When it comes to personal finance, one of the most important things to have is a budget. Budgets are meant to give you an overall look at your finances so you can start working towards your goals. But what if you have no idea how to make a budget or how they work? It should be a straightforward process, but if you’ve never created one before, you may have no idea where to begin. Here’s how to create a budget that makes sense.
Track your spending
Before you even think about putting together a budget, you’ll need to track all of your spending for a month or two. From gas to snacks, you literally need to write down (or use an app) everything you spend money on. The idea here is to see where all of your money is going. There’s no point in creating a budget if you don’t know what you spend money on, but you also need to factor in expenses that don’t happen on a monthly basis such as special outings,
List everything out
Making a budget comes down to three major things: income, expenses, and savings. Income is straightforward since that’s the amount of money you bring it. List that at the top of your budget. With expenses, you need to list everything as line items. For example, you’d have different lines for rent/mortgage, gas, groceries, internet, clothing, presents, and so on. It’s okay to group some things together, such as eating out and entertainment, as long as you’ve accounted for all of your spending. Finally, you should have a section in your budget for savings. That could be short-term or long-term savings, but make sure to list them out so you’re getting the full picture.
If this is the first time you’ve created a budget or you haven’t updated yours in a while, you might be shocked to find out how much you’re spending on certain things. Maybe you’ve realized a fair amount of your income goes to eating out, or your cell phone bill is higher than other people you know. Now is the time to slash or make adjustments to your spending. Every dollar you save can be put towards paying down any debt that you may have or put towards your saving goals.
Prioritize your savings
Many people wait until the end of the month before they start saving, but often they find that they don’t have any leftover funds available. With a budget, you can prioritize your savings since it’s a line item. Not everyone can dedicate a huge amount of their income to savings, so start with a small amount to begin with. As you slash expenses or become more familiar with your budget, you can increase your savings. You can also take things one step further by automating your savings. Set up automatic transfers so your saving goals are met every month. Time it around when you get paid, and you’ll never notice the money missing.
Although budgets are meant to keep you on track, there will be times where you blow it. It’s possible that you forgot to factor in one-time expenses or you simply had a bad spending month. Don’t get too upset about it, but try to recognize why you went over budget and make changes so it doesn’t happen again. Budgets can change often due to a variety of reasons – you might have gotten a raise or your expenses went up. Make adjustments as needed, but think about the big picture, which is spending less than you make and saving for your goals.
Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog
Money We Haveis one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.