Setting up a family budget may be a process most people would rather avoid. However, spending a few hours crunching some numbers – and sticking to them – will help you and your family get back on track. A budget also reduces stress and allows you to enjoy life a little more, rather than constantly worrying about keeping your head above water.
So stop singing the budget blues and take comfort in budget bliss with these six steps.
1. Calculate your net monthly income first
This will set the pace for your budget. Avoid using gross income because some of this money will be deducted, including taxes, EI, CPP, investment contributions, etc.
Tip: Don’t count on windfalls
Relying on uncertain income in your budget can be dangerous. Year-end bonuses, tax refunds and investment gains are nice, but they can vary, making them very difficult to account for in a budget. Stick to your monthly net income and you’ll be on the safe side. Use any additional revenue to pay off debt or to put towards your primary goals.
2. Set your budget around a goal
Now that you know how much money you have coming in each month, it is now time to build your budget – and setting goals are key. Whether it is a mortgage, a home renovation, paying off debt or planning a family vacation, budgeting for goals helps you find the discipline needed to make big purchases and keeps you motivated in regularly managing your budget.
3. Determine fixed costs first
A successful budget will account for fixed costs first. These include car payments, mortgage and rent, utilities, insurance, some debt payments and any other contract-based payments. These fixed costs should be separated from your discretionary spending, which you should only consider after accounting for your fixed costs.
Tip: Budget for debt payments
Make your debt payments at the beginning of the month. Once money is gone it’s gone. Waiting until the end to pay ‘whatever is left’ is a bad strategy. Get it out of the way early for a stress-free month. Remember, don’t just pay the minimum – be sure your debt payments cover the principal so you get out of the debt hole faster. Consider debt a fixed cost.
It’s also a great idea to setup a repayment plan and schedule. If you’re feeling overwhelmed, talk to your creditors and financial institution. You can also make arrangements with a credit counselling agency.
4. Create discretionary spending categories last
These expenses include dining out, travel, gifts, clothing, entertainment, personal care, etc. Discretionary spending is within your control and is generally not critical, unlike say a car or mortgage payment. You can personalize these categories based on your own wants, i.e. cut back on clothing if you’re saving for a weekend away.
Tip: Strike a balance between needs versus wants
You can still enjoy life while getting back on track. The key is balance. For example, while dining in is always more cost-effective, enjoying a dinner out with friends from time to time is good for your mental and emotional health. Though this is discretionary spending, a little fun once in awhile is important and should be built into your budget. Budget for it in advance and you won’t have to worry about whether you can afford it.
5. Build a buffer into your budget
Planning for a rainy day is an important part of any budget. From unforeseen car repairs and pipe bursts to other emergencies, save a little bit of money each month to cover these costs. Over time, you will build up an emergency fund that will help cover a job loss, etc. Plan on saving 10 per cent of your net income to put towards your buffer.
Tip: Predict your expenses every month
Anticipating how much you may spend from one month to the next will allow you to take control of your financial situation and avoid surprises. The best way to do this is to plan around your calendar. Do you have plans with friends? Is there a birthday or two? Are there any holidays coming up? Perhaps you’re approaching a month where you have three car payments instead of two. Planning ahead will allow you to account for this and shift money from one category to the next.
6. Get into a routine and manage your budget
Take a few hours every two weeks to update your budget and to track whether you’re ahead or behind. That will help you stay on focused and avoid end-of-month cash flow problems. Now that you have a set financial goal, you’re better able to track how far you’ve come in meeting that goal.
Tip: Calculate where to cut from your budget
Knowing how much you’re spending in certain categories gives you an appreciation for your hard-earned money. Review your expenses regularly so you learn to cut from certain areas and contribute more to others. You’ll be surprised to see how much you’re spending on impulse purchases and dining out. Cut where you can without being too restrictive.
Now that you have an understanding of the steps you need to take in creating a budget, consider using one of these online budgeting apps – they’re easy to use and avoid you having to constantly crunch numbers. The app will do most of the work for you.
If you’re looking for something more detailed, there are plenty of useful budget templates you can consider. There’s also the Government of Canada’s simple, but effective budget worksheet you can use – just scroll to the bottom.
Now that you have an understanding of the steps you need to take in creating a budget, use this basic budget template at the bottom of this page to get you started. At Affirm Financial, we know that a budget can go a long way to get you to where you want to be financially.