Why you need a budget
While the idea of making and sticking to a budget may seem daunting to some, it’s a crucial task that will help you better understand where your money is going, and it can even help you improve your financial habits.
The exercise can also help you balance your income and expenses and regain control of your finances, enable you to pay off debt, save for projects you care about, or set money aside for a rainy day.
How to make a budget
Finding the right tool
There are a number of budgeting tools out there that can help make this task easier. Simply enter your income and expenses in the fields provided, and the tool does the rest.
For example, the Government of Canada’s Budget Planner tool lets you create a personal budget and save it online. It provides tips and suggestions to help you stay on track, along with illustrated graphs to help you see where your money is going.
There are also a number of web and smartphone applications you can use to keep an eye on your cashflow. Some even sync automatically with your bank account as you make transactions so you can monitor what you’re spending vs. what you’re making.
List your income
Other than your salary, you might also have other sources of income. For instance, you may receive tips, bonuses or commissions, social assistance or employment insurance benefits, investment income, a pension, support payments, CNESST benefits, family allowances, the Quebec solidarity tax credit, or GST/QST credits. These amounts are typically listed in the “Deposits” column of your bank statement.
That being said, it’s a good idea to keep track of your net income (i.e., your income after tax deductions), as well as all other amounts you receive. If you have any doubts, your pay stub and latest income tax statement can be valuable sources of information.
List your expenses
Just like your income, you need to list all your expenses in the fields provided. If you have expenses that aren’t listed in the budget tool, you can easily add them to the table.
More specifically, you might have fixed expenses like rent or mortgage payments, electricity bills, telecom bills (e.g., internet, cable, streaming services, cell phone, home phone), gym or activity memberships, public transportation passes, pet expenses, insurance (e.g., life, critical illness, disability), or debt payments.
Variable expenses include groceries, entertainment and dining out, clothing and personal care products, medical expenses, gifts, and vacations.
Ad hoc expenses such as registration fees, driver’s licence renewal fees, car maintenance and repair fees, and professional membership fees should not be overlooked. Taking a look at last year’s bills can give you a good idea of how much you should be budgeting for the current year.
It’s always a good idea to keep your receipts to determine your expenses and keep track of cash purchases, which can have a considerable impact on your budget. For example, treating yourself to a $3 snack on your daily coffee break will end up costing you more than $700 at the end of the year.
Finally, keep in mind that the more specific you are, the more accurately your budget will reflect your financial situation. Your bank and credit card statements can be of great help.
Pay yourself first!
In addition to debt payments, a portion of your budget should be dedicated to savings, whether for retirement or a project you care about. How much you save will greatly depend on how much money you have and what your goals are. You’ll have a better idea of these figures once your budget is made.
Setting money aside in an emergency fund is also essential. Ideally, it should be funded with enough money to cover three to six months of expenses in case you lose your job, come down with an illness that prevents you from working, or experience some other major financial hardship.
If saving this much seems impossible, keep in mind that you can always start with small amounts. You’ll get there eventually!
Evaluate your budget
Once you’ve listed your income and expenses, as well as the amounts allocated to your savings and emergency fund, you’ll be able to see whether you’re running a deficit or on the right track.
Either way, reviewing your areas of spending will help you identify any unnecessary expenses you might be able to reduce or eliminate altogether.
This exercise will also make it easier to balance your budget. For instance, it can help you plan for major expenses or assess your ability to pay off your debts.
Update your budget regularly
Over the first few months, get into the habit of reviewing your budget to determine if it’s realistic. Once you have a better idea of what you’re spending, you’ll be able to make adjustments if necessary. It’s a good idea to track your expenses and keep your receipts.
You should also update your budget as your situation changes. Having a child, buying a home, losing your job, or decreasing your spending will all affect your financial situation.
Key takeaways
- Making a budget is a great way to manage your finances
- There are several budget tools that can help
- Accurately listing your income and expenses is essential
- Making a budget can help you save
- Updating your budget will help keep you on track