Budgets need to be managed. That means keeping track on a fairly regular basis. Without some form of monitoring, you will have no way of knowing:
- If your budget is realistic;
- if you are working within your budget; or
- if you will be successful in achieving your financial goals.
Here are 5 different personal budgeting systems that can help you track and manage your budget.
The most often thought of approach to budgeting is to use a simple spreadsheet or on-line budgeting tool to record your expenses every month. By tracking and comparing your actual spending to your budget you will be able to identify whether you are on track, or whether you need to make further changes, either to your budget or your spending habits.
This budgeting method works for some but can become tedious. Often people give up after a month or two. The trick to making this type of budgeting program work is to record just enough detail to be useful, and not so much that it becomes a chore.
If you would like to track your expenses on a monthly spreadsheet, download our free excel budgeting workbook.
Jar or Envelope Budgeting
The jar or envelope method of budgeting works well because it is simple, yet effective. By allocating your spending into categories like groceries, transportation, entertainment, debt repayment and savings, you are controlling how much you spend and where. It doesn’t matter how you choose to spend your money as long as you stop spending when that particular jar is empty.
As a budgeting system, this method can help control overspending. To be effective however you will need to accurately predict and allocate your expenses into appropriate categories.
Your ‘jars’ don’t have to be physical piles of cash. You can use virtual jars by setting up different bank accounts for different purposes.
Under this method you set up 3-5 separate bank accounts for managing your money. Your accounts can be set up any way that will help you stay within budget. A typical approach might be to have one account to pay living expenses and then have separate accounts to set funds aside for specific items like an emergency fund, vacation account, savings accounts etc.
While this method can help you set aside funds for specific items, it does not help identify ways to improve your overall spending and savings habits unless you have prepared a detailed budget to start.
If you don’t like to budget at all, one approach is to save a fixed amount each month, then spend the rest.
Known as reverse budgeting, this method works if you have a good income and are just looking to discipline your savings. If you are having trouble making ends meet, this type of system won’t help you find ways to reduce your expenses. You also need to have the discipline not to use credit to make up any shortfall in the month.
Using on-line banking or jars, under this budgeting approach, you make sure all your essential bills and expenses are paid out of each paycheque before any discretionary spending. What’s left over is yours to prioritize.
If for example your hydro bill is $200 and you are paid weekly, you pay $50 each week towards your hydro bill. If your rent is $2200, you would set aside $550 each week in a separate account (or jar) to make sure you have the funds available to pay your rent next month. Once you have paid or set aside money for all your necessary expenses, you can spend what’s left over.
The biggest advantage of this system is all your bills are paid and you don’t run out of money at the end of the month. By not tracking your non-essential spending however, you are not necessarily spending your money wisely. You may not be paying off your debt or saving as much as you could, or should.
Whatever system you choose, budgeting is an important step in solving your money problems and meeting your financial goals. Choose the budgeting system that works best for you.