Budgeting in Four Simple Steps

Which of these statements best describes you when it comes to budgeting:

a) I keep a very detailed and balanced budget that I review every month.
b) I have prepared a budget but I rarely look at it.
c) It sounds like a good idea, but I just don’t know where to begin.

Most of us would say statement c) best describes how we feel about budgeting. In fact depending on which study you read the percentage of people that actually follow a budget ranges between 1-5%. I would like to recommend a few ideas that might help us get started, and alleviate any fears that we may have with keeping a budget.

First let me start by making this statement: “A budget is the most significant and simplistic tool to creating wealth.” Let me explain. In its most simple terms a budget is nothing more than a rule of measure. To know if we are on track financially we need something to measure our current financial status against. Stated another way, if we were to embark on a journey across the country would we not first plan our trip? This is the significance of a budget. To meet our financial goals we need a plan of how to get there. I would like to offer four suggestions to assist you with your plan.

1) Start to Track Spending
The first place to start is by tracking your monthly spending for the next two to three months. This allows us to average out monthly spending, and isolate or eliminate one time purchases. Expenses should be categorized into fixed or variable. Fixed expenses include those that are recurring and cannot be easily altered such as mortgage or rent, car payments, utilities, and anything to which you have a formal contract. Variable expenses can be more easily manipulated. Examples include groceries, fuel, clothing, gifts and donations, and all of our miscellaneous spending.

2) Create a Realistic Ideal
I know, I know, a realistic ideal. Is that not the definition of an oxymoron? The goal however is to recognize that for a budget to work it must be realistic. This means that we cannot just expect to cover a budgetary shortfall by increasing our income 25%, and it often takes time and sometimes money to alter our fixed expenses. It also means that we need to create an ideal, or a goal that will challenge us. The result is that we want to first list our current income, subtract our current fixed expenses, and then subtract our variable spending. Once this is done we either have a surplus to which we should invest or a shortfall meaning that we need to alter our variable spending to eliminate this shortfall.

3) Wiggle Room
Some people call it “mad money,” I simply call it Wiggle Room. What I mean is that we need to ensure that we build room for error into our budget. What we are trying to do is eliminate the #1 excuse budgets fail, which is because we get discouraged. If the budget is too tight and we fail the chances that we continue are greatly reduced.

4) Review Monthly
The final step is simple. We need review our actual spending compared with our budget once a month with an accountant or family member we trust. This will ensure that we follow the plan we have created.

I recognize that for some of us this comes easier than for others, but I believe that when we consider these simple steps, and recognize the significance that a budget will play in our lives the process becomes easier.

In fact I would like to put forth this challenge to all of us: First, create a list of 5 financial goals that we would like to achieve in the next 12 to 24 months. Be specific. Second, follow the steps I’ve outlined above to create and maintain a budget that will help you achieve those goals. Third, show your goals and budget to an accountant or family member you trust, solidifying your plan, and allowing them to encourage you.

Please feel free to contact me regarding any questions that you may have, or if you would like assistance in creating a budget. I would also love to hear from you regarding your own goals, plans and achievements. You can contact me by email at accounting@birchent.org or by phone at 778-786-1440.

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Matthew Birch has ten years of accounting experience with dozens of companies varying in size from 1 to over 100 employees. He has worked with organizations in many different industries ranging from service to wholesale and retail sales and from construction to manufacturing. Serving the accounting needs of Vancouver and the Fraser Valley Matthew owns and operates Birch Accounting & Tax Services from his home in Clayton Heights Surrey. To contact Matthew regarding any of the services offered by Birch Accounting & Tax Services please call 778-786-1440 or email accounting@birchent.org.