Budgeting Tips for Everyone

Budgeting is essential in taking control of one’s personal finances and a first step to building savings. Here are 13 tips to help get you started.

•  List your expenses and income

Like many things in life, writing it down makes things a lot clearer in your mind and helps you organize your thoughts. Writing down actual numbers also paints a vivid picture of your financial situation and provide a good reality check. The numbers don’t lie. The very first thing one needs to know is how much income there is compared to household expenses and whether there is a surplus or deficit, then work from there.

• Identify fixed expenses. Track variable expenses.

Fixed expenses such as rent, phone bills, subscriptions etc do not need tracking and can often be automated. It is also easier to plan your leisurely spending budget when one knows his/her fixed expenses in advance. Variable expenses such as groceries and gas can differ by even a few hundred dollars a month so it makes sense to keep track of these expenses and review spending needs from time to time. Gas and groceries in particular are worth paying attention to because the lines can some times be blurred between essential and non-essential spending for both (eg. buying unhealthy snacks versus staples like milk and eggs, and driving to work versus driving out of town for leisurely activities every weekend). 

• Save water and energy.

Other common variable expenses are water and electricity. Sometimes simply turning off the lights when you leave a room or not leaving the tap on while washing the dishes or brushing your teeth can not only help save you some dollars, but also helps with reducing water waste and carbon dioxide emission from power plants. Do your part by helping the environment and save money while doing it!

• Wants vs needs.

Understanding your wants versus needs is key to building a proper household budget. Writing these expenses down and quantifying them helps give a clear picture of the reality of your cash flows versus what you would like them to be. Some important questions to ask are what percentage of my spending is wants versus needs? Can I cut down any non-essential spending? Can I easily allocate some of it to savings and investing? Are the household needs all taken care of? 

• Make saving one of your bills. 

Many people see how much they have at the end of the month and save what is left over rather than setting a specific amount to save each. However, savings should ideally be a line item in everyone’s budget. By telling yourself that a set amount savings is one of your ‘bills’ you are giving it (nearly) the same importance as rent or your mortgage payment. It tends to be harder to save money because ‘savings’ do not go towards anything urgent (such as bills or products and service we need to pay for immediately. Categorizing savings as a ‘bill’ makes it seem more urgent than simply money that you have leftover.  

• Negotiate bills.

This one is often overlooked, but many are surprised by how much they can actually save by trying this. Monthly bills such as auto insurance and phone plans are essential expenses, but they are consistent cash flow outflows. Reducing these monthly expenses can really add some flexibility especially on a tight budget. Check to see if you can bundle and save. Even if you save $100 monthly after renegotiating all your bills, that’s $1200 annually that you can save, invest or put towards another expenses that matter more.

• Take advantage of automation. 

Automating both your bills and savings takes a lot of the guesswork and decision-making out of budgeting. It is helpful (if you can) to line them up so that they are timed together at a certain time in the month, but even if this is difficult to do, at least one has a schedule they can rely on to make sure one prioritizes paying bills on time and in full and that the monthly savings goal has been met. Paying your bills manually on the other hand takes more time, requires more decisions to be made and may even result in prioritizing your non-essential expenses over bills and savings.

• Reward yourself. 

Staying within your budget can be a tough task. To keep yourself motivated to continue it is a good idea to reward yourself with something that you like or enjoy doing. For example, you could buy yourself a new pair of shoes if you stay within your budget for three months in a row. One can even go a step further by limiting the reward amount to any surplus in the budget, this way one can be extra diligent each month about not overspending. 

• Cut the cord. 

The distribution of entertainment is changing drastically. In the age of the internet, one can essentially watch anything online. This is a very different reality than just a decade ago. However, in today’s world, it is making less and less sense to pay for both TV and internet, especially given the price tag on some TV packages. Some TV packages cost more than having a Netflix, Amazon Prime, HBO and Disney+ subscription combined!

• Subscription saturation. 

While many subscriptions are attractively priced, it is important to watch out not to end up having a list of subscriptions that one barely uses. This is especially important because subscriptions tend to be a fixed monthly expense. Cutting out unused subscriptions can really help to free up some cash flow for other items in the budget.

• Consider ditching credit cards. 

Credit cards can make some of us feel like we have access to ‘free money’ for a short period of time. It feels empowering in the moment, but reality can hit very quickly. There is nothing necessarily wrong with using credit cards, especially if you feel you have got things under control with your monthly budget and your ability to save. In fact, credit cards can be very useful for making big purchases, reservations and of course many come with added perks and rewards. However, credit cards are not for everyone, even though society makes us believe that they are. For some, the points and perks are not worth it if the right financial and budgeting habits are not in place.

• Use pre-paid cards.

Pre-paid cards can really help if you have issues controlling credit card spending. How it works is that you load the card with your own money and spend from it. It is like a debit card, as simple as that! Most are MasterCard and VISA branded and which allow you to use them wherever you would use a credit card (online purchases, making reservations, booking flights etc). Some even allow you to earn points when you spend. The main difference is that you only spend from what you have and are not borrowing from the bank. In a sense, isn’t that the way it should be?

• Don’t compare yourself with others.

While this final point is less technical, it is arguably the most important. Many poor financial decisions stem from us comparing our own spending with that of others. As a result, we may feel that we need to ‘level up’ our lifestyle end up spending on things that we do not need and even things we do not want. The reality is that everyone has their own circumstances and therefore the level of spending should be appropriate within that context. People have different income levels, mortgage payments, number of members in the household, debt levels etc. As such, it would not be fair to compare to anyone but yourself. As the saying goes: Act your wage, not your age.

The above tips are meant to be a kick starter for those who are new to creating a budget and organizing their finances or a refresher for those who already have some experience managing one. We hope you found these tips useful. If you have any of your own budgeting tips, please do share them in the comments section below.

Moez Mahrez, CFA

Analyst for 5i Research