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How to set up a budget, part 1: Understand where you are now

Published by: LifeWorks,

Setting up a budgetThe vast majority — 85 per cent — of Canadians agree that they ‘need to save more money’, but nearly two-thirds are not making savings a priority, finds a recent CIBC poll. What’s more, the average Canadian could save up to $360 more each month without even noticing.

Why is it so hard to save? 

People think it’s too hard to save, but the truth is that we’ve just become rusty at saving. It’s about shifting your mindset and getting into the habit of saving regularly. One of the best ways to reduce or avoid money worries is to set up a realistic personal budget. A budget is a tool that will help you understand your income and expenses better and achieve your financial goals faster.

In this first part of a three-part series, we take a look at how you can take charge of your finances by understanding where you are now.

Take charge of your finances

First, you have to recognize that you have some control over your finances. It’s easy to blame money problems on things you can’t control — that your salary is too low, taxes are too high, or your loved ones aren’t spending money carefully leaving you struggling to budget every month. Don’t fret — there is usually some room to manoeuvre, and there are always steps you can take to improve your financial health.

How to take back control of your finances:

1. Understand where you are now. How does your money come in and go out? Are you spending more than you earn? Are you saving enough for the future?
2. Understand where you want to be. How would you like your money to work for you? What are your financial goals?

Both of these steps will be easier to take if you break them down into small chunks that will help you gain control over financial concerns that seem unmanageable.

Understanding where you are now with your money

Gaining control over your money begins with understanding your current situation — how much you make, spend, have, and owe. This may take some work, but it will give a clearer picture of where you stand that can guide you as you think about how you can improve your overall financial well-being.

Monthly income and expenses

Gathering and writing everything down will help you understand how your money comes in and goes out each month and will let you see your income and expenses. Remember, you want a general idea of your budget, this isn’t an official report that needs to be accurate to the penny. Rough figures can work as well.

To work our your current monthly budget, try to find your most recent:

  • bank statements
  • payslips
  • debit and credit card statements or bills
  • receipts for things you usually pay for in cash
  • spending on seasonal items (this may vary from month to month)

Tracking cash spending

One way to find out how you spend your cash is to pay careful attention to your spending for two weeks or a month. Keep receipts for every cash expense during that period, or use an electronic organizer or pocket-sized pad of paper. At the end of the period, sort the receipts or review your notes and add up how much you spent on lunches, groceries, movies, laundry, gas, and other categories on the worksheet.

Tip: If you’ve tracked spending for two weeks, you can multiply the amounts by 2.16 to get a monthly spending estimate.

Use banking and budgeting apps like Monzo or Mint to manage and track your expenses any time

Calculating seasonal and occasional expenses

While spending on clothing, car repairs, and gifts occurs unevenly, some bills are due once a year, such as a car registration fees; some may be due quarterly, such as property taxes; and some, such as insurance and heating bills, may be high in some months and low in others. How can you fit them in the monthly budget?

  • For bills due just once a year, divide by 12 to get a monthly average.
  • For seasonal and occasional expenses, find out what you paid during all of last year by looking through bills, bank statements, and credit card statements, or by merely estimating cash payments. Then divide that annual total by 12.
  • For weekly expenses, multiply by 4.33 to get an estimate of monthly spending.
  • For a quarterly bill, this is a simple matter of dividing the last payment by three (since the bill covered three months).

Adding it all together

After you have written out your monthly spending and income, subtract the expenses from the income. This gives you a snapshot not only of where you are now but also of how you’re managing your money.

If your…

  • … income is higher than your expenses, start putting aside money each month for savings or focus on paying off debt.
  • … expenses are higher than your income, your budget can help you see what might be causing the shortfall and what changes to income or spending are possible.

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