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Before I decided to implement a budget, my finances were in a horrible mess.  I owed money to various credit cards and had no idea what the balances were or even what the minimum payments were.  I skipped payments and fell behind on almost every bill I had except for rent.  I had a vague idea about how much money I was bringing in monthly and I had no plan for the following week let alone the future.

Having a budget keeps you on track with everything financial and allows you to work out a plan for your money.  You can plan for groceries next week or a vacation you want to take next year.  It’s all about goals and how to meet them.  There was a time when if I wanted a new book I would have to frantically check all the balances owing on my credit cards to see which one I could charge the item to.  With a budget, that time has passed.  I know what I owe and what I can afford.

Creating a budget is a crucial skill that, I believe, should be taught in school.  It’s easy once you know what you’re doing and pretty simple to learn.  The difficult part is sticking to it and having the discipline to make the hard choices.  Without hard work and the will to follow the budget, it’s pretty much just a piece of paper or a pretty picture on the computer screen.

Here are the basic steps to setting up your budget.  Follow these and you’ll be well on your way to financial responsibility.

Step 1 – Determine your monthly income

I don’t care if you get paid weekly, bi-weekly, or monthly, you have to know how much money is coming into the budget before you can decide where it needs to go.  It’s great to say you make $20 an hour, but what does that translate to after taxes?  You don’t have to know the exact amount down to the last cent, but at least have it to the nearest dollar.  Check your bank statement or your pay stub, it’s on there somewhere!

Also, be sure to include all sources of income when you are looking for the monthly total.  Do you get child tax credit?  What about GST or Trillium?  These are all sources of income that contribute to your monthly budget.  They need to be calculated into the formula.

Step 2 – List all your expenses

When I say track your expenses I mean track EVERYTHING!  Spend two dollars for a coffee?  Track it.  Spend another dollar for the kid collecting for her hockey team at the supermarket?  Track it.  Every little bit of money you spend leaves the total amount you have left to budget.  Every dollar counts.

Sit down and make a list of everything you spend on a monthly basis.  Rent, gas for the car, groceries, utilities; these are all important lines in the budget that need to be paid.  There are also irregular expenses like gifts and clothing that need to be considered.  Take whatever you spend on these items in total for the year, add them all up, and then divide that number by the number of months you have left in the year.  That’s how much you need to budget for every month in order to afford these purchases.

You also have to factor your debt payments into the budget.  How much are you spending on credit card payments?  Do you have a loan you have to pay?  What about a line of credit?  These are all items that need to be considered when you track your expenses.

Step 3 – Set up a Savings Account

Savings might be something you have never had in your life.  By the time you are done paying all the bills there might not be a cent left for saving.  I remember before I had a budget in place, savings were something only rich people had.  My budget allowed me to build a savings account for the emergencies that tend to crop up from time to time when you least expect them.

If, after calculating all your expenses, you have some money left over you should consider setting up a savings account.  Even setting aside ten dollars a paycheque will quickly add up to something.  Most experts say that you should have at least three months worth of payments saved up in case of emergencies.  I don’t think that’s impossible, but it might be a little unrealistic right away.  Work at saving $1000 first.  It’ll take some time, and a ton of dedication, but will be worth it in the end.  Having a savings account with some money in it will ensure that if an emergency pops up you won’t have to go deeper into debt to handle what life throws at you.  It’s important to remember however, savings are for emergencies and emergencies only!  It’s not a fund to go on a shopping spree or buying something you don’t need just because it looks nice.  Emergencies will happen; keep this fund ready for them.

If you already have a savings account for emergencies consider setting a “savings goal”.  Challenge yourself to save a certain amount of money by a certain date.  Who knows, you could have three months of bills set aside in no time!

Step 4 – Determine your NEEDS and WANTS

Now that you have a budget set up it’s time to determine what you need to pay each month and what you want to pay each month.  This is the time to figure out if you are running a surplus or a deficit.  A surplus is when you have more money at the end of the month than you need.  A deficit is when you are spending more money that you actually make each month.

If you have a deficit, it’s time to cut some spending from the budget to make ends meet.  Maybe it’s time to cancel cable.  Maybe you can cut back on going out on the weekends.  Whatever you decide to cut from the budget make sure it is a realistic choice that you can stick to.  There is no point in saying you’re going to quit smoking to save money if you have no intention or desire to quit smoking.  You’re just setting yourself up for failure.  Go through the budget and decide what you NEED to keep.  Shelter, food, and clothing are needs.  You have to have these to survive.  Fancy clothes, playing bingo twice a weekend, or drinking a case of beer a week are wants.  You don’t need these to survive.  These decisions are going to be very personal and likely very difficult to make.  This is the hard part of creating a budget.

If you have a surplus, consider doing something with the money instead of just leaving it there.  Every dollar should have a purpose in the budget.  Transfer the money to a debt you’re paying off.  Contribute to your savings account.  Invest in an RRSP for your retirement or an RESP for your children’s future.  Never leave a single dollar without a purpose.  Every dollar has to be used for something.

Remember to keep the budget realistic.  It’s OK to go out on the weekend once in awhile.  The key is to just do it every now and then instead of every weekend!  Budget for your entertainment and you will still have money to have fun.

Step 5 – Re-evaluate often

Your life will change from month to month, it’s important that your budget change with it.  Don’t be afraid of the change.  Readjust often and set new goals.  The more you work the budget, the better your budget will be.

Sometimes the budget can be an overwhelming thing.  We are here to help you set up the budget and keep it going from month to month.  Call us for an appointment today for free, professional budgeting advice.