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FINANCIALLY AESTHETIC · GUIDE 02/37
BUILD A BUDGET AND FIND YOUR FINANCIAL LEAKS
FA-1.2 · The Money Operating System
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START HERE
A budget isn't punishment. It's a decision made before the money disappears.
Know Where Your Money Is Going
Tracking your money will help you determine what’s coming in and what’s going out of your pocket. Every dollar you spend has an impact on your overall budget.
For example, if you buy a $3 coffee every day, your expenses amount to over $1,000 a year.
To find out where your money is going, keep track of your expenses.
Try this exercise for 1 or 2 months:
- Write down everything you buy, from groceries to your daily coffee
- Record the bills you pay during this period, such as your phone or internet bill
- Try to divide your expenses into two categories: “needs” and “wants”
Small changes to your habits can have a major impact on your budget and your ability to save.
Before you start using the envelope budgeting method, it’s essential to create your current budget to understand your various categories of day-to-day expenses. Creating a budget helps you understand where your money goes each month, identify unnecessary expenses if needed, and save money as a result.
To do this, you should use your account statements from the last three months:
- List your salary and other income (social benefits, retirement or disability benefits, unemployment benefits, etc.).
- Identify the categories that correspond to your expenses by first listing the expense categories (food, transportation, leisure, health, clothing, etc.).
- Note the expenses incurred in each category over the past three months.
- Calculate your average monthly expense: to do this, add up the amounts spent in each category over the past three months and divide by three. You’ll notice that some expenses are fixed (rent, credit, insurance, cell phone plans, etc.) and others are variable.
Categorize Expenses Without Unnecessary Complication
There are several ways to categorize your expenses. In the calculators we recommend, we’ve chosen to group them by the broad categories of needs these expenses cover: food, clothing, housing, household goods, transportation, children’s education, leisure and culture, and banking and financial services. This is the simplest and most practical approach.
Our calculator will also automatically group your expenses according to another classification: fixed expenses, day-to-day expenses, and occasional expenses.
Fixed expenses are mandatory payments due at regular intervals, such as taxes, or those resulting from contractual obligations, such as water bills, rent, insurance, and loan payments. If you do not pay them on time, you risk legal action, penalties, and, at the very least, the suspension of services that are often essential. It is essential to have the money available to cover these expenses.
These expenses are also referred to as “fixed expenses.” “Fixed” does not mean that the amount due is always exactly the same each period, nor does it mean that these expenses can never be reduced. Rent payments remain constant for a year, but service charges, gas bills, and phone bills do not… Nor does this mean that only these expenses correspond to essential needs. This is often the case - such as with housing and electricity - but not always. Conversely, food expenses are not included in this category.
Day-to-day expenses are incurred frequently, either daily or weekly. Since their amounts vary, you have greater flexibility and control over them. With one caveat, however: these expenses are also, in most cases, absolutely necessary. This is true of food expenses.
Occasional expenses - which are more irregular and vary more in amount - can, in some cases, be more easily postponed. These include, for example, home furnishings, leisure activities, etc.
This budget calculator helps you determine whether, at the end of the day, you have enough savings to finance your projects (major purchases, investments, etc.). You can then identify the expense categories that weigh the heaviest and see if savings are possible. Finally, the proportion of mandatory expenses is crucial. You should monitor this very closely to prevent these expenses from spiraling out of control - for example, due to credits or car-related fees.
Needs and Wants: A Line That Depends on Context
Understanding the difference between your needs and your wants is the key to creating a smart budget.
A need is something that is necessary, required, or essential. For example, a roof over your head, clothing, food, or medication.
A want is something you’d like to have, but don’t necessarily need. For example, dining out, a trip, a gym membership, or designer shoes.
Needs and wants aren’t the same for everyone. What’s a want for one person might be a need for another. For example, if you live near a bus route, a car might be a want rather than a need. If you don’t have access to public transit and can’t get around any other way, you might need a car.
In addition, your needs and wants may change over time. For example, a large house may be a need while you’re raising a family. But a condo or a smaller house may be sufficient once your children move out.
Once you’ve determined your needs and wants, you’re ready to create your budget.
Plan Your Expenses Before They Happen
We all handle expenses differently. Some are spenders, others are savers; some are impulsive, others are cautious. It’s up to each of us to “make do.” But if we fail to manage and organize our expenses as much as possible, the consequences can be severe. In addition to worry and stress, we risk going off track financially - that is, falling into costly or even uncontrollable debts. We’re also simply less likely to be able to carry out the projects that are important to us. That’s why it’s helpful to plan your expenses based on your resources, adjust as needed, and check to see if you’re sticking to your plan.
To set up your personal budget effectively, the easiest approach is to proceed step by step:
1\. Take stock of your income and expenses from the past year;
2\. Make projections for income and expenses for the coming semester or year;
3\. and don’t forget to regularly monitor your budget once it’s in place. Before making a new expense, make sure you have the necessary funds.
Identify small, recurring expenses and leaks
If you buy a $3 coffee every day, your expenses amount to over $1,000 a year. This type of small, recurring expense - which is almost invisible at the time it’s made - illustrates why keeping detailed track of day-to-day expenses - those made daily or weekly, in varying amounts, but over which you have greater control and discretion - helps you detect financial leaks.
Once you’ve established and are tracking your budget, compare it regularly to your actual spending:
Review your budget from time to time. If your actual spending often differs from your budget, adjust your figures to make them more realistic.
When comparing your budget to your actual spending, ask yourself the following questions:
- Are there significant differences between your actual spending and your budget?
- In which categories are the discrepancies the largest?
- Are these discrepancies due to an unexpected event, or do they pose a risk of recurring every month?
- Are you saving enough money to reach your financial goals or repay your debts
The envelope budgeting method
The envelope budgeting method, also known as “cash stuffing,” is an easy and effective way to manage your budget. It allows you to visualize and organize your weekly or monthly budget by managing it with envelopes.
For each expense category, you’ll set aside an envelope with an amount you determine in advance. This will help you plan your spending, avoid overspending, and better manage your family budget.
32% of French people report using envelopes regularly or occasionally to better manage their expenses (CSA survey, 2023).
Step 2: I define the names of my envelopes
It’s important to note that fixed expenses, which are generally paid via direct debit (rent, insurance, electricity, phone and internet plans, credit, etc.), are not included in the envelope method.
Now:
- Gather some envelopes. Also, keep in mind that on some banking apps, you can create subaccounts - which function like envelopes - corresponding to each type of variable expense.
- Label each envelope with the categories identified in Step 1 and any other categories based on your savings goals.
Some of the envelopes or subaccounts you’ll create will be essential, such as:
- Groceries
- Healthcare
- Leisure
- Clothing
- Transportation or gas fees
The rest will be determined based on your lifestyle and typical expenses. Here are a few examples:
- Dining out
- Hair salon
- Sports activities
- Pets (if you have any)
- Etc.
You’ll also need to create additional envelopes for savings, particularly for your emergency savings. For these envelopes, you’ll need to set an annual goal, but the envelopes will be filled weekly or monthly.
Step 3: I allocate an amount to each budget category
To complete this third step, refer to the current average for each type of expense that you established in the first step.
For each envelope, enter the maximum amount you want to allocate to that expense for the week or month.
Step 4: Withdraw cash to fill the envelopes
At the beginning of the month, when you receive your income and other funds in your bank account, you’ll need to withdraw the amount you’ve allocated to each envelope. Then fill them with the amount you estimated in Step 3.
Important!
- Leave the amount for your fixed expenses in your bank account - these are typically paid by automatic debit: rent, water, gas, internet, insurance, monthly payments for credit, etc.
This is crucial, as you’ll need to leave enough money in the account to avoid unnecessary bank fees.
- Be mindful of your bank card’s withdrawal limit and adjust it as needed with your bank.
- Make sure to store your envelopes in a discreet place so they’re safe.
Step 5: I track my expenses using the envelopes and reallocate whatever’s left
On the back of each envelope, you can track your expenses by noting how much money is left inside.
At the end of the week or month, if there is money left in your envelopes, you can set it aside in your savings envelope.
Practical Limitations of the Method
Keep in mind that using the envelope savings method means you’ll forgo the interest you could earn by saving in a bank savings account, such as a “livret d’épargne populaire” or a “livret A.”
Adjusting the Budget When It No Longer Reflects Reality
Step 6: I readjust the amounts in my envelopes
After 2 or 3 months of using the envelope budgeting method, you may realize that the envelope categories and/or the amounts allocated no longer match your needs. You may therefore need to add new envelopes or readjust the amount for each one.
Also, take stock after a year of how much money you’ve managed to save: this method should allow you to set money aside every month!
This approach to making adjustments is similar to that of a general budget:
Now that you have a budget, try to stick to it and improve it as you go.
To help you, try the following:
- Keep all your receipts and bills
- Limit your expenses as much as possible to what’s in your budget
- Update your budget with any changes, such as a wage increase or a lower bill
- Compare your budget to your actual spending at the end of each month
Continue this exercise every month. You can set a reminder or block off time in your calendar to review your budget regularly. If you make this a habit, you’ll be more likely to stay on track.
What Research Shows About the Benefits of Budgeting When Dealing with the Unexpected
Dr. Kan explained that creating a budget is important because it can reduce uncertainty about a person’s financial situation. A budget helps people know exactly how much money they can spend in different categories of expenses.
Among the key findings of her research:
- People who create a budget adapt to constraints by prioritizing their spending more than those who do not create a budget
- Budgeting makes a greater difference for those facing the most significant financial constraints
- Those who budget exhibit fewer dysfunctional behaviors, such as overspending or making impulse purchases
Budgeting before spending resources makes timely prioritization more likely and mitigates dysfunctional behaviors.
According to data from the 2014 Canadian Financial Capabilities Survey, although only 46% of Canadians create a household budget, 93% of those who do say they usually or always stick to it.
SYSTEM CHECK
Build a realistic first draft, find the leaks, then revise it with real numbers.
- CFPB - Your Money, Your Goals toolkit - United States - consumer financial education.
- CFPB - Creating a cash-flow budget - United States - practical cash-flow tool.
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