How much did you spend on travel and entertainment in the last year? Now, you may be thinking, “that’s a bit of a stretch,” right?
If you don’t know how much you have spent in certain areas, don’t worry — you are not alone. A 2019 report showed that only half of Canadians have a budget.
Very few people like to budget. Quite many think of budgeting as adding up numbers here and there, and they don’t want anything to do with that.
Yes, budgeting involves numbers, but more importantly, they relate to your finances. If you have ever thought of budgeting as a daunting activity, here’s a simple way to go about it.
Write down your total income
The first step to budgeting is knowing how much income you make. If you have multiple sources of income, add them up.
Note that the total income you use for your budget is your net income. Your net income is what you receive after tax and payroll deductions.
Itemize what you spend on
This should be easier than you think. Your expenses include items like groceries, rent or mortgage, utilities, transportation, travel, entertainment, and child care.
Some expenses are fixed for every month. An example of a fixed expense is your rent.
Your rent does not fluctuate monthly, and you know how much goes out of your income for this expense.
On the other hand, expenses like groceries vary every month. Your grocery expenses may be similar but will not be exactly the same every month.
If you are unsure how much you spend on certain things, check your previous bank statements to get an estimate.
A simple monthly expense list can look like this:
- Rent: $2,000
- Groceries: $500
- Childcare: $1,000
- Clothing: $300
- Transportation: $100
Total Expense: $3,900
Identify your financial goals
Suppose you plan to buy a home in the nearest future; you can save money for this goal every month.
Identify how much you need for a house down payment and how much you need to set aside monthly for this financial goal. Include this amount in your budget.
If you have any debt, you can also plan to pay down your debt in your budget.
Allocate your net income to your expenses and financial goals
Let’s assume the amount you need to save monthly for a house down payment is $500.
If your monthly net income is $5,000, you can allocate $500 from this amount to your down payment goal. You would have $4,500 to allocate to your $3,900 expenses effectively and have $600 left.
You can then assign the $600 to any savings goals or use it to pay off any outstanding debt.
Track your budget
Practically, you may end up spending less than you planned for or above your budget. The only way to know this is if you track your expenses.
Pro Tip: Do not let your expenses go untracked for many months, as they can get mixed up and make budgeting even more taxing.
A good old way to track your budget is to review your banking statements and input the numbers into a spreadsheet such as Google Docs or Excel.
Alternatively, you can use a budgeting app or software that connects to your bank accounts. The banking apps can extract your expense data and group them into expense categories on your behalf.
You can easily see which areas you spend on the most or which of your expenses exceed your planned budget.
Budgeting helps you know where your money goes. It is easier to plan when you have more accurate estimates of your income and expenses. With a budget, you can allocate your income to important financial goals and avoid spending on unnecessary items.
How can you get better at budgeting? First, you need to start.
Starting is the first step to getting into the habit of budgeting. Then, you have to be consistent. Consistency helps you plan for your finances in the short and long term.
Identify your income, estimate your expenses, itemize your financial goals, allocate your income to your expenses and financial goals, and track your budget.
These easy steps to budgeting can help you gain more control of your finances and help you build a promising financial future.