How to Create a Budget in 5 Steps
We all know the importance of living within our means but according to recent statistics, less than 50% of Canadians use a monthly budget to plan their spending. When putting together a budget plan the key is not to make it complicated or difficult to follow.
Here are 5 steps to help you create your budget:
1. Keep it Simple - There are several free budgeting program and apps that you can find online or you can create your own Excel spreadsheet. If you are not comfortable with these types of programs try using good old paper and pen.
2. Track Your Expenses - It’s difficult to put together a budget plan without first knowing where your money goes. Most of us know our regular bill payments such as mortgage/rent, car loan, loans/credit cards, insurance and utility bills. It’s all of the other living expenses that can be difficult to get a handle on. If you use your debit and credit card for most purchases then you should review your last few months of statements. Otherwise, it may be a good exercise to track your expenses for a month by keeping receipts.
3. Record Your Household Income - If you get a regular paycheck then use your net income/take-home pay. Be sure to include other sources of income such as child support or child tax benefits. If you are self-employed you need to set aside a portion of your income to pay your income taxes – use your after-tax net income for your budget. If your income fluctuates you can use your previous year’s income tax assessment to calculate your average monthly income. Record the total of all income sources as your monthly amount.
4. Set Goals - Your goals should be reflected in your monthly budget plan and be discussed with your spouse/partner and ranked from highest to lowest priority. Goals can be broken down into three categories, (a) Short term (0-12 months), examples include a vacation; new appliance; establishing emergency savings; (b) Intermediate(1 - 5 years), examples : down payment for a home; renovations; vehicle purchase; reducing debt; and (3) Long Term (5 years+) - examples: saving for children’s education; paying off your mortgage; retirement savings.
5. Create Your Budget - Once you have a good handle on your income and expenses and have set your financial goals it’s time to put your new budget into practice. Keep in mind that that budgeting is similar to dieting, if it’s too restrictive than it will be hard to stick to. Make sure the amounts that are budgeted are realistic and the goals you have set are achievable. Your budget also has to have some flexibility and it needs to be reviewed regularly and be updated to reflect your current situation.
If you are having difficulty budgeting or find that you do not have enough income to meet all of your debt payments then it may be time to get professional financial advice.
Powell Associates Ltd. is a Licensed Insolvency Trustee (LIT) focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses. We offer free consultations to review your personal financial situation and practical debt resolution options. Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth - it's your choice.