Budgeting is a term that may seem intimidating due to the assumption that it means “giving up” the things you’ve become accustomed to. In reality budgeting is the process of organizing your spending so that you develop sustainable long-term habits. Learning the basics of budgeting makes it easier to determine if you are living beyond your means or if a few small changes to the way you manage your finances can get you back on track.
Start by Meticulously Tracking Your Spending
Budgeting is about getting personal finances under control and knowing where money is being spent. The first part of creating a budget is tracking every penny and the type of transaction. This ranges from paying in cash to using a credit card – in some cases it can also include tracking personal investments and mutual funds.
Start by writing down every conceivable monthly expense. This will include things such as groceries, fuel expenses, clothes, and entertainment. If you are creating the budget for your family, ensure you account for medical check-ups, dental and vision care, and medication. These expenses are typically recouped if you have health insurance but it can take weeks for a claim to be processed by your insurance provider.
Segment Your Expenses Into Lists
Make two lists: the must have list and the want list. The must have list should include bills like utilities, housing, groceries and medical costs. It should also include any debt payments and a savings goal. These are necessary expenses and the highest priority when making a budget.
The want list should include extra expenses like a coffee at the local coffee shop or the meal out with friends at the end of the week. Anything that is not necessary goes onto this list. These are the items that can be scaled back when money is tight.
Crunch the Numbers
Using accounting software or a good old fashioned piece of paper and a pencil it is time to crunch the numbers. It’s quite a simple process, just subtract your monthly expenses from your monthly income. This determines the amount of money you have to work with and how your money is being spent.
Most people stop at this point. With a loose budget in place they go on their merry way. However, I always recommend assigning at least 10-15% of the monthly budget to unexpected expenses. This tactic is a fail-safe; the money in the sock drawer if you will, that will keep your head above water even in the most pressing financial times.
About the Author
Carly Lance is the online marketing coordinator for Personal Bankruptcy Canada, a network of Canadian bankruptcy trustees that help “good people deal with bad debt.”