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How to set up a budget

So you’ve decided to get serious about your finances, but you have no idea where to start. Generally speaking, the first thing you should do is create a budget. With one in place, you’ll clearly see where your money is going. If you’re new to budgeting, it can be a bit overwhelming since you may not have an idea of where to start. Don’t worry, we’ve got you covered. Here’s how to set up a budget:

Step 1: Track your spending

The first thing you need to do is to see where your money is going. For the next month or two, write down everything you’re spending money on. That would include your weekly grocery run to hanging out with friends. You’ll also want to include some fixed or automatic expenses that aren’t always obvious. That could include your rent or mortgage, streaming services, and baking fees.

Another thing to consider is your yearly or one-time expenses that can easily be forgotten. Things such as insurance, medical bills, credit card annual fees, gifts, and donations are the type of things you want to look for.

How you track your expenses are up to you. Some people will literally write everything down, while others will use an app to monitor their purchases. The idea here is to see where all your money is going.

Step 2: Decide on your goals

Before you get to making an actual budget, you need to decide what your financial goals are. Goals can vary depending on your stage of life, but some common things to consider include:

●      Saving for retirement

●      Buying a home

●      Taking a vacation

●      Saving for your child’s post-secondary education

These goals could take years to reach, but that’s okay. By identifying what your priorities are, you can build them into your budget so you’re constantly saving. How much you’ll be able to set aside for each goal depends on your budget.

Step 3: Create a budget

Now that you’ve got your expenses and goals identified, you can create your budget. Start by listing your income at the top of your spreadsheet. For most people, that’s usually just their pay, but if you have any additional income sources, include them.

Below that, you’ll want to list all of your fixed expenses first. That would include things such as you rent or mortgage, utilities, phone/internet, groceries, debt repayment, etc. Follow that up with the rest of your monthly and yearly expenses. Finally, add in all of the goals you’ve listed. You’ve now got a basic budget.

Step 4: Make adjustments

Creating a budget for the first time can be eye-opening. Quite often people are spending more and saving less than they thought. If you’re spending more than you make, then there’s clearly an issue, but adjustments can quickly be made to balance things out.

Take a look at your spending and see if there’s anything you can cut. Since you tracked your expenses already, it’ll be pretty clear where you’re spending more than you should. Maybe you need to cut back on eating out or perhaps you need to reduce the amount you’re spending on shopping.

You’ll also want to think about the goals you’ve set. Are they still realistic? You might need to cut back on the amount you’re saving to focus on other things such as paying down debt. That said, if you don’t have any debt, prioritizing your goals can go a long way since you’d be paying yourself first.

Step 5: Don’t beat yourself up

Here’s the thing about budgets - they’re frequently changing. There’s a good chance you’ve forgotten to include something in your first budget, so you’ll need to make some changes later. Alternatively, your income may fluctuate if you’re a freelancer, so having a balanced budget every month may not be possible.

Try not to obsess over the small details or get upset if you’re not saving as much as you’d like. Updating your budget regularly is a part of life. The main goal of a budget is to see where your money is going. Occasionally, you’ll likely ask yourself if there’s a way you can save more money by cutting expenses. With a budget, you’ll quickly be able to identify areas that could be improved.

Also, hopefully over time, your income will increase. If you’re not upping your expenses at the same time, you’ll just end up saving more. Avoiding lifestyle creep is one way to ensure you have a balanced budget.

Final thoughts

Setting up a budget takes time, but it can practically manage itself once you have one in place. That said, adjustments do need to be made from time to time. At the very least, look at your budget at least once a year and see if any updates need to be made.

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is 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.

Barry Choi is a paid spokesperson of Sonnet Insurance.
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