Budgets for Beginners – Part 1: Why a budget?

I love budgets. I find that they are the single best money management tool out there and everyone should use them. Especially whoever manages the family money.

The first budget I ever created was when I was off to university. I was incredibly lucky because my parents were paying for my tuition (hurray for RESPs!) and they were also going to give me an allowance to cover my living expenses. However, my dad made me create a budget for this allowance. He said the amount I would get would depend on how good my budget was. Obviously, it had to be reasonable, but he also wanted me to make sure I really thought about what I would need – and live with it. I remember cheekily adding a budget of $100 per month for Starbucks, arguing that I will need it to help me study. He accepted it.

It was a great lesson because I really needed to stick to it. It had to cover everything from my cell phone bill, to books, to laundry, to going out. I got a fair amount, but its crazy how quickly it went – especially when I wasn’t paying attention to my budget.

To put into perspective WHY budgets are so important – and not just for university students, but everyone: over 50% of Canadians don’t have a budget. So its no surprise that:

1. Almost 1/3 of Canadian families are living pay cheque to pay cheque. This means that they never, or almost never, have any money left over after paying for essential expenses, according to this article in the Globe and Mail,

2. 25% have never made a contribution to savings – which is scary, since almost 40% of Canadians feel they will need to have $1 million to $3 million saved for retirement and another 34% will need between $500,000 and $1 million. And yet of the Canadians who are saving, more than half are saving less than 5% of what they earn, based on responses from this poll.

3. Over 75% of Canadians surveyed have an average of $16,000 of consumer debt. Though I bet its actually higher especially if you consider things such as car leases or financing to be consumer debt, which I do.

Having a budget, on the other hand, can truly help avoid a lot of those problems.

I’ve been using some form of a budget ever since the one I started in university with varying degrees of strictness. I feel like it keeps me line and keeps me honest about what I can and can’t afford. And, speaking honestly, there have been months where we have been over-budget. Sometimes because something we budgeted for ended up being more than we expected and sometimes because we were lazy about monitoring the budget and spent money on stuff that perhaps we shouldn’t have.

But by reviewing our budget regularly, at least I KNOW where we stand and it gives me a signal if we should cut back a bit (such as buying a bottle of wine and hanging out at home instead of going out for drinks) or a lot (such as put off buying anything except necessities like food or gas – this would include haircuts, clothing for myself/hubby/kids or anything that we really don’t need) over the course of the next month.

I’m going to detail how to best go about creating a budget for a family in my next post, which I will be putting up in a few days. In the meantime, if you don’t already have a budget but will want to create one, start compiling all your financial data (bank statements, credit card statements, tax bills etc) so you will be ready to hit the ground running.

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