a fantastic empowering feeling. You’ll enjoy all the relief it will provide!

With experience, you will also learn to keep different financial options opened. Using an effective conservative budget with sufficient margins of safety should then give you the necessary leeway to adapt to all situations, even the most unpredictable ones.

Fundamental Budgeting Principles

An effective budget should remain simple, especially if it’s your first experience with that kind of process. In the beginning, you should only consider your budget as a simple tool to track what goes in and out.

If your budget turns out to be too elaborate to start with, you may lack the motivation to keep it updated and to follow up on it. Some details are necessary but avoid getting drown into too much information as the main objective should be to get a clearer broad picture of your financial situation that will help you improve with time.

A good trick is to use banking and credit card statements as a basis to track your income and expenses. These days, neat web-based interfaces will even allow you to adjust categories and alerts to tailor them to your needs and situation.

It also can be a great idea to get rid of some technicalities that make you lose time. For instance, you could automate some bill payments or investment contributions.

Several different budget examples easily accessible via the internet can give you some inspiration, but in the end, you should still do it your way. Anyone is intelligent enough and you are the best person to analyze your own particular situation.

When it comes to budgeting, most people tend to include all possible income sources but often forget some expenses. Personalizing your budget should keep you more involved and help you avoid overlooking expense items. It can also allow you to focus on specific aspects you wish and can improve.

Talking about estimating income and expenses, by definition, a budget should be as realistic as possible but the secret to keep it under wraps is to stay conservative. To some extent, you should always underestimate income and overestimate expenses.

Unsure income possibilities should be disregarded in budget previsions. For instance, in our situation, it’s ok to account for regular salary but not for possible government GST tax credits. Even though there’s a good chance we will get our hands on those types of payments, we like to treat them as bonuses that provide additional margin of safety.

Setting conservative attainable budget targets is a must to stay motivated. It can be a great feeling that will boost your confidence when you hit or even better, beat a budget number. Always falling behind using too aggressive projections can have the completely opposite undesirable effect on your morale.

In the long haul, staying conservative will help you keep a balanced budget which leads us to another important and unavoidable budget basic concept: to remain in the black.

Using too much red ink is not a viable long term option for your budget. Credit and debt problems are literally a plague in our consumption driven era. This may sound simplistic but if your budget results in a deficit, your main objective should be to balance it as soon as possible.

As we mentioned before, no magical solution exists to evade the basic budget equation. To get things better, you will have to cut down on expenses or boost up revenue.

Again, anyone who has experienced a difficult financial situation before will tell you that getting back in the black and remaining there can be the greatest feeling of all. Just consider your budget as the optimal tool to achieve so. Also remember that hope to improve any situation always exists, no matter how bad it presently seems.

Because it can really be a game-changer, again, let’s get back to the simple facet of budgets.

One effective way to simplify things is to limit the number of categories or items you use in your budget. In the 12-Minute Tradition, we like to use about 12 main budget categories. As some of your already know by now, our research and experience have shown that in many instances, 12 is really the optimal number to employ to maximize results.

In budgeting, a minimal number of significant categories is still necessary. But on the other hand, you would probably get lost in details using too many. A large number of categories could lead to a lot of data entry or categorizing mistakes.

For example, using one general Transportation category would probably be much more productive than having several items like auto payment, gas, auto insurance, maintenance, repairs, registration, tickets, etc. 

Keeping detailed records may help you remember every expenses but simple categorizing should be more efficient to track and implement broader changes. After you general structure is in order, you could always revert to a couple more specific categories to concentrate your attention on one or two items you wish to monitor closer.

Speaking of concentration, one other key to successful budgeting is to focus on pertinent information. Too often, people get lost in a huge amount of useless data and can’t accomplish anything with it. So avoid getting overwhelmed by too much information and focus on simpler relevant figures you will be able to utilize.

For instance, you should easily be able to differentiate fix and variable expenses. Using an additional specific digit with your existing category numbers could do the trick.

Another good idea would be to identify outflows related to basic needs versus the more luxurious ones. We like to use three levels for this purpose: essential, normal and luxury. These levels will help you choose where to spend more or less when circumstances change.

Let’s hope our unorthodox budget presentation will give some of you the missing encouragement to start taking advantage of this powerful tool. Feel free to share your own budget stories and be sure to join us again. 

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