Has someone ever offered you a variety of budgeting tips — some useful, some not — and left you wondering why budgeting is so important in the first place? You may already know how much money you have, which bills you must pay, and what you plan to do with what money you have left.
Unfortunately, life often has different plans than the ones you've made for yourself. Unexpected costs arise, whether by need or by choice. For example:
- a mobile device you want is released
- a designer clothing line you like goes on sale
- a monthly bill is higher than you expected
- you have unexpected travel expenses
- you need medical care that isn’t covered by public health benefits
This list of surprises is endless and when one occurs, it can derail your expectations. Fortunately, a well-thought-out budgeting approach can help you manage unexpected financial challenges more effectively. So, forget the unsolicited advice — we’ve put together a list of proven strategies to help you prepare for life's financial surprises.
Understanding Financial Goals
When people think of "financial goals," they often picture big expenses like retirement, buying a home, or purchasing a car. However, financial goals also include smaller, short-term objectives. Budgeting often includes setting near-term goals, such as saving for unexpected expenses or planning for specific purchases, tailored to your lifestyle.
You can create specific goals, also known as S.M.A.R.T. goals, defined by the following essential elements:
- Specific
- Measurable
- Attainable
- Relevant
- Time-Bound
Specific
The more specific your goals, the more likely you are to achieve them. Vague is unachievable because you haven't defined the qualifications of success. To clarify your goals, ask yourself questions like what, when, where, why, and how.
For example, saying “I want to save more money” is too vague. No amount of saving leads to success with this goal. On the other hand, “I want to save $600 over one year" is a clear and defined goal you can achieve.
Measurable
Once you've defined your goal, give yourself a way to measure your progress while working towards that goal. Break the goal down into smaller, manageable steps so you don’t have to rush to finish at the last minute.
Let’s go back to the example above. The goal was to save an extra $600 in a year. Since there are 12 months in a year, dividing $600 by 12 gives us $50 per month. One way to make this goal measurable is by breaking it into smaller steps, such as saving $50 each month. This approach makes our $600 goal more achievable than putting off saving until later in the year.
Attainable
It's important to aim high, but you shouldn't aim "too high." Set goals that challenge you without being overwhelming. Be realistic about what you can achieve. Create a goal just outside your comfort zone that remains attainable with a bit of effort.
Realistic
Even attainable goals may not be realistic considering your habits and responsibilities. When considering your goals, balance ambition with realism to increase your chances of success. While it’s important to challenge yourself and step outside your comfort zone, it’s just as crucial not to set your goals so high that you fall short of reaching them. Start with small goals, and once you achieve them, you can aim for more ambitious ones.
Time-Bound
When setting a goal, make sure to assign a clear deadline for when you want to achieve it. Saying “I plan to save more money this year” is vague; it doesn't set any benchmarks or even any standards for success. On the other hand, “I plan to save $1,200 for my emergency fund by December 31 next year, saving $100 each month starting in January” sets a specific goal with benchmarks. It follows the S.M.A.R.T. goal framework, assuming saving $100 a month is realistic for you.
Track Your Income and Expenses
A critical part of a clearly defined budget is seeing your bigger financial picture. That means asking questions like, "What am I spending money on now?", "How can I spend less?", and "What are the expenses I can't live without?" Then, take the following steps to improve your financial situation:
- Track how much of your income you spend each month.
- Note what you spend money on besides bills.
- Record where you spend money and the types of purchases you make.
- Identify any bills you can eliminate.
- Keep an eye on how much you’re saving, if anything.
- Look for other areas where you can adjust to improve your finances.
Reviewing your spending habits can help identify patterns and areas for adjustment to align with your goals. Although tracking your spending and saving habits may feel tedious, it gives you a significant advantage as you attempt to save your money.
Create a Realistic Budget
Adjusting financial habits can be challenging, but creating a budget that reflects your current needs and priorities may help. If your budget is too strict, you might give up on your goals; if it’s too loose, your progress will be slow. Either way, it can hinder your progress. A realistic budget is easier to stick to in the long run, helping you reach your goals.
Tip: Include all money that comes in or goes out of your bank account in your budget. Remember to factor in taxes like GST or HST, as well as any other provincial taxes, alongside your usual bills and expenses.
Review and Adjust Your Budget
As your life changes, you likely will have to change your budget along with it. Consider these changes that may happen over time:
- Job changes
- Salary increases or decreases
- Utility or other bills increase
- Adult children move out or go to university
- You get married or divorced
- You move
Each of these situations requires you to adjust your budget to better match your new financial reality. In other words, a budget isn’t fixed; it’s flexible and should change with you. Reviewing and adjusting your budget periodically, especially during major life changes, can help it remain relevant to your circumstances.
Navigate Big Financial Decisions
Big financial decisions can feel overwhelming. Some people find it helpful to approach them in smaller, manageable steps. Whether you're considering buying a house, financing a car, or planning for an investment, there are several key factors you should consider:
- Define what you need and determine if this decision aligns with your life goals.
- Consider how a new financial commitment will affect your budget. Can you afford it?
- Explore financing options like loans and credit, then choose one that fits your situation.
- Study its terms and interest rates, and consider how it will impact your future finances.
- Confirm you can meet your other financial obligations with this new expense.
Plan for Your Future
These budgeting strategies can support your efforts to work toward your financial goals and plan for the future. It all starts with a solid plan and setting S.M.A.R.T. goals to guide you.
As you meet each goal, keep your momentum by creating a new and more challenging one. For example, set goals to pay down debt after establishing an emergency fund. Once your debts are cleared, you can focus on boosting your savings and improving your financial situation.
Don't forget to budget for long-term goals like retirement, education, and major purchases in addition to your regular monthly and discretionary expenses. Following a consistent budget may help you work toward achieving your financial objectives.