With household debt levels at all-time highs, and not seeming like they’re about to go down any time soon, everyone’s wondering how they can keep more money for themselves and still get out of debt at the same time. The answer, while it can be complex, always starts with one step – creating a budget. But how do you do it? It’s much more than just figuring out how much money you have at the end of the month and deciding what you’re going to spend it on.
Collect all of your financial paperwork
Have a chequing and savings account? Get your statements together. Do you have investment accounts? Grab the paperwork for those, too. Do you have utility bills, pay cheque stubs, and child care receipts? Get those too. If there is paperwork pertaining to your current financial situation, you need to have it all laid out in front of you before you can embark on building your budget.
Record your income
If you have an outside job that gives you a pay cheque from which taxes are deducted, use the net income amount (take home pay) for your budget. If you’re self-employed, record every penny (or nickel) that you make. If you have any other sources of income such as child support or baby bonuses, write those down, too. You can’t create a comprehensive budget unless you know everything you have to work with.
Record your expenses
The same goes for your expenses. Write down every car payment, every mortgage payment, and every other expense that you face every month. Break the expenses down into two categories – fixed and variable. The fixed expenses are those that are required for living and that you can’t really play around with too much. They include things like your mortgage and your car payment. Variable expenses are those that you have control over, meaning that you also have some wiggle room to cut them back.
Total both your income and your expenses
This is the part that becomes scary for some people – finding out whether they’re bringing in as much as they’re handing out. Yes, add up all your income and expenses (separately of course,) and see where you stand. Does your income total more than your expenses? You may be in good shape, but can you shave even more from your expenses in order to put a little more aside in savings every month? Are your expenses more than your income? Then it’s definitely time to put a stop to that. The next step will show you where (if anywhere) you’re spending too much, and the first places that you should consider cutting back on.
Yes, we know that we just told you there are expenses that you can’t do much about, such as your mortgage. But we also all know that when the going gets really tough, there are always things you can do about those expenses – such as selling them off and getting rid of them altogether. After all, how much sense does it make to live in a mansion when you can’t even afford to heat it throughout the cold Canadian winter? In order to determine if you have expenses (even fixed expenses) that are costing you too much, the chart below indicates the allocations on your own budget that you should see.
If you find that one category of your budget is already much more than it should be, find ways to cut back on it. Move things around, or just do a little sacrificing and go without the luxuries of life for a little while. It might not be fun, but this is what budgeting is all about. Also notice that within the allocation chart there are categories for debt repayment and savings. These are not luxuries. They are actual benefits or expenses that you must start paying – even if it’s only a little at first.
Review, review, review
So many people think that because they have relatively the same expenses and the same income every month, they never need to revisit their budget once they’ve got it in place. But neglecting your budget is only going to land you back where you first started – wondering where it all goes before you can make ends meet. Remember that it’s a monthly budget. Because of that, you should be pulling it out at least once a month (hopefully at the beginning so you know where you’re headed,) and looking it over. Make changes when necessary (but none that will get you in trouble,) and then put it aside for next month when you’ll need to pull it out and do it all over again.