Let’s create a budget. A budget is a tool that helps you manage your money. It shows you your full financial picture – the money you bring in each month and where you plan to spend it. It helps you determine what a want vs. a need is and shows you where you can cut expenses to ensure you only spend what you have. It also allows you to see where there may be any extra money that you can put towards reaching your overall goals (set in Challenge #1) quicker.
For Challenge #3, we will focus on creating an annual budget that works for you. You can complete this challenge manually on a piece of paper or online. If doing online, here are several great budget templates that can assist you:
- Conexus' Budget Calculator
- Downloadable Microsoft Office Templates
- Gail Vax Oxlade’s Interactive Budget Worksheets (online or excel download)
Whatever method you choose, the process will be very similar.
Determining your monthly income
The first step of a budget is figuring out how much money you’ll have each month (similar to what we did in Challenge #2). Under the income section of your budget, list all sources of money (pay, support, grants, etc.) you’ll receive in the coming months. Remember, this is the take-home amount as it’s the money you actually have available to spend.
For those with a regular pay cheque – one that is the same each time – your income should be around the same amount each month. Note: If you’re paid bi-weekly, there are two months each year that you’ll receive three pay cheques.
For those that have irregular or seasonal income, it can be a bit more difficult and there are two ways you can determine a monthly income amount for your budget:
- Use your average monthly income. You can find this by taking your last six months’ total income and dividing by six.
- Use your lowest amount of monthly income that you received in the last six months. For example, if you’re monthly income over the last six months ranged between $1,900 and $2,200, use the $1,900 amount in your budget.
Whether you have a regular or irregular monthly income, it’s important to not over-estimate this amount when creating a budget. A budget provides you guidance on how you will spend this money and over-estimating will cause you to budget money you don’t have. If you end up receiving more money in a month than what you budgeted, use this extra money and put towards reaching your saving goals faster.
Remember, you shouldn’t include any non-guaranteed income such as tips and money received as gifts into your anticipated monthly income budget. Non-guaranteed money is exactly that – not guaranteed and unknown – and should be treated as extra money for your goals.
Creating a budget based on what you have
Now that you have noted your income for each month, it’s time to create a plan to spend this money. First, create a list of all your expense categories. The spending analysis you completed in Challenge #2 can assist you in creating categories specific to your spending habits. Be sure to include categories for your saving goals and any debt payment expenses, such as credit cards, you may also need to budget for each month. Once you have these categories, take it one step further and create sub-categories for each expense. This helps provide a detailed understanding of each category and identifies fixed expenses (ones you can’t change) and variable expenses (those you have control over and can change).
Next, you’ll need to allocate money to each expense. It may be easiest to start with expenses that are fixed such as mortgage/rent, utilities, etc. and then move into the variable expenses such as groceries, entertainment, etc. Don’t forget to include expenses that aren’t monthly such as sporting fees, gift purchases, etc. – for these expenses, place the budgeted amount under the month they’ll occur. It’s also okay to leave a category at $0 if you don’t plan on spending anything in that category within a given month.
Once you have your amounts allocated, look to see how it measures against your monthly income. If you’re under-budget, woohoo! With this extra money, look at adding more to your saving goal categories to help you reach your goals faster.
If you’re over-budget, some adjustments will need to be made. First look at your variable expenses – are there any places you can reduce your budget such as groceries, entertainment, etc.? Adjust as needed until you become balanced, or even better yet, under-budget.
If money is really tight in one particular month, consider not budgeting money for one of your saving goals. Use this as a last resort though and ensure it doesn’t become a consistent thing. If you’re noticing a trend in not having enough money to cover your expenses month after month, consider bringing in extra income or making some changes in your day-to-day life. For example, pick up a part-time job to bring in more income or start using public transit to help reduce costs related to your vehicle.
One-time, occasional expenses
Expenses that only occur once or twice throughout the year can have a big impact on our monthly budget. For these expenses you can do two things:
- Budget the full amount in the month the expense occurs; or
- Budget smaller amounts each month leading up to the expense.
The second option helps reduce the pressure of finding these one-time costs within your budget all at once and is especially helpful if you have several large, one-time expenses that all occur within the same timeframe.
For example, your child plays soccer and club fees of $400 are due every September. Consider putting smaller amounts into your budget each month that can be used to pay for the expense when it comes due. If you were to start in February, by putting $30 away each month, you’ll have $210 by September which would only leave you with $190 extra to budget in September to help cover this expense.
Create separate savings accounts for your goals
When saving for your goals, place this money in a separate account for each goal. Set limits on accessibility (i.e., must go to a branch to access the money) to reduce the spending temptation. By placing in a savings or investment account, you’ll also gain interest and see the money grow faster.
If you put these all together, you have your annual budget – your full financial picture.
Setting a budget helps you focus on what’s important and gives you guidelines on how you’ll spend your money. It’ll be up to you though to ensure it actually happens the way you say it will. You can do this by keeping track of your spending which we will be covering in next week’s challenge. Come back next week to learn more!