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How to Design a Budget That Works for You

08/13/2015 05:37 EDT | Updated 08/13/2016 05:59 EDT
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Most adults understand that they need a functional budget, but not everyone seems to have one. According to Statistics Canada, households with at least $100,000 or more in total annual income account for 37 per cent of all debt in Canada. In the meantime, households with incomes of at least $50,000 but below $100,000 make up 38 per cent. While the cost of living in Canada can be steep, it's possible to live comfortably for much less than $100,000, as demonstrated by this neat calculator on Canada.com.

Perhaps all we really need is an ability to follow a proper budget. You may have one already but if it's not informing your financial decisions, then it's worthless. The sooner you admit that, the better. Here are some of the most common reasons why budgets fall apart:

1. Your Budget Doesn't Match Your Lifestyle

The first thing you need to consider when making a budget is your lifestyle -- and that of your family. If you just set up a budget for the sake of having one and expect every member of your family to follow it, even though it doesn't account for their needs or wants, then it's bound to fail.

For instance, maybe your spouse is a huge collector of vinyl records or perhaps you enjoy having some money for casual spending. Whatever the case, your budget should have room for everything and anything you may enjoy.

That being said, you shouldn't devote too much money to extra spending either, simply because you may not have enough of it! The idea is to create a sense of financial flexibility, not to suck your funds dry.

2. You Lack Commitment

A proper budget should allow you to keep track of all your expenses but only if you stick to it. If you regularly spend money off-budget, your expenses will eventually add up and your budget will collapse.

Let's assume that your grocery budget is $600 a month, but you spend $700 instead because you really wanted those frozen pizzas the other week. If your budget does not account for that extra $100, then you may incur a small debt -- a debt that will grow if you keep doing this.

Maybe you are thinking that you can overcompensate for all the extra spending in some other area of your budget but unless you calculate how much exactly you can sacrifice in that other area, it's unlikely that you will.

So, if you have a compulsion that drives you to spend money randomly, then you should either fight it or create a bit more wiggle room in your budget, as suggested above.

3. Your Significant Other Lacks Commitment

Sometimes it's your spouse who lacks a commitment. If month after month, you are continuously short on money and your partner's erratic spending habits are at fault, then you better fix the problem before it's too late.

There are several reasons why your partner may not be on board with budgeting. Maybe they just hate planning, thinking that everything will work out without their interference. To solve this, give your spouse a reality check by connecting your life goals, such as buying a new car or travelling somewhere nice, to your current financial situation. If you can clearly explain how your budget can help you achieve those goals, then they should eventually agree with you.

If your partner enjoys planning but they are not in charge of the budget, then they may be subconsciously rebelling against it due to a feeling of exclusion. In this case, you may want to scrap your current budget and rebuild it from scratch, allowing your partner to fully participate in the process.

Be diplomatic and negotiate.

4. Your Budget is not Balanced

Certain budgets allocate too much money for some expenses and not enough for others. This imbalance can easily make your budget seem far too restricted and perhaps even push you to abandon it.

For instance, you may feel compelled to devote a good chunk of your money to your credit card debt and potentially neglect other important expenses, such as groceries. However, even if your debt is terrifyingly big, the best solution is to pay it off slowly, because otherwise you will start overspending on whatever you deem less important and effectively flush your whole budget down the drain.

5. You Spend too Much Money on fun

Perhaps you spend more money on having fun than you ought to. Your "fun" may exist in the form of hobbies, which you may not even view as expenses but in reality it doesn't matter what you are spending your money on -- it is still an expense.

So, if you find yourself regularly spending too much money on eating out, compulsively collecting things or some other diversion, then you may want to create a special category for this expense in your budget. Calculate how much you really spend on your hobbies, and if you discover that they are compromising your budget, then look for ways to change that.

6. Your Budget Doesn't Account for Emergencies

You may have a solid grip on payments such as rent, debt, groceries and so forth but if you fail to account for emergencies, then all your careful planning can easily amount to nothing. For instance, your car may suffer a severe malfunction and if it's no longer under warranty, then you may need to cover the expense yourself. This can easily put you in debt, even if you've been doing just fine up until then.

It's impossible to predict if and when such expenses would be necessary but you should at least expect them. Devote some money to an emergency within your budget, and you will be ready for almost anything.

A budget should not prevent you from enjoying your money. It should merely ensure that you don't spend more money than you can actually make. Don't neglect it and you will do fine.

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