For families and couples young and old, budgeting your spending habits helps to build a stable financial future. This personal financial survey will allow you and your loved ones to practice spending more efficiently and focus on growing your savings. But how do you go about actually creating a budget?
Many people hear the word budget and immediately associate it with negative a connotation. But many people do use budgets to gain control their finances. If it’s your first time budgeting, it’s normal to feel like you’re overwhelmed. At Canada Life Insurance, we’ve decided to formulate a simple monthly budget building strategy to help anyone who is struggling with getting their financial situation in order.
Step #1: Knowing Why You’re Budgeting
Deciding to start a budget should be your first action, but you need to do it for the right reasons. The hardest part of the budgeting process can be actually deciding to start the process! Don’t just start budgeting because someone talked you into it, you need to look at your situation and decide if it is right for you.
If you feel you’re spending more than you’re earning, you may very well need to consider a budgeting plan. It’s important to remember that budgeting shouldn’t be the final solution, it is merely a guideline to getting you in the habit of spending less.
Step #2: Record All Income and Make a List of Monthly Expenses
Record all of your income for a monthly timeframe and remember to include all paycheques and any other outside sources of revenue. If you earn irregular income, like hourly wages, you can average out the last 6 to 12 months of income and use that figure as your budgeting basis.
Next, gather your financial paperwork, which includes any pertinent bank statements, investment accounts, and bills. These forms, as well as other monthly expenses like groceries, utilities, entertainment, and student loans, should all be written down and organized by name and amount.
At this point, you should have a figure for your month-to-month income as well as an idea of what you are spending. This is the step that will take to most planning for first-time budgeters as gathering all the necessary statements and forms can be time-consuming. But the more information you can dig up, the more structured your budget will be.
Step #3: Fixed and Variable Expenses and Your Final Totals
Organize your spending into fixed and variable categories so it’s easier for you to make adjustments later. Fixed spending is simply expenses that stay the same each month and typically include mortgage payments, car payments, and cable/internet bills among others.
Variable expenses, on the other hand, fluctuate from month to month and are usually made up of entertainment, gifts, and grocery expenses. These are the expenses that will require the most adjustments if you need to make any.
With everything organized in a list and clear to see, total both your income and expenses. If it ends up that your income is larger than your expenses, you are heading off on the right path. If this is your case, you can now organize more of your income to areas of your budget like retirement savings. If your total expenses are higher than your monthly income, you need to start making adjustments.
Step #4: Making the Necessary Changes
Usually, the entertainment and gift categories are the easiest to cut back on. Begin making your cuts there if you are overspending. Don’t eat out as much and don’t frequent as many movie theaters or other entertainment hot-spots in one month. Grocery and gas prices always change so it is harder to begin making your cuts in these areas. Also, these are important expenses required in our daily lives so trim back here if you can, but we wouldn’t recommend starting with transportation and groceries.
Try not to rely solely on your credit cards to cover expenses, this tends to lead people into more debt as they struggle to make appropriate payments. When you are cutting back on expenses, train yourself to live on cash alone. Give a loved one your credit cards to hide so you are not tempted to use them. With a strict cash only plan in place, your credit reliance will fade and you’ll be training yourself to spend only on what is necessary.
Step #5: Track and Review
After you have made the necessary changes to your spending habit and begun to put them into action, you need to follow-up and monitor your new budget. Always check in each week or month to ensure that you are sticking to your desired budget and make any tweaks you need to make in order to stay on track.
Keep careful track of your spending patterns the first couple of months, this way it will be easier for you to review everything. As you keep track of your habits you can see where you fell short and which areas of your budget need improvement. Over time you will adjust to the changes you put in place and smarter spending will be second nature to you.