Budget Principles – The Finer Points

Basic Purpose

The entire idea being keeping a budget is to know where you are spending your money.  If you stay in the loop as to where your money is going, you’re able to make better informed decisions when purchasing things.  You will be far less likely to spend your way into debt, or if you are already in debt, having a budget will allow you to make a plan to get out of debt.

You will be better equipped to deal with large unexpected expenses because you’ll already have a system in place to deal with them, which lowers your stress levels when dealing with financial issues.

You will save money!  Having and sticking to a budget allows you to streamline your finances.  You will have a plan with how to spend your money so you will spend less on needless expenses like bank service charges, late fees, overdraught charges and credit card interest.  In general tracking your spending will open your eyes to many needless purchases you may be in the habit of making, and allow you make better use of your money.  It will also allow you to spend money guilt free when the time calls to do so, because you’ll know that you can afford it.

Keeping a budget requires two main things:  A means for creating your spending plan – ie. Making your Budget, and secondly it requires a means to track all of your transactions (purchases) and dedication to recording every purchase on a daily basis.  Recording each transaction you make is what turns most people off from keeping a budget – it can seem tedious and time consuming, but it’s the key to being able to look back and see how you’ve spent your money.  MoneyPlan makes the transaction logging as quick and painless as possible, and only takes a minute or two each day, and is WELL worth making it a habit.

The main idea behind how MoneyPlan in particular operates is that it keeps track of how much money you have to spend for each category, regardless of where that money is physically.  At your bank you may have a high interest savings account with $2000 in it, a separate chequing account with $500 in it, and maybe you also have $100 in your wallet.  The balance MoneyPlan reflects would equal the sum of all of these accounts - $2600.  MoneyPlan won’t keep track of where you keep your money.  That is ultimately something that is not important to budgeting, so in order to keep MoneyPlan simple and easy to use, we’ve left that up to you.

Being Intentional

One of the most important principles to follow when you’re budgeting is to be intentional about every dollar.  The way this materializes on a budget, is that the amount you account for your expenses and savings each month should be equal to your monthly income.  Simply put your budget should balance.  If you have accounted for all of your monthly expenses and it comes out to be LESS than you make for that month – that’s great!  But don’t just let that surplus float around aimlessly.  Now is the time to put it work towards some sort of specific savings.

Likewise the most important thing you can do when you put money away for savings is to be intentional about it.  Each dollar you put away should be going towards saving for a specific purpose.  Put away a small amount each month for vacation, for buying a new car, large purchases that you might want in the future, etc.  It’s very difficult to plan ahead and be aware of whether or not you can afford certain things when your savings are all lumped together into a giant pool with a nebulous purpose.

Designing Your Budget

In MoneyPlan there are two different ways you will be using to allocate funds, Expenses and Savings Funds.  Both are handled a little differently in MoneyPlan.  Expenses are things like your mortgage payment or rent, utility bills, as well as monthly allowances for things like gasoline, or groceries - anything that you pay for on a regular and predictable basis every month.  Savings Funds is a way to set aside a certain amount of money each month in order to plan for a large expense at some point in the future, such as a new car, vacation, or some sort of bill that comes irregularly (for example if you pay car insurance every 3 months).

Similar expenses are grouped into Categories, for example you might include your car payments, car insurance, and gasoline all into a Category called Transportation, and then in a separate Category labeled Food, you would include expenses like groceries for the month and an allowance for eating out.  MoneyPlan allows users to create as many or as few categories as they like, but we recommend keeping around 6-10 major categories.  The more categories you have, the more specifically you can analyze your spending, however it also becomes more complicated to manage.  You have to find the balance that works best for you.  Below is a sample list of categories one might think about using:

Housing

Utilities

Transportation

Food

Recreational Spending

Miscellaneous

Savings Funds in MoneyPlan are created separately from the budget itself.  You can create as many Savings Funds as you like, and MoneyPlan will keep track of the balances.  Savings Funds only need to be added to your budget plan if you intend on setting aside a certain amount from your income each month to grow it.  You can still keep Savings Fund that are off-budget, in which case the balances in these accounts won’t be contributed to on a monthly basis.

When you record a transaction you will specify what Category or Savings Fund to post the transaction to.  MoneyPlan will keep track of your total spending for each Category and each Savings Fund, as well as show you how much money each month you have budgeted for each Category.  The key to staying within your budget is to not spend more than you’ve budgeted for in each Category.

As we all know, sometimes despite our best efforts we will spend more money than we intend to, and go over budget in a certain category.  That’s ok.  This is where MoneyPlan’s flexibility really shines.  If you do go over budget, MoneyPlan will make sure you know about it, but unlike other zero-based budget software, it won’t MAKE you do anything about it.  How you correct your overspending is up to you, and you have a number of options:  If you anticipate that this overspending is going to be a regular thing month-to-month you may want to go in and increase the amount you have budgeted for that category by decreasing the amount from another category.  Or you may want to leave your budget it as is – a little overspending here and there is ok as long as you underspend in another category.  Each new month you get to start fresh – that is as far as categories are concerned, MoneyPlan doesn’t remember overspending or under-spending from the previous month.  If overall you spent less than the total you budgeted for, good for you!  Your overall balance (or net worth) will grow.  It is important to understand however that if you spend MORE than you budgeted for you are living beyond your means.  While it is okay for this to happen once in a while, if you are constantly living beyond your means more often than not you will very quickly find yourself in debt.

Balance and ‘Available to Spend’

You will notice that MoneyPlan keeps track of two different balances, one is called “Balance”, the other is called “Available to Spend”.  Balance is the total amount of physical money that you have – cash in your wallet and money in the bank are all included in this. “ Available to Spend” is your Balance minus what you have allocated in your MoneyPlan Savings Fund and minus what you’re going to contribute to your Savings Funds at the end of this month.  It is the amount you have available to spend on the expenses in your budget.  For example, let’s say you have $500 in cash in your wallet, and $2000 sitting in the bank.  Your MoneyPlan “Balance” will equal $2500.  Of that, maybe you have a MoneyPlan Savings Fund set up for a vacation, and you have allocated $400 into it, and you will be contributing another $100 into it at the end of the month.  This means your “Available to Spend” is equal to $2000.

A great way to know mid-month if your spending is on track, is to look in the top left of the Transaction Log screen and make note of the “Unspent Budget” amount.  Simply put, this is equal to the total amount of your budget, minus what you’ve already spent.  So if your spending stays as planned, this is how much MORE you’ll spend between now and the end of the month.  Now take a look at your “Available to Spend” amount.  Is it less than the Unspent Budget amount?  If so, you’re going to be spending more than you have by the end of the month.  The only exception would be if you have another paycheque coming in this month that hasn’t been logged yet, because that will boost your Available to Spend.

Unspent Budget = Your Budget minus what you've already spent

Available to Spend = The cash you have available to spend on monthly expenses

Final Thoughts

Ultimately the key to a stress-free financial life is to follow these points:

1. Be intentional about all of your money, don’t let surplus float around, and save for specific purposes.
2. Stick to your budget as best you can, but don’t stress over small overages as long as you’re generally spending less than you earn.  Make adjustments to the budget as needed.
3. Be committed to tracking ALL of your spending so you know if you’re sticking to your budget