Budgeting lies at the heart of every financial plan. It helps to keep you on top of your expenses and keep your spending in check. You can’t set a realistic savings goal, until you really know how much you’re spending right now. Unfortunately, many people have no idea what comes in or out of their bank accounts, and they’re often left wondering why they don’t have any money left at the end of the month. So start budgeting now, to avert a financial crisis in your home.
Now, I know budgeting isn’t everyone’s favourite topic, and there are some writers out there even trying to claim that it’s fun. But when you’re just starting out and unaccustomed to one, a budget is never much fun, until you start to see the improvements to your own financial life. But once you do, watch out! It can become obsessive.
So let’s get started, shall we? Here are some budgeting tips to get you started:
Categorize your spending
Think of all the things you use money for everyday. Insane, right? Well that’s why we’re creating categories – to help you organize all those expenses. But for now, let’s not get carried away with the number of categories or get bogged down in details. It’s one reason many household budgets fail – they’re too complicated. You can always divide the categories further, down the road. Here’s some sample categories to get you started:
Here you’ll have your and your spouse’s paycheque(s) and any miscellaneous income.
- Mortgage or Rent. Be sure to lump in your property tax and/or any condo fees.
- Insurance. That includes your home, auto and life insurance.
- Essential utilities. This includes your hydro/electricity bill, water and heating gas. If you’re renting, some of these may already be included in your rent.
- Non-essential utilities. This includes things like your cable, phone and internet
- Groceries & Personal Care. Groceries are pretty self-explanatory. Personal care includes everything hygiene/beauty-related. That includes soaps, shampoo, dental care, diapers (for your child of course). I usually lump these together, since I find it makes it easier to budget. But keep them separate, if you find that works better for you.
- Dining Out.
- Car Costs. Includes gas for your car, licence and plate renewal, as well as oil changes and maintenance.
- Clothing. For your whole family.
- Kid stuff. For all your kids wants. Toys, books, etc.
- Fun Money. This is for all the other stuff – the wants – the CD’s, electronics, tools, going out to movies, books, shows, membership dues (i.e. the gym you don’t go to, other clubs, magazines and subscriptions).
Other categories could include Loans, Child care, or Pet care, if you have any. Remember, this is just meant as a guide. A budget should fit your lifestyle.
Track your spending
Keep track of each and every dollar you spend. After about three months, you should get a good account of your spending habits. Here are a few tips to help you get started:
- Start on the 1st of the month. Give yourself a clean slate (that doesn’t mean you can blow all your cash on the 31st).
- Create a separate page for every category. So you have room to enter in all your receipts and add up the totals.
- When you get a new receipt, add it to your category page. Every day, empty out your pockets of receipts. That means your paycheques, utility bills, cash and credit receipts and record them under each category. If recording them daily seems like a lot of work, stuff all those receipts daily into a jar or envelope and record them at the end of the week.
- Record your net (after-tax) income only. The amount that actually gets deposited in your account.
- Record the credit card transaction the day you swipe it. Not when your bill comes in.
- Split Receipts. Create a separate envelope for all those receipts that have multiple purchases on it. Those that just don’t fit nicely into any one category. So for example, if you bought a new computer at Costco, and also bought a giant jug of ketchup, it goes here. When you’re ready to record them, split up all the items by category.
- Record where you spent it. In the Dining out category, for example, if you see a long line of McDonald’s entries for the month, it might be time to curb those Big Macs.
Most importantly, keep tracking. Once you have all the numbers, at the end of the month, add up all your expenses and subtract them from your income. You should end up with a positive number. If you don’t, Lucy, you got some ‘splainin’ to do!
You should be spending less than you make. The average Canadian now spends $1.51 for every dollar he/she makes. Looks like the average Canadian obviously doesn’t have a budget!
Budgeting your spending
The first time you do it, the numbers will surprise you. You’ll find that you’re spending way too much on more than one category. It happens, but here’s your chance to fix it.
- Create your list of all the categories on one page. This is your budget page.
- Add up all the totals for the past three months for each category and divide by three to get your monthly total. Write that amount down next to the category.
There are always categories like car costs and medical, which you won’t be able to fully predict, so do your best to estimate. Then try and see which categories you can reduce spending on. Can you make a few calls to lower your insurance? Are you spending too much eating out? Look at areas that are not that important to you, so you can spend more on the areas that are.
A budget gives you a great overview of where your money is going and more control over your financial life. It takes a bit of time, but well worth it, so start budgeting!