How to Make a Budget 101

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Disclaimer: I am not a financial advisor. You should always consult a professional to determine what your investment strategy should be based on your needs and the laws where you live.

What is a budget?

A budget is merely a written guideline to help you control your money instead of having money control you, and it can transform your life! If you have any goals, and you should, because that is what life is all about, a budget can help make it happen.

Who should have a budget?

Everyone should have a budget. A budget is WRITTEN DOWN either on paper or digitally. An airy, fairy, vague idea about how much money you have and what your expenses are is NOT A BUDGET!

I feel very fortunate to have had the upbringing that I did. Were my parents rich? No, far from it. They were actually alive during the Great Depression of last century and learned to be very frugal from their parents. My mother actually kept a household record book like an accountant and took a bookkeeping course. She still reconciles her money every day, down to the last penny, and gets upset if it doesn’t add up. (I wish I was that good.) Even my dad wrote things down for his business.

My brother and I both got an allowance every week that we had to earn by doing basic chores ( keeping our rooms clean, making our beds, washing dishes, etc.) If we wanted something that cost more than what we had, we had to save up for it or we could earn extra money by doing other jobs (ironing, cutting the grass, etc.)

So, who should have a budget?

Everyone should have a budget. I don’t know how many times I heard someone say, “I don’t know where all my money went,” and they made a decent pay cheque! They think they’re doing fine and then the car needs new brakes or the faucet springs a leak. Or they have an accident, get sick or their income goes down and in no time at all, they are in trouble. Life happens. It’ll throw you a curve ball when you least expect it. If you have a proper budget, incorporating savings in it, it doesn’t have to spell disaster.

So to break it down in easy to understand sections…

There are four basic parts to any budget.

Net Income – what you get to bring home after the taxman takes what they think is their share, and any other deductions your employer takes off. If you are self-employed you will have to add them to fixed expenses.
Savings – You’ve probably heard this before – Pay yourself first. Have at least $1000 emergency fund and then build it up to cover six months of expenses. It’s never to early to start saving for retirement and there are many different ways to do this – Registered Retirement Savings Plans, employee pension plans and Tax Free Savings Plans. Talk to your financial advisor to determine the best strategy for you. If you have kids you may want to start saving for their post secondary education. I like to have a separate account for wants – like a vacation, a renovation, new furniture or a new car.
Fixed Expenses – mortgage or rent, utility bills, insurance, bank fees, food (semi-flexible) and anything else you have to pay. This also includes debt repayments – car, student, credit cards, etc. (If you have any debt it should be your goal to pay it off as soon as you have built up your initial $1000 emergency fund. Of course you keep making your minimum payments in the meantime.) For those fixed expenses that you pay annually, semi-annually or quarterly divide them into an average monthly cost and if possible, put into a separate savings account until needed. Some expenses such as insurance and taxes can be set up to be paid monthly to make it easier.
Flexible Expenses – anything else that may be a want, but not necessarily a need, or that changes from month to month. (Expensive hairdos, manicures, clothing, hobbies, fancy cell phones, dining out, etc.) Yes, you can survive without some of theses things. Obviously you will need some clothes from time to time, but you shouldn’t need to buy a whole new wardrobe every month.

Step One:

Track your spending for at least a month or two – write down every cent you spend. Keep receipts for everything – even the coffee you pick up on the way to work. (It’ll make it a lot easier to remember what you spent if you don’t have time to write it down right away.) Use a little notebook or create an Excel spreadsheet. You may find it becomes a habit and keep doing it – that’s what happened to me. It makes life so much easier when you can see where you’re maybe overspending so you can make adjustments.

Step Two:

Make a budget. Some guidelines for categories are as follows:

Housing Costs…

Include all fixed expenses previously mentioned. Also include savings for maintenance – if you know you need to get the eaves cleaned out or the furnace serviced once a year, or you need to paint the fence that’s peeling – that’s not an emergency. Everything wears out eventually and you need to factor that into your plan. I like to allocate 5% of the 35%housing budget for these things but you need to figure out what you are going to need. Having a fire or flood and having out of pocket expenses until things are settled with the insurance company would be an emergency. *Please get insurance even if you are only renting. Your landlord’s insurance will not cover the cost of your belongings.

Transportation Costs…

Include bus and taxi fares, auto payments, insurance, parking, gas or alternative fuel. If you have to maintain a vehicle you will have to pay for car washes and cleaning, and be saving for maintenance and repairs – (because even if you have a brand new car you are going to have to get oil changes, or snow tires or something.) It is also a good idea to get an auto club membership like CAA or AAA, if not included with your car purchase.

Living Costs…

Include everything else that you consume or spend money on to live. Obviously you will have food and clothing costs, but don’t forget – hobbies, health and dental care, gifts and donations, entertainment, child support, legal fees, etc. Everyone’s situation is different.

Debt Payments…

are unfortunately a necessary evil for a lot of people. Included here would be student loans, medical or dental loans for things not covered by provincial, employee or private health plans. Of course, also add credit cards or any other type of debt not previously mentioned.

If you use a credit card for rewards, convenience or safety (travelling) be sure to pay it off every month. If you lack the discipline to live within your means, DON’T have a credit card. Simple as that. Credit cards are not free money and if you wouldn’t waste your cash on it, don’t use a credit card.

Mortgages and auto loans are already listed in other categories but it is always a good idea to pay these off as quickly as you can too. There are exceptions to that rule, but you should always talk to your financial advisor to see what the best course of action is for you.

Savings…

can be increased from 10% after all debt is paid off for whatever your goals are. The more you can save, the freer you will be able to live the life you want to.

More Tips on Budgeting:

Every dollar you have needs to be allotted to a category so when you subtract your expenses from your income you end up with a balance of zero. If you end up with a negative balance you will need to go back and trim some of your expenses or find ways to increase your income. If you have money left over – great -you can either put it towards debt, if you have any, or add it to your savings for something special.

After doing an annual budget, slotting in major purchases or expenses that you may know about (ie. a new lawn mower or snow blower, or a planned vacation), you should then do a monthly budget, incorporating those fluctuating expenses that are current in that month. (Birthdays, special occasions, annual, semi annual or quarterly bills.)

Yearly budgets give you an overview of your estimated average expenses but the monthly budget is more accurate. To make your budget work, you need to keep track and make adjustments as needed. This is where the monthly budget is invaluable.

Happy budgeting!