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Coming up with even a basic budget is a big achievement for most of us. But having more than one budget can actually help you get to your goals sooner. Find out why.
Sticking to a budget can be a tough business. Even with a step-by-step budgeting guide to follow, having the discipline to stay on target with goals for spending and saving is a challenge. Even the task of finding out where your money is going can be a struggle. Susie Erratt CFP® has seen many clients come unstuck with a budget plan when they have to put everything they spend under a microscope. “It’s very confronting to look at day-to-day spending and get really strict on what’s allowed and what isn’t,” says Susie. “When this is what people experience with their household budget, it can really put them off.”
Know your numbers for essential expenses
To guide her clients towards a more positive view on budgeting, Susie takes a different approach. “Instead of asking questions about where their money goes, I just ask them to fill in a really simple list of expenses and be as accurate as they can based on a couple of recent bank and credit card statements,” she says. “It shouldn’t take more than 10 minutes to arrive at a pretty accurate total for what they spend from month to month. Then we look at any debts they have, including their mortgage and make sure the repayments are all accounted for.”
This part of the budget process gives Susie’s clients a rough idea of how much is left over when regular expenses are taken away from income. “It’s bound to move around a little each month, as not all living expenses are stable,” says Susie. “But it’s good to have a working total in mind for your life goals. And this is where budgeting gets more fun and interesting. When you make plans for what to do with that extra, you find yourself trying to make sure that extra amount is there in your account at the end of the month.”
The benefit of more budgets
Given how challenged we can sometimes be by having to budget, it might seem counterintuitive to keep track of multiple budgets. But according to Susie, it can actually be very empowering to tackle money management in this way and supports her clients to focus their finances on what’s most important. “Setting your own goals and deciding from month-to-month how to share your money between them can really help you experience the financial freedom budgets can bring,” she says. “Instead of imposing limits on how you save, this self-guided budgeting method gives you flexibility, so you can funnel more money into the things that matter to you as your situation changes,” says Susie.
Budget for emergency savings first
Susie suggests having a target in mind for each goal, whether that’s the cost of a holiday, a budget for Christmas presents or a new bathroom. “But before you start saving for all of these, you need your emergency fund in place. That’s the budget you need to put first because it’s there to stop you from getting into more debt. So if you have an unexpected bill to pay, say for car repairs, you won’t have to add to your loans. If you do, these will increase those regular monthly commitments, leaving you with less to put towards your future budgets for those important goals.”
Freedom to choose where your money goes
Once your emergency budget is taken care of, you can distribute that spare cash flow to your other budgets or get ahead on paying off loan balances. “From month to month you get to decide which budgets and debts to put the money towards,” says Susie. “It’s up to you whether to direct more into paying off debts one month or rolling a bigger sum into the holiday fund to get you closer to that target. Of course, if you’re serious about saving, it makes sense to clear loans with the highest rates of interest early on. That way you’ll get to free up more of your future income to dedicate to those budgets you look forward to spending.”
No fear of failure
Susie has found an extra benefit of this multi-budget method for her clients – it builds a sense of accomplishment that keeps them motivated. “As you don’t have a fixed monthly commitment to each budget, there’s no sense that you’re failing if you decide to put renovation savings before extra debt repayments. That’s an important feature of this approach because knowing you’ve fallen short of a target can make you feel like giving up. This way, you feel more in control and positive about having these budget goals and making progress towards them on your own terms.”