Build an Easy-to-Follow Budget
How to make budgeting a lifestyle habit.
By Renauld Smith
Industry Veteran & Executive Director of IAPDA
How to make budgeting a lifestyle habit
The most common thought that comes to mind when considering a budget is how difficult it is to set up and maintain. Today it’s easier than ever to get started as technology will do the heavy lifting.
With programs and apps ready to set up the outline and do the figuring, you still need to provide the correct direction regarding your finances. You’ll need to have basic knowledge to build the foundation of your budget to prioritize your goals.
Fundamentals that make up a budget
These are the 4 components of a budget:
- Income
- Flexible Expenses
- Fixed Expenses
- Discretionary expenses
Income Is obviously the first factor to be considered as this includes all sources of income.
Expenses Are separated into wants or needs and how they’re paid.
Fixed Expenses Any expense that does not change from period to period.
Flexible Expenses Costs that can be adjusted by the amount or eliminated by the consumer.
Discretionary Expenses A cost that a household can survive without or nonessential spending.
Understanding your expenses allows you to have a clear picture to prioritize and the ability to make the correct adjustments with your goals or when a life event occurs.
Types of Expenses
Understand how expenses are defined will help you when categorizing transactions. A universal example that everyone can relate to is your housing costs as they cover all three types of expenses:
- Utility Bills for you home are flexible expenses as you will be able to adjust your usage as need be.
- Decorating and renovation are discretionary expenses as they are not considered a necessity.
- Mortgage payments are fixed expenses along with home insurance, HOA dues and taxes.
Categorizing your transactions
Categorizing your transactions will help you understand your earning and spending habits allowing you to track your budget. The way we categorize is a personal preference.
Budgeting platforms will need your direction to divide your spending as not everyone will categorize in the same fashion. For example, some will categorize food costs into separate categories such as grocery bills and dining out while others may combine the two into one category.
It's best to split up expenses when categorizing as it will be easier when making adjustments down the road. For example, as we mentioned earlier, housing costs should have multiple categories – mortgage as a fixed expense, utility bills as flexible expenses and decorating and renovating as discretionary expenses. This way you’ll have a clear picture of where you’re able to adjust if you need to reduce your overall housing expenses
Flexible and discretionary expenses – Estimating the cost
Fixed expenses are a given with a set monthly cost. Flexible and discretionary expenses need to be calculated. Calculating a three-month average will give you a monthly spending limit for these categories.
When you categorize your transactions, your program tells you if you’re on or off budget and exactly how much you’ve been spending.
A digital platform will go to work for your once you’ve categorized your accounts. The platform will automatically update after every transaction so it will be easy for you to assess if you need to make any adjustments. Here are a few suggestions to maintain your budget:
- Log on to your platform and keep an eye on your spending. If you see that your actual spending is exceeding your spending limits, make a simple adjustment to stay on track.
- If a simple adjustment doesn’t work and you end up consistently out of budget in a specific category, the spending limit may need to be adjusted. A good rule of thumb – when you raise a spending limit in a category remember to lower a limit in a different area, if possible, to offset and remain on point.
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