Making a budget in 3 steps

Making a budget in 3 steps

A balanced budget is key to carefully managing your money and finances. SSQ can help you make one.

Why make a budget?

A budget is the groundwork for sound financial planning.

Why? Because it’s easier to manage your money when you know exactly how much is coming in, how much is being spent and how much is being saved.

A budget makes it possible to:

  • Live within your means
  • Reduce your expenses
  • Pay off your debts instead of drawing them out
  • Spend your money on your priorities and make your dreams come true

Who should make a budget?

Everyone… according to financial planners. And especially if one of these situations applies to you, then making a budget should definitely be a priority:

  • You have trouble paying your bills
  • You don’t know where your money is going
  • You have trouble paying off your debts
  • You never seem able to set money aside
  • You are on the verge of buying a home, buying a vehicle or going on a trip
  • You are going through an important life event, like retirement, a new child, going back to school or going on sabbatical

Making a budget is not just for people in dire financial straits. Making a budget will help you avoid over-indebting yourself.

The latest statistics show that the household debt ratio in Canada is 170%, which is similar to that of the United States immediately prior to the 2008 financial crisis.

This means that for every $100,000 in income, a family owes $170,000.

Don’t be a statistic. Take your budget seriously.

A budget in 3 steps

Step 1: Make a list of your income and expenses

For your income, refer to your pay stubs or bank account statements.

This may be a little more complicated for self-employed workers, especially if you are still waiting on customers to pay your invoices.

When it comes to expenses, there are the monthly ones:

  • Mortgage
  • Car loan
  • Insurance
  • Cable
  • Utilities (if you opted for equal payments)
  • Banking fees

… and irregular ones. For these, it’s best to compile a list that dates back 1 year. Then, calculate a monthly average.

If you are putting money away for a rainy day, be sure to include that amount in your budget.

The more thorough you are at this step, the more true-to-life your budget will be.

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Google Play

Step 2: Analyze your budget

You must now analyze all the numbers you compiled at step 1.

To make sure your budget is balanced, compare the amounts paid for each expense to the suggested spending percentages:

  • Housing (rent, mortgage, taxes, insurance): 35%
  • Transportation: 15-20%
  • Food: 10-20%
  • Savings: 5-10%
  • Utilities: 5%
  • Leisure activities and education: 5-10%
  • Health, dental, eyewear, prescription drug insurance: 3%
  • Debt reimbursement: 5-15%
  • Clothes: 3-5%

Whenever you exceed these percentages, you must tighten your financial leash. Be sure to re-assess your spending habits and adjust your budget accordingly.

Put your money where you think it is necessary.

Step 3: Balance your budget

For a budget to be balanced, your income must be at least equal to, ideally more than, your expenses.

If that is the case, congratulations! This means that you have extra cash that you can spend on yourself or put towards your retirement, which is reassuring.

If your expenses exceed your income, changes are going to have to be made.

Reduce your expenses

Cutting down on nonessential daily expenses is a good way to stay the course.

The best examples of this are packing a lunch rather than going to the restaurant or not buying unnecessary items just because they’re on sale.

Increase your income

This is easier said than done.

A quick way to raise money is to have a garage sale. You could be surprised at how much money you could make simply by getting rid of unwanted objects.

The sharing economy is also a good way to make a little extra cash. If you own a car that you rarely use, sign up for Turo and rent it out.

If you are a jack of nearly all trades, you could start a sideline project to generate some extra income. Keep in mind, however, that becoming an entrepreneur can be complicated. For help, refer to the Canada Business Network.

Needs or wants?

Assess your buying habits and behaviours.

Focus on the essentials first, then on unplanned purchases.

Far be it for us to tell you how to spend your money, but it’s hard to pay your credit card bills when you succumb to temptation on a regular basis…

The best way for you to resist temptation is to put off an impulse buy until later!

Often, just waiting a few days is long enough to make you realize that you don’t actually need the thing you thought you really wanted.

How to stay on budget?

This is the hardest step of all!

It takes willpower. Keep all your bills and tabulate them over the course of the month.

Monthly to-dos

To be on the safe side, check whether you are on budget or “in the red” every month.

If your income is higher than your expenses, then put the leftover money in an emergency fund to prepare for the unexpected.

If your expenses are higher than expected, you must re-evaluate your situation as quickly as possible to avoid over-indebting yourself. Are these expenses the result of something unexpected that will likely never happen again? Or, will they be a regular occurrence?

These are just two of the questions that must be answered in order to re-balance your budget.

What if your life changes?

Check your budget from time to time, especially after a change in salary or when new regular expenses arise.

Your budget has to be realistic, not idealistic.

Need help?

If the idea of making a budget stresses you out, ask for help (free) from the Canadian Association of Credit Counselling Services (CACCS).

These community organizations are there to help you better understand your budget and improve your financial situation.

Contact an advisor. This person will be more than happy to help you manage your finances.

Note: This blog post is provided for information purposes only. It is not a substitute for professional legal, financial or fiscal advice. For advice specific to your personal situation, always speak with your advisor. SSQ cannot be held responsible for any decision made as a result of reading this blog post.