At the start of each year, I have emails in my inbox from people who need my help with budgeting.
I have found that creating a realistic budget is not easy for people to handle over the years.
It’s as if you have a full chocolate bar, but you’re only allowed to eat one square, but you keep sneaking another.
My friends lead to debt because when the chocolate bar is gone, someone has to replace it.
Today, let’s talk about how to create a realistic budget for the new year.
Your Money Needs You To Create A Solid Foundation
Creating a realistic budget seems easy enough, but even the smartest people struggle with their money.
Don’t be afraid of managing your money by setting a realistic budget that fits the lifestyle you want to live today and tomorrow.
What’s interesting is that no matter what budgeting system is used, it must be a realistic budget.
By that, I mean you can’t budget more money than you earn.
Related: How to fix your money problems
I know, common sense, but it happens, and sometimes there are legitimate reasons.
The idea is to recognize and repair it as soon as possible if you mess it up. It’s that simple.
I’ve received emails from executives who can balance a budget for their department but not themselves.
What I think is happening is we put too much stress on ourselves when it comes to money.
Expectations seem to be higher when it is money that you earn as opposed to the bosses.
Here’s the thing – You are THE BOSS of your Money, and you don’t want to mess that up.
However, people do, and that’s a reality that will go on and on.
What you can do is work slowly on fixing that foundation by understanding your relationship with money.
At the same time, your employer might not be so forgiving if you lose money for the company.
For this post, I want to focus specifically on setting a realistic budget.
The idea is that by implementing a few key money-saving techniques, you’ll get a visual picture that you can work with.
Four Key Aspects Of A Realistic Budget
Today, let’s talk about these 4 key aspects of a realistic budget:
- How A Budget Works
- Creating A Realistic Budget
- Money Management Tips
- Focus and Mindset
Money Management Can Go Left Or Right
We’ve learned from our mistakes in the past, and for those failures, I also blog about our successes.
This blog is authentic, which you don’t find much of these days.
I even created a 10-step mini-budgeting series to guide anyone who wants baby steps to learn the process.
Please don’t fall prey to all of those get-rich blogs online because most of them are just trying to pay off debt.
By that, I mean they have no idea what they are talking about.
Understand how to weed out successful bloggers and those that are learning.
Do you want to learn to bake from scratch from an experienced baker or a box?
I’d take the experience over any box because you will see exactly how it’s made and with a fresh perspective.
Isn’t it amazing how easy it is to get lured by people who haven’t been through the process?
For example, I won’t tell you that budgeting is exclusively what made us a debt-free couple.
I will tell you that a budget helped us in the process of becoming debt-free.
Begin With The Logic That Your Realistic Budget Will Work
When you need to budget, but you start with the philosophy that it won’t work, it won’t.
That’s sort of like throwing in the towel on a cake that had an overcooked one on one side.
Cut off the side that burnt and eat the other. You know what you did wrong, and you won’t do it again.
So there are two things to take from this;
- We’ve had a mortgage, vehicle loans, college loans, credit card bills, etc.
- Not everyone will become debt-free.
Understand that there is no one size fits all debt vacuum that will clean up a financial mess.
How A Budget Works
Regardless of how you were brought up from a financial standpoint, you need to understand the basics of budgeting.
Most of all, budgeting is a habit, and you need to work on it daily to fit it into your routine.
This may take 10 minutes, but it will be 10 minutes you’ll thank yourself for one day.
The most common concerns seem to come from what we see and live through as children.
- Your parents never had money because bills came first
- You grew up with a single parent who struggled to make ends meet
- Money management didn’t exist
- Social assistance was the only financial system you knew
- Arguing, Anger and Lies
- Lavish lifestyles Without Frosting (money)
Children hear and see everything, and it can scar them for life or motivate them to be better.
If you have no children and have experienced any of the above, you have two choices.
Embrace the same type of lifestyle or evolve and break the chain.
Budgeting is simple if you strip it down to a bare-bones budget.
When you start with a budget, you really want to know how much money you net each month and your fixed and variable expenses.
- How much money given to you from your employer after taxes.
- What fixed expenses are
- Which expenses you can work with to save money – variable expenses.
Fixed and variable expenses are not the same where fixed expenses are, well, fixed. You can’t easily if at all, juggle them around as you can variable.
An example of fixed expenses would be rent, mortgage, insurance and car payments.
Some fixed expenses might be paid weekly, monthly, quarterly or year after year. A good example would be property taxes.
This is why having an understanding of projected expenses when budgeting is crucial.
On the other hand, variable expenses would be your groceries, credit cards, gas, eating out, travelling, clothes, hobbies, donations, etc.
At the basic level, you track what’s coming in and going out based on the money you earn.
Even if you have an irregular income, you can still create a budget that works for you.
Creating A Realistic Budget
When you create a realistic budget, whether you’ve budgeted or not in the past, it’s comparable to concocting a recipe.
Build your realistic budget from scratch by getting all of the must-have ingredients to make it work.
This is the base of your realistic budget as a basic cookie recipe.
From there, you can keep adding fun ingredients such as chocolate chips, M&M’s or raisins.
However, you have to figure out how much money you have leftover once you create the base recipe.
For example, if you net $3500 a month, you automatically deduct your essentials from that.
Then you can start adding more based on how much money you have left.
These would be items that are personal, close to the heart, hobbies or family-oriented.
Once you run out of money, you’re done.
Below is our actual budget; however, you need to customize a budget to your lifestyle.
Start with the essentials or the budget categories that you must have no matter what.
What that means is that you cannot negotiate these costs as they are as tight as glue.
However, you can play with the grocery budget by using coupons, eliminating brand names, shopping the sales, meal plans etc.
Ideal Household Budget Percentages
Below are our household budget percentages and what, on average, they should be at the end of the month.
If you find you are going over or under the percentage ratios, consider if it’s a good thing or a bad thing.
Then fix it if need be.
For example, if your housing ratio consistently costs you 50% of your net income, you need to move, earn more money or sell and downsize.
- Housing Ratio – 35% or less
- Savings Ratio – 10% or more
- Transportation Ratio 15% or less
- Debt Repayment Ratio 15% or less
- Life Ratio – 25% or less
Building Your Base Recipe For A Realistic Budget
Here we go, so grab a pencil and paper and take notes, but you can come back and read this post any time you’d like.
These items would be considered your base recipe.
- Mortgage and Housing – mortgage or rent payments, house insurance, property taxes, house or rental insurance.
- Groceries – this is pretty straight-forward however you need to figure out how much your grocery budget should be.
- Debt Repayment – loans, student loans, credit cards etc.
- Healthcare Costs – Any costs that aren’t covered by works benefits or OHIP, medical costs, prescriptions, dental, physio etc. (keep your receipts as you may be able to claim them in your income tax return).
- Retirement – Savings, RESP, RRSP, investments, Life insurance etc.
- Transportation – vehicle payments, insurance, repairs, stickers and licence renewals etc.
- Daycare Costs – Before and after school programs or all-day daycare for your child/ren.
- Life Insurance – This may be controversial but for us, it was a must.
- Projected Expenses – These are expenses you will have to pay at some point throughout the year.
Below is our actual budget or Cookie Recipe, which totals $6545.80.
The amount of income we net must meet or exceed this number for our budget to work.
In our case, it fluctuates based on any extra cash we earn each month.
If we spend too much, we have to find out if the budget is not balancing correctly.
Also, a budget must be visited regularly as life does change.
For example, when we had our son, we needed many baby products that we had never considered before.
So, as the year rolls through, take some time to review your budget categories and make any necessary changes.
Important Expenses For You Or Your Family
Once you’ve finished the essentials above, move on to the budget categories that are close to your heart.
These would be considered the extra ingredients that you want to make the cookie dough taste better.
For example, you may send your parents money and invest in an RESP registered education savings plan to help fund your child’s education.
You might send money to your parents or children who need your financial help.
Instead of a trip to the mall or online shopping for clothes, you can consider second-hand shops or hand-me-down clothing and shoes.
Perhaps you go to church or make donations to your favourite charity each month.
A hobby that generates income for you or has the potential to. Mine would be blogging.
You can also consider sports or other activities for your children to build a realistic budget.
- Can your realistic budget handle sports expenses?
- Is eating out a good idea or should you focus on eating in?
- What can I do to reduce the costs to fit within a realistic budget?
Nice To Have But Non-Essential For A Realistic Budget
These are the ingredients that might bake it into the base recipe, but if there’s no more room, then you can’t do it.
We all have non-essential wants, but you can’t buy them just as we say to a child because you need money.
The same rule applies to your realistic budget because then what happens?
- You begin spending more than you earn
- Credit card expenses increase
- You fail to pay for your essentials
- Removing money from retirement investments or emergency savings
- You throw the budget out because you don’t think it’s working
Focus and Money Mindset
Managing your money takes skill and habit, as I mentioned at the beginning of this post.
Related: 20 Habits Of A Debt-Free Family
I promise you the more you budget, the better you will get at it and see success.
Budgeting is a mindset, and once you’re ready to save and pay off debt using that momentum to win.
Start with a realistic budget, and when your cookies get too easy to make, test out a new form of budgeting.
I find the further we learn about the budget, the more detail we want to see.
We use a zero-based budget which we love, but there’s plenty out there to choose from.
Check out my free budget binder tools for all of our free budget downloads.
Discussion: What else would you add for readers who want to create a realistic budget?
Comment below as I read all of the comments on this blog and try my best to reply.