Budgeting for Beginners
In my opinion, a budget is the cornerstone to achieving all your financial goals. I know it can sometimes come across as a dirty word that no one wants to think about, but trust me; it is the key to your financial survival. Whether you are living paycheck to paycheck on a very low income or you have extra money left over after all the bills are paid, you need a budget.
But where do you start?
Forget past blunders and failed attempts to set up a budget. Discard them just like last year’s resolutions that have fallen to the way side. Budgeting is a path to freedom that will allow you spend your money without having feelings of guilt or shame that can often accompany a costly purchase. When you know what your spending limit is you can purchase that coffee or magazine with confidence knowing the budget is still working for you and that you are still on track. Add a new resolution to your list this year and set up a budget today. Like any new resolution it will take effort, time, and discipline but in the end you’ll thank me for it.
Here are seven easy steps to creating a budget you can easily follow to help reach your financial goals for 2019.
Step 1 – Calculate your Income
Before you can decide where to spend your money you need to know how much you have to spend. Sounds pretty logical when you say it out loud, but in a world where everyone seems to be keeping up with the Jones’ we sometimes can forget that truth. What you need to know is your “take home” pay. This means how much do you have after taxes and all other deductions like pensions and benefits? What ends up in your bank account on payday?
If you have an inconsistent income that fluctuates from week to week or month to month use the lowest amount you take home. This way you know that this will be the base amount you have to work with and if you have a string of low months your budget will already be set up for this amount.
Write this number at the top of your page. This is the amount we are going to deduct expenses from.
Step 2 – Gather up all your expenses
Next we want to figure out all your monthly expenses. This can take some effort and will require you be realistic and honest with yourself. This is the section that won’t change much from month to month. In this step you need to figure out every item that costs you money each month. Things like mortgage/rent, utilities, insurances, food, gas/transit pass, cell phone/home phone, and internet are recurring monthly expenses that are paid every month. Write them down and deduct them from the income line from step 1.
You’ll also have non-recurring and fluctuating expenses such as gifts, clothes, subscriptions, and automobile repairs that only come up once in awhile. These expenses need to be broken down into a monthly payment. Take whatever you spend on these occasional expenses per year and divide it by 12. This new number will tell you what you should be saving each month in order to meet the costs of purchasing these items. Write each of them down and deduct it from the total left over after deducting the above numbers from your income.
Finally, add up all your variable expenses such as entertainment, lunch/dinners out, or alcohol/cigarettes. These expenses are consistent throughout the month but tend to fluctuate depending on how much money you have left over once the bills are paid. Make your best guess as to what you spend each month on these different items and subtract it from the total amount of money remaining.
Just like life, your budget will grow and change as you do. Don’t be afraid to change the budget and adapt your calculations as needed.
Step 3 – Gather up your Debts
Next we need to figure out how much we are spending on debts. This category includes car payments, personal loans, credit cards, lines of credit, overdraft, and any other loan payment you might have. I’m not considering a mortgage as a debt payment here because we have accounted for that above in the regular monthly expenses. Have no illusion, your mortgage is a debt and should be treated as such. We’re just going to focus on the other debts for this portion. Subtract your regular monthly payments from the remaining amount after all the other expenses have been accounted for.
Step 4 – Figure out how much you want to save
Having money in a savings account can make running a budget a lot easier and can give you a real sense of comfort. Knowing you have money for emergencies already set aside will ease your mind a great deal when things eventually go wrong in your life. Experts say you should be saving 10% of whatever you make for those rainy days but saving anything is better than nothing at all.
Deduct your savings from the remaining balance and see what you have left.
If you’re like most Canadians you probably don’t have anything left at all. In fact, you are likely showing a negative balance once everything has been accounted for. If this is the case don’t lose heart. Your budget will help you find ways to eliminate this deficit and achieve a positive balance.
Step 5 – Track your Expenses
This is, in my opinion, the most important step of the entire process. Sure, you have to know what you make as an income and you need to know how much you are spending on each item of your budget, but everything up until this point has been “best guess”. Now we need to KNOW what everything is costing you each month. There is no better way to do this than by tracking your expenses.
There are hundreds of different apps you can download to help your tracking or you can simply use a notebook and pen. Whatever system you decide to use remember that consistency is key. You have to track everything each day for a full month. No matter what you purchase, write it down! Even giving a dollar to the hockey kids collecting at the grocery store can add up quickly. Keep track of EVERYTHING! This is by far the most difficult part of the process. Many people lose interest and desire when trying to complete the tracking portion of the budget. Either they don’t want to see the reality of their situation or they just lose the drive to track the expenses. Over 90% of the people who give up on making a budget do it while tracking expenses. Put in the work and you will be happy you did in the end.
By tracking your expenses over time you will learn the truth about your spending habits and where your money is going. Once you have a handle on your spending habits you can plug any holes in your financial bucket and fix that deficit once and for all.
Step 6 – Compare the budget and tracking
Once the tracking has been done it’s time to compare it to the budget you set up back at the beginning of this process. How close were you to your estimates a month ago? Did you forget some items on the budget list? Have you noticed any spending trends that worry you?
Successfully tracking your spending for a full month will almost certainly give you an “AHA” moment. I have never had anyone complete their tracking forms and come back saying they were not surprised by anything on the list. There is always an item on there that makes you think about where you are spending all your money and how quickly it disappears.
Once the tracking is done you can make decisions about where you can make changes to your spending in order to change the month end balance. Is it time to cut back on the coffee purchases? Should you start packing a lunch instead of eating out all the time? How often do you need to buy clothes or books? The purpose of a budget is to figure out how to spend your money so that you do not have to rely on credit each month to get by. By making changes to your budget you can eliminate the need to rely on credit. Remember however, the changes you make need to be realistic. There is no point in saying you are going to quit smoking in order to balance the budget if you have no intention of quitting. Saying that you will pack a lunch every day from now on is not going to work if you simply fall back into old habits and start eating out every day again. Make changes that are realistic and that you will stick with.
Step 7 – Eliminate the Deficit?
If, after all your tracking and changes, you still have a deficit at the end of the month you will need to re-evaluate your lifestyle and choices. Carrying a deficit each month will only keep pushing you further and further into debt. Eventually that debt will reach a point where you will not be able to make the payments any longer.
Only two things can be done to eliminate a deficit. You can make more money, or you can spend less money. Spending less money is the easiest choice to make; it can also be the most difficult one to. Many people have to forgo building a savings account for emergencies just to keep food on the table. Now is the time to think about what you really need to spend money on each month. Do you really need a new book or outfit, or do you just want it? Identifying needs and wants is the best thing you can do to help manage the budget.
Alternatively, you could make more money. Is there a job out there with better pay that you can apply for? Can you start something on the side to make extra money? What about selling some of your old and unused things to make a little extra cash? Adding extra income to the monthly budget will surely help balance the books but keep in mind that a higher income also means higher taxes need to be paid. Be sure to talk to your human resources person at the second job about having more taxes taken off your check each payday or you’ll end up owing the government at tax time.
Budgeting is not something that everyone will get the first time around – maybe not even the second or third time either. Sticking with the budget will take dedication and commitment, but the payoff will be everything you hoped it would be. Soon you’ll have a savings account built up and those debts will be getting smaller and smaller as the months slide by. Investing the time into constructing a budget is like investing in yourself. Learning to live within your means will be the best thing you ever do.