Budgeting

A budget is a tool that allows you to take control of your personal finances and to make the best use of your income in order to meet your needs, according to your values and preferences. It also helps you to plan and to ensure that you reach your objectives. When we realize where our money is going, some options may become more apparent. Budgeting can help you reach a savings target, or repaying debt.
This article first adresses who needs a budget, and why making a budget can be a good idea. The article then deals with the various steps involved: define your goals; track your spending for a while; prepare a balanced budget; track your progress.
==Who needs a budget?==
More than 60% of US households currently engage in budgeting (formally or informally), and of those who currently don't, more than 40% have done so in the past.Zhang CY et al. (2021) How Consumers Budget, SSRN Electronic Journal, viewed October 14, 2021. Budgeting is "highly prevalent across the income distribution", so it is not restricted to people who are under financial strain. There is a positive correlation (not to be confused with causation) between budgeting and percieved financial wellbeing: "the propensity to budget increases signicantly from 41.8 percent to 71.1 percent when moving from the lowest to highest index score for perceived financial wellbeing".
One US studyDonnelly G, Iyer R, Howell RT (2011) The Big Five personality traits, material values, and financial well-being of self-described money managers, Journal of Economic Psychology, v. 33, p. 1129-1142, viewed April 30, 2022. found a correlation between some of the "Big-5" personality traits and money management practices (defined as “budgeting, saving, investing, spending, and otherwise overseeing the use of money”). In other words, some people seem psychologically better predisposed at managing money carefully than others. The two relevant personality traits in the US study are conscientiousness (positively correlated) and neuroticism (negatively correlated). A small Dutch study found a negative relationship between "mental budgeting" (the tendency to assign expenses to mental accounts) and neuroticism.van Rosmalen B (2020) The influence of personality and preferences on mental budgeting, Master Thesis, Rabdoud University, The Netherlands, 49 p., viewed May 1st, 2022. People who score high on neuroticism tend to show more compulsive buying behaviour. Therefore, somebody who scores low on conscientiousness and/or high on neuroticism would probably be more likely to benefit from developing an explicit budgeting strategy/system to increase self-control and good financial outcomes. People with such personality traits might also benefit from consulting with a financial advisor.
===Who does not?===
However, if (1) you've calculated a savings rate that will allow you to reach your goals, including retirement, (2) you are easily saving that amount or more every year, perhaps with the help of automated contributions to your investment accounts, and (3) you have no consumer debts, then you probably don't really need a budget. In other words, if you're already saving enough, who cares where the rest of the money goes in detail? Everybody else, read on...
==Why budgeting can help==
In preparing your budget, generally your goal is to balance your income with your regular expenses, savings for your financial goals and repaying your debts.
Specific reasons for budgeting include:
* Figuring out where your money is going
* Making sure that you spend less then you earn, to repay debt and save for the future
* Reducing stress
* Gaining more control over your finances, and feel in control
* Helping you to reach your goals
Thaler describes bugeting as self-control procedure.Thaler RH and Shefrin HM (1981). An economic theory of self-control. Journal of Political Economy 89:392-406, available on ResearchGate A person can be thought to contains two entities, a planner and a doer. The planner is concerned with lifetime well-being, which requires saving for the future. The doer is selfish and wants to spend now. Therefore, "the planner requires some psychic technology capable of affecting the doer's behavior", such as rules of thumb or budgeting.
A large Dutch study shows a statistical correlation between mental budgeting (mentally assigning expenses to categories or 'accounts') and having savings goals.Antonides G, de Groot I M, van Raaij WF (2011) Mental budgeting and the management of household finance, Journal of Economic Psychology 32:546–555. A correlation was also seen between mental budgeting and knowledge of financial products. In the authors' words, "mental budgeting is not a naive type of financial management".
A US study found that the most common reason given by people who budget is the desire to avoid overspending. Other popular reasons include saving for short term or long term goals, avoiding future debt, and repaying existing debt.
==Before you start==
===Goals===
Budgeting typically starts with some thoughts on what are your financial goals, both short term and long term?Financial Consumer Agency of Canada, Making a Budget, viewed October 10, 2021. Write them down. This may include paying back debt, reducing your weekly expenses, saving for a big expense, saving for retirement, etc. 
===Tracking expenses===
It is worthwhile to consider past spending when formulating a budget. So the next step is keep track of your money for a month or two. This will help you understand spending habits and expenses. Consumer advocates generally recommend tracking everything on a daily basis during this time.
Some expenses might only occur once a year, such as purchasing certain gifts, some insurance payments, renewing your driving licence, property taxes, etc. Go through your files (paper or online) to find out the relevant yearly amounts and divide them by 12 to arrive at the monthly figure.
===Needs versus wants===
Knowing the difference between your needs and your wants is an important budgeting consideration. Things you need are essential expenses such as appropriate shelter, food, basic transportation, basic clothing, etc. People's needs change over time, depending on where they live, if they have children, etc. Things you may want are everything else, and wants are influenced by factors such as advertizing, emotions, habits and peer pressure.Financial Consumer Agency of Canada, Needs and Wants, modified February 10, 2017, viewed October 14, 2021.
A commonly cited guideline on personal finance websites (e.g., How to Choose the Right Budget System, December 18, 2019, viewed October 14, 2021.23 Personal Budgeting Methods, viewed October 14, 2021.), probably aimed at middle income families, is 50-30-20: you could spend 50% of take-home pay on needs (necessities), 30% on wants, and 20% on savings and debt repayment. The specific numbers are not important here, but rather the basic message is that a significant portion of income should go to savings, and most of the remaining portion should be spent on needs rather than wants, otherwise the budget will typically not balance.
==Preparing your balanced budget==
Now that you know what you've been spending for the last month (or year), you can prepare a balanced budget for the future. This means that revenues (income) and expenses (including savings) must balance. In terms of spending categories, keep it simple; the more complicated the budgeting process is, the less likely a person is to keep up with it. 
===Shortfalls===
After preparing your budget, if it indicates that you have a shortfall, review your budget to see where you could reduce spending. You could also consider whether there are ways to increase your income.
===Surpluses===
If you have money left after you have completed the budget, consider using it to repay debt, particularly non-deductible debt, faster or to increase savings for an important financial goal.
===Flexibility===
Depending on your circumstances, you might want to have some flexibility in your budget. Preparing a budget when you have irregular income or a number of "one-time" expenses can be tricky. To avoid running out of money because expenses occur before the money actually arrives you should establish an emergency fund.
===Budgeting tools===
There are a number of tools available to help in the creation of a budget, such as spreadsheets, personal financial software and online budgeting tools (including apps). For example:
*The Financial Consumer Agency of Canada has developed an online tool that does the math for you
*The Credit Counselling Society has a free Interactive Budget Calculator Spreadsheet for Canadians
*See the sample budget worksheet below. 
Such tools generally provide a good starting point for preparing a budget, but remember simplicity will typically increase your chances of successfully following your budget.
==Tracking your budget==
Once a personal budget has been created does not mean the effort is done. You should track your monthly income and expenses against your budget.Heath C, Soll JB (1996) Mental Budgeting and Consumer Decisions. Journal of Consumer Research, v. 23, p. 40-52, PDF available from ResearchGate, viewed May 1st, 2022. 
If you find that your actual amounts are not matching up to your plan, then adjustments should be made, either in budget amounts or spending habits.
As Heath and Soll (1996) write, "for a budget to be an effective self-control mechanism, it must be at least somewhat inflexible", since you don't want to spend your rent money on a frivolous expense. On the other hand, as noted above, some flexibility between budget categories (especially the non-essential categories) can be a good thing, as long as you can still reach your savings goal at the end of the month or at the end of the year.
==Sample budget worksheet==
 Sample Budget Worksheet
 	Previous Month ($)	Budget ($)	Actual Spending ($)	Difference ($)
INCOME 	 	 	 	
Salary or benefits 	 	 	 	
Canada Child Tax Benefit (CCTB) 	 	 	 	
Other 	 	 	 	
Total INCOME 	 	 	 	
BASIC EXPENSES (NEEDS) 	 	 	 	
Home 	 	 	 	
Rent or mortgage payments 	 	 	 	
Property taxes/condo fees 	 	 	 	
Home insurance 	 	 	 	
Utilities (such as electricity, water, cable or telephone)	 	 	 	
Repairs and maintenance 	 	 	 	
Transportation 	 	 	 	
Public transportation 	 	 	 	
Car loan payments 	 	 	 	
Car repairs, gas, etc. 	 	 	 	
Car insurance/registration, etc. 	 	 	 	
Living expenses 	 	 	 	
Groceries 	 	 	 	
Child care 	 	 	 	
Medical and dental 	 	 	 	
Outstanding loan payments 	 	 	 	
Basic clothing 	 	 	 	
Life, disability and medical insurance 	 	 	 	
Emergency fund 	 	 	 	
Other 	 	 	 	
OTHER EXPENSES (WANTS) 	 	 	 	
Restaurants and entertainment 	 	 	 	
Clothing (extra) 	 	 	 	
Hair care 	 	 	 	
Gifts 	 	 	 	
Vacations 	 	 	 	
Other 	 	 	 	
Total EXPENSES 	 	 	 	
SAVINGS TO REACH GOALS (Total income minus total expenses)	 	 	 	
==See also==
*Cash management
*Net worth
*Record retention
==References==
==External links==
*Financial Consumer Agency of Canada, Making a budget
*Financial Consumer Agency of Canada, Financial toolkit Module 1: Income, expenses and budget
*Top 3 budget software in Canada
*Statistics Canada, Household spending by household type, 2010-2019
*Investor Education Fund, Budgeting, includes a spreadsheet
* Household budgeting, from the Bogleheads Wiki
* Saskatchewan, Household Budgeting; includes tips for lowering costs
*Mental Budgeting and Consumer Decisions, Journal of Consumer Research, 1996
*The Globe and Mail, How to make a budget: Best apps and templates, cash-only budgeting and more
Category:Getting started
Category:Financial planning
Category:Personal finance