Budgeting basics ‘Budget’ shouldn’t be a four -letter word

Budgeting basics

How to create a budget and take greater control over your finances

In our previous article, we looked at how to maximize your dollars with a quick, simple `spending plan'. A spending plan is a flexible guide that can help you develop a clear picture of the money you have coming in and going out every month. A budget takes the idea of a spending plan to the next level. A budget is a more detailed and structured plan to help you monitor your spending each month. While a budget provides less flexibility than a spending plan, it can be a really helpful tool for anyone looking to do as much as they can with their monthly income.

Why bother making a budget? More than half of all Canadians say they do not use a budget to manage monthly spending1. What that means is that those individuals may not realize how much they're really spending on different expenses or activities each month. A budget is really just a very organized breakdown of how much money you have coming in and going out and what specific things you're spending it on.

Once they actually sit down and create a budget, many people are actually surprised at what they find. Arming yourself with this

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knowledge about how you're spending your money can help you to adjust and adapt from month to month to make the most of your finances.

`Budget' shouldn't be a four-letter word Over the years, the word `budget' has gotten a bit of a bad rap. Many people think of it as being like a kind of `financial diet'. They see it as something negative or restrictive and that really doesn't need to be the case. Like any other tool, a budget isn't `good' or `bad' on its own. It's all about how you use it.

How do I create a budget? Making a budget doesn't need to take a lot of time or energy. But there are some things you will need to do first in order to make your budget as useful as possible.

1. Decide where your budget will `live' ? Some people use paper and pen. Some people prefer to use a spreadsheet program on their computer or phone. Use whatever makes the most sense and is most convenient for you.

2. Consider using a template ? We've included a sample budget in the next section of this article. But there are lots of templates available online. A quick search will provide you with plenty of options. The template we've used below is a modified version of a budget from the Financial Consumer Agency of Canada website, which can be found here.

3. Track your spending for one month ? Save your receipts from every purchase for the month, no matter how small. Every time you spend money on something (whether

it's your rent/mortgage, monthly bills or even something as small as a cup of coffee, record it. This information is really important to make your budget relevant for you.

Let's budget! Okay. Now that you've selected your template and the format of your budget document, it's time to starting putting numbers in those boxes. Feel free to use the sample budget template in the next section as a guide.

1. Income ? The first step is to write down the total amount of after-tax money you have coming in from all sources in a typical month. Put this figure in the `income' column. `After-tax' means the amount of monthly income you have left over after taking income taxes into account.

2. Basic Expenses (Needs) ? Next, you will need to write down all of your mandatory monthly costs. These can also be thought of as your monthly `needs'. This would include things like rent/mortgage, utilities, transit, car loan, child care, groceries, medical expenses, etc. In Column 1, record all your basic expenses from the previous month. Then, in Column 2, use that same number as your budgeted amount for the coming month.

3. Other Expenses (Wants) ? Once you've tracked all your basic monthly expenses, it's time to record all the other things you spend money on in a given month. These are also known as your `wants'. This would include things you choose to spend money on, such as coffee, newspapers, meals out at restaurants, entertainment, etc. In Column 1, record your other expenses for

the previous month. Then, use the same figure in Column 2 as your budgeted amount for the coming month.

4. Track Your Spending ? As the month progresses, track your spending on various expenses and record it in Column 3 (Actual Spending This Month). Saving receipts is the best way to make sure your information is accurate and that you don't forget anything. Try to update your expenses each day.

5. Subtract ? Every time you update your expenses, subtract the figure in Column 2 from the figure in Column 3. Put the updated answer in Column 4. This is how much money you have left over to spend on that category until the end of the month.

At the end of the month, it's time to do some assessment. This is where you see how your real life spending compared with your budgeted plan. A balanced budget is what happens when your money coming in is greater than your money going out.

Did you have money left over in any or all of your categories? Or did you need to borrow in order to make ends meet? If so, review your budget and see if there are any small, recurring expenses or `wants' that you could cut out.

Some parting budgeting tips

Be committed: A budget is only useful if you update it on an ongoing basis with accurate information. Staying committed to the process will give you the best snapshot of your finances.

Give yourself room for flexibility: If you would like to spend more on a certain category in one month, that's fine. Just try to spend less in another category to make up for it.

Keep your bills and receipts: This is the best way to make sure you have accurate information on your spending.

Evaluate and adjust: Your budget isn't written in stone. Review it from time to time to make sure it works for you. Adjust certain categories to make it more realistic and relevant.

Leave room for fun things: A budget shouldn't feel like a financial `diet'. Be sure to leave room for fun things throughout the month.

The bottom line Creating a budget and sticking to it each month can help you make more informed decisions about what you will spend your money on. It can help you identify areas where you might be wasting valuable dollars. It can tell you how much money you will likely have left over (after paying your monthly fixed expenses) to spend on other things. And a budget can actually help decrease your stress levels related to finances, because having one can help you eliminate unpleasant financial surprises.

Sample Budget Template

Column 1: Previous Month

Income List after-tax income sources Total Income

Basic Expenses (Needs) Home - Rent/mortgage - Home insurance - Utilities Transportation - Public transit - Car loan - Car repairs, gas,

etc. Living Expenses - Groceries - Child care - Medical, etc. - Basic clothing Other Expenses (Wants) - Restaurants and

entertainment - Gifts, etc. - Daily expenses

(coffee, paper, etc.) Total Expenses

Column 2: Budget for This

Month

Column 3: Actual Spending

This Month

Column 4: Difference (Col. 3 Minus Col. 2)

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice.

? / TM Trademark(s) of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada. All other trademarks are the property of their respective owner(s).

(03/2016)

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