Budget is not a four letter word

What does the word budget mean to you? If you ask dictionary.com, it will tell you that a budget is

an estimate, often itemized, of expected income and expense for a given period in the future

Sounds scary doesn’t it?  Well lucky for you, a budget doesn’t have to be scary, and it doesn’t have to be a four letter word.  Everyone will tell you it’s important to create a budget and stick to it if you want to have control over your finances, but I bet that many people won’t tell you that you don’t always need a formal budget written down on paper.

In fact, you can get by with a basic informal budget by just knowing how much you can approximately spend each week on certain items.  For example, if you know that each week you make $500, you should not be spending more than $500 each week. In reality, you should be spending much less because you want to you make sure you are:

1. paying yourself at least 10% of your salary to put into savings
2. putting aside additional money to meet your financial goals

So how does this work? Well, first off, let’s take that 10% off right away, so of the initial $500, you now have $450 left. From there, let’s say that each week $200 has to go to rent to make your monthly rent payment of $800. This leaves you with $250, let’s take off another $150 each week for other expenses including cable, internet, cell phone, and miscellaneous, leaving you with $100 each week to spend. Finally, let’s subtract another $50 because every month you want to put $200 towards the purchase of a new TV.

Now that you know that you have roughly $50 to spend a week, how do you want to spend it? I like to buy my lunch once in a while, so I know that $10 a week I spend buying food, leaving me with $40 to either put into my savings, or spend on whatever I want. For those of you who are visual, here is a simple diagram.

And there you have it, we were able to make a simple budget in under five minutes, and you don’t have to write anything down in a formal budget , because each week you know you only have $40 which is not allocated to something. So the real question is, will you spend or save that $40 each month?

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1. Why You Need A Budget The article below was published in Canadian Money Saver magazine...

One Response to “Budget is not a four letter word”

1. the weakonomist says:

   March 16, 2009 at 10:00 am

   I don’t work within a budget, I just limit my access to my own accounts. Most of my paycheck goes into long term savings, which includes many goals both near and far. I live off just a small portion of my income, and so anything beyond what is in checking I cannot afford.

   Reply