Budgeting & Spending: What is a Budget and Why Create One (Blog Post #6)

If our goals when we become adults include achieving financial independence and financial stability in our lives, and reducing the degree of financial stress we subject ourselves and our families to, then we need to recognize the importance of the relationship between the income we earn and the expenses we incur. When we become adults, we will have more expenses to cover on our own since we inevitably will have greater financial responsibility than we do now as kids. So when we do get older and begin to earn an income, it will be super important to spend time thinking about the expenses that we will have in comparison to the amount of money we are actually making. Obviously, over time, the expenses we have will change just as the income we earn hopefully will change (for the better). It will make sense, therefore, as adults to constantly revisit the relationship between our income and our spending.

A personal or household budget is a spending plan that is based on an estimation of one’s income and expenses over a specific period of time. Creating a budget, not in one’s head but on paper, is a valuable and worthwhile exercise which forces one:

Naturally, not all of the expenses we will have as adults will necessarily be month-in, month-out expenses. Some may be quarterly, some may be annually, and some may be one-off expenses. So how should we go about budgeting for these less frequent expenses that may come up within, for example, a 12-month monthly budget? If one has an expense that is not monthly but let’s say quarterly, then for budgeting purposes one can simply incorporate that quarterly expense into the 4 relevant months that the expense is due. For example: March, June, September, and December of a given year. Alternatively, for budgeting purposes one can choose to spread evenly a quarterly expense across all 3 months of the given quarter. For example, budgeting 1/3, 1/3, and 1/3 of a quarterly expense across January, February and March instead of budgeting 100% of the quarterly expense just in March. To illustrate, let’s say you have taken out a loan and you have to pay the loan back in quarterly increments of $150.00. Instead of budgeting for the month of March $150.00 in loan repayments, you could budget $50 for the month of January (even though you would not actually spend it in January), $50 for the month of February (even though you would not actually spend it in February), and $50 for the month of March (even though you would end up spending $150, not $50, in March). The same approach to budgeting can be used for a one-time annual expense or a one-off expense. If one has an expense that is not monthly but let’s say once a year or is just a one-off expense, then for budgeting purposes one can simply incorporate that one-time annual expense or that one-off expense into the relevant month that the expense is due. Alternatively, for budgeting purposes one can choose to spread evenly an annual expense or a one-off expense across all 12 months of the given year for which one has created a budget.

Whatever approach, for budgeting an individual expense, that you prefer is the approach you should use. But spending the time to create an objective, detailed budget and to revisit it regularly as you carefully track your spending will be time well-spent. Ultimately, having the discipline to live within your budget is going to be one key to achieving your financial goals and achieving financial independence and financial stability in your life. Additionally, creating a budget will force you to identify individual spending priorities (and perhaps even personal savings priorities). Why? Because the total amount of income we earn will naturally impact the total amount of money we spend (and can save). So as adults we will have to make choices and a budget is a practical financial planning tool that we can use to hopefully make more informed financial decisions and better choices.

I would love to hear from you. Any ideas, experiences, thoughts, comments and questions….please do share.

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