Thursday, October 20, 2011

How To Build A Budget

The best way to keep track of your money and make sure you're saving your money properly is to build a budget. You can write it out on a piece of paper or make a spreadsheet in Excel. I'll help take you through the steps in building your own budget.

A budget is broken into 3 sections; income, fixed expenses and variable expenses. Each section has 2 - 3 columns. The first column will be the budgeted amount and the second column will be what you actually earned/spent. It's optional to add the 3rd column, which you can use to figure out how much you were over/under budget.

The first section of your budget should be your income. Figure out all reliable sources of income. For most people this is just your regular paycheck, but if you receive regular cheques from the government for disability or child support they should be included. Things like bonuses and tax returns are not guaranteed, so they should not be included in your budget. IF you don't work on a fixed salary, try to under estimate your monthly income. It's better to end up with a little bit of extra income then miss a shift or two and not have enough. After you have all your income accounts, calculate your total monthly income at the bottom.

The second section is you fixed expenses. These are expenses that you have to pay, like rent, utilities and insurance. Unlike your income, you should slightly overestimate you expenses. If you don't leave enough room you might get a bill that's slightly larger than usual, but you will still have to pay it. You don't need to double what it usually is, just give yourself a little wiggle room. Once you have all of your fixed expenses, enter the total at the bottom.

The third section is your variable expenses. These are expenses that exist based on your personal lifestyle. These totals are easily adjustable because they are not bills that you owe. It's more like your spending money. Examples include entertainment, food, sports/activities, savings and 'other'. If you're paying off debt, include that as an expense. (Try to pay MORE than the minimum payment!) Look at previous bank statements to get an idea on what you spend on each category each month. Don't forget to look at how much cash you spend! It's easy to think you don't spend as much as you do when half of it is cash transactions. Once you have all your variable expenses, enter the total at the bottom. Right below that enter the total of your fixed expenses + your variable expenses.

Now that your have listed all of your income and expenses, it's time to balance your budget. Calculate the difference between your monthly income and your monthly expenses. If your expenses are greater than your income, you need to trim. Your fixed expenses generally can't be trimmed, however some of your utilities like internet and cable can be cut back. Do you really need 300 channels? Probably not. Internet and cable are also utilities that you can get deals on if you bundle them together with the same company. With Rogers you can combine your internet, cable, land line, and cell phone, the more the cheaper.

Variable expenses are really where the trimming takes place.  Eating out at restaurants a lot is a huge unecessary expense.  You can greatly trim your food budget by cooking at home.  Even if you can't cook, a box of about 30 frozen chicken strips is about the same price of one order of chicken strips at a restaurant.  Then there's still drinks, tax and tip!  Clothing is another big one, it really isn't necessary to spend $300 a month shopping, especially if you're someone who is paying off debt!  Keep trimming back these variable expenses until your expenses are equal or less than your income.  If you have any leftover money, put it in your savings!  If you have debt, pay the debt!

So now you have your budget.  But that's not the end.  Now you have to stick to your budget!  Record your bills as soon as you pay them, and keep track of your variable spending.  It's a good idea to keep a notebook for you to enter all your spending.  Include the date, what you bought/where and how much it cost.  It's best to get receipts, expecially if you're using cash.  At the end of the month go through your bank statements to make sure you didn't miss anything.

If you came in under budget, congratulations!  If you continue to come in under budget the next few months, it's probably safe to boost your variable expenses a little bit, but if you're surviving, watch your savings grow.  If you came in over budget, take a look at each category.  Did you not make enough or did you spend too much?  Where did you spend too much and why?  The first few months will always take a bit of tweaking.  But if you're just shopping too much, then don't tweak your budget, give yourself a good smack and get your butt in line!

If you need more help building your budget try the interactive budget worksheet on Gail Vaz-Oxlade's blog.

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