Budgeting – the way forward
Whether you’re living hand-to-mouth or earning six-figures a year, it is essential that you know where your money is going, especially if you need to improve your financial situation. Budgeting gives you power over how you spend your income and if you want to have a handle on your finances it’s the only way to go.
Budgeting isn’t all about restricting your spending nor is it about cutting out all the fun in your life. It’s mostly about understanding. It involves knowing how much you have, where it goes and then planning how to best use it. Budgeting is making the most of your income!
The first budgeting requirement is determining a time-period, the most common period is monthly – as that is how most of us get paid, but in some cases, it can be weekly, biweekly or annually, depending on our income frequency.
After determining your budget timeframe, the next step is calculating how much income you receive. Usually this is your salary but remember to include your spouse’s income if you’re married. Then add in any other sources of income you may have, such as dividends, interest, income from your side business, and so on.
Now it’s time to see where all that income goes by recording your expenses.
Start with all the repeating payments you have, such as your mortgage or rent, car payments, insurance, debt (other loans, credit card debt, etc.,) school fees, and of course taxes. For most these are going to be fixed amounts that we cannot easily change.
Now let’s look at the expenses we have more control over (it’s time to dig deeper). The two ways to calculate these expenses are; 1) Take out your cheque book (looking at your bank statements can help as well) and 2) Save all your receipts for a few weeks and separate them into categories like gas, fast food, utilities, groceries, entertainment, subscriptions, restaurants, movies, drinks, repairs and miscellaneous. This will let you see where you’re spending the most money. A tip to setting up the categories is creating a separate section for every expense over a pre-determined threshold amount. If your miscellaneous category ends up as a major expense, you need to split out some spending recorded there into its own category. If you have online checking and primarily use cheques and your debit card, you may be able to download your transactions into a spreadsheet program to help with the categorizing.
You should now have all the information needed to create your personalized budget. So, go ahead, and total up your monthly income and your monthly expenses. Subtract your expense total from your income total. A positive number means that you are earning more than you are spending, congratulations! Creating a budget, in this instance, will help streamline your spending and result in a larger monthly savings potential.
If you end up with a negative number, don’t worry too much. The whole reason for creating a budget is to identify deficiencies and find out how to reverse them. Now that you can visually see how much you fall short, you can adjust your spending or saving in certain areas to improve your financial situation. Budgets help you track your spending to see where the leak is!
Often people who live paycheck to paycheck overestimate how much money they can spend and end up spending too much. You may be spending more money on things you want than things you need. Or, your money is slipping through cracks you didn’t realize were there. Whatever the case, setting up a budget and paying close attention to your spending will help you get back on track.
This process might require some lifestyle changes. For example, if you’re used to buying a latte every morning before work, you can start saving by making coffee at home, or going without coffee completely. You might have to get rid of the expensive cable package, because if you’re living paycheck to paycheck, you really can’t afford it.
Oftentimes you’ll realize that just making a few small adjustments can significantly improve your situation. This may mean cutting back on one of your newspaper subscriptions, eating out one time less a month, or even just hitting the matinee instead of the prime-time movie. Typically, just saving a few dollars here and there can be enough to not only make sure you spend less than you earn, but also apply a few extra dollars to things like high-interest credit card debt or help start a savings account.
Check back for our follow-up articles on budgeting: Ten tips to help you battle a spending habit, Setting up a successful budget system and Setting your financial goals.