Budgeting may seem daunting, but it doesn’t have to be complicated. It’s not so much what you make, but how you spend it that’s important. And in order to know how to stay in the black, you need a budget, the roadmap that tells you how much you have coming in and where it all goes.
Here are 10 steps that can help you along the way.
1. Gather the facts
It all starts here. Find your financial records for the last three months or so. This includes bank statements, credit card statements, recurring bills and bills for such things as heat, water and hydro, cable and internet and clubs and memberships like the YMCA or gym. Don’t forget to include all your little extras – morning coffee, magazines, buying lunch. Those expenses will be crucial when you’re looking for places to trim.
2. Create a worksheet
Once you have the facts you have to organize them in a way that gives you a clear picture of what you spend and on what. It may not be pretty, but it will tell you what you need to know. The best way is to use a worksheet.
The Financial Consumer Agency of Canada (FCAC), is a federal agency whose job is to protect and inform consumers about financial services. Credit Counselling Canada offers another version with a pie chart that allows you to quickly see where the money is going.
3. Fixed vs. discretionary spending
Break your spending into fixed and discretionary costs. Fixed costs are such things as mortgage or rent, car payments, and insurance. You must pay them every month and they usually don’t change.
You have more control over discretionary expenses. You have to buy groceries, but do you need Häagen-Dazs super premium ice cream? Other areas to take a look at include gasoline, dining out, movies, clothes, and that latte every morning. Small things can add up.
4. Rules of thumb
Your housing costs should be less than about one-third of your gross income, financial planning experts say. That includes heat, hydro and property taxes. The Canada Home Mortgage Corp. has a mortgage affordability calculator to help crunch the numbers. Another rule of thumb is that your monthly debt payments should not exceed 40 per cent of your gross monthly income. This includes housing, and such things as car loans and credit card payments.
5. Pay yourself first
You’ve heard this one before. That’s because it’s the best way to save money. Try to put away 10 per cent of each pay cheque, preferably using an automatic debit on payday. If you can’t manage 10 per cent, try 5 per cent. Anything is better than nothing and you’ll be surprised at how easy it is. Build that into Step 2 when you are creating your budget.
6. Cut out non-essentials
Do you really need to buy lunch five days a week? Can you live without that $5 skinny mochachino? Make it a treat rather than a fixture. You might be able to eat out less often, or dine at less expensive restaurants. Try leaving you credit card at home to avoid impulse purchases.
If you’re looking for help this frugal living Website and blog have plenty of ideas.
7. Pay more than the minimum
When it comes to your debt, interest rates are everything. Pay bills on time to annoying service charges and sky high rates on credit card. Pay more than the minimum balance. For instance, if you owe $1,000 on a Mastercard that charges 18 per cent and pay the minimum $40 per month, it will take you nearly two-and-a-half years to pay off your debt – and you’ll wind up paying close to $1263. This calculator from Industry Canada can help you compare Visa and Mastercard against store credit cards, lines of credit, and rent-to-own programs. You can also change the minimum payment and interest rate information.
8. Save for a rainy day
For safety, your best bets are a high-interest savings account. You’ll be lucky to get an annual rate of 2 or 3 per cent, but it’s better than the fraction of a cent you’re getting, if at all, in your savings account at the bank. Find an account with minimal fees, or consider a Tax-Free Savings Account.
9. Review and adjust
Go over your budget regularly to make sure you are staying on track. Compare actual spending to the budget and look closely at instances when you spent more money than you planned. Was your plan realistic? Should you adjust by cutting in one place and adding in another?
Your spending patterns will change some from month to month, but by tracking your income and expenses carefully, you know exactly where your money goes.
10. Build in a reward
You endured the pain, so build something in to reward yourself for sound financial management. Don’t be afraid to splurge (a little) when you meet your goals to save money or trim the budget – fancy dinner, new shoes, a shiny new gadget. Then, back to the plan.