How to Build a Basic Budget When You’ve Never Budgeted Before? (Plus My Favourite Budgeting App!!)
Budgets, oh budgets — that’s right folks, I’m saying the “b” word so many people seem to find so unpleasant. To most, budgets seem mundane and frugal. But to the financially saavy person, a basic budget is the most crucial, essential step you can take down the road to personal financial success. It’s critical to manage your income and expenses, and to make important and realistic financial decisions and goals.
Many Canadians don’t have a clue where their money is going! Yet each month they find themselves struggling to live paycheque to paycheque. It’s time to take control of the situation, by learning how to build a quality, basic budget. You’ll find that maintaining a budget, once you get the hang of it, will offer you substantially more financial flexibility when you might need it most. Below, I’ll show you in just 5 steps how to build your own Basic Budget, even if you’ve never made your own budget before.
1.Know Your Income
First and foremost, you’ll need to understand how much money is coming in each month. For a lot of people, this will likely be your employment’s income, but you might have additional income streams such as investment interest, side jobs, or the like. The vast majority of people will have relatively the same amount of income each month. You won’t have much control on this figure, but it still helps to know what you’re working with.
2. Essential, Cannot Avoid Expenses
Once you have your income figured out, you’ll need to move on and calculate your monthly expenses. This is the part that most people don’t like to do. Particularly if this is your first time making a budget, you might be in for some surprises! I usually start off with the expenses that I really cannot avoid each month. These are the essentials, like rent (or mortgage payment), insurance, and food costs (do not include restaurant / take out food though!). In most cases, your essential expenses will be your largest ones each month. They’ll also tend to be fixed amounts which won’t fluctuate from month to month.
3. Rest of the Must-Haves
After the essential expenses are out of the way, list and tally up the remainder of your costs associated with “needs”. These are the rest of the expenses that you might consider your “cost of living” each month. Things like electricity / utility costs, telephone, prescription medicine, debt and loan minimum payments, etc. Once you these are all listed, add up your “cost of living” expenses with your “essential” expenses. These are your basic expenses.
4. Expenses You Can Play With
Now that we have our main expenses tackled, it’s time to deal with your variable expenses. These translate to your budgeting “wants”. You can live without them and still survive. This would be such expenses as gym memberships, restaurants, cable subscriptions, and deluxe internet packages to name but a few examples. These are your expenses that you have the most control over, and it’s likely to be the area where you find most of those “surprises” I mentioned previously. If that’s the case for you, have no fear — this is why we’re making the budget in the first place!
5. Basic Budget: CHECK!
Yeah, you heard me fine — that, in a nutshell, is a basic budget. Of course, budgets can be much more fancy if you need them to be. If, after creating your Basic Budget, your expenses are still less than your total income, it’s time to get creative! The surplus income can be put towards a multitude of various financial goals. Are you saving a portion of your income each month? If not, you should be! The ideal way for those just starting to save in Canada is with a tax-free savings account (we’ve looked at the basics of TFSAs here).
BONUS: I mentioned that I’d share with you my favourity budgeting app. If you’re ready to take control of your financial life, then a great way to get started is by using Mint. I like Mint because it’s free, secure, easy to use, and you can get it for both your computer and phone. I think it’s coolest feature is the ability to set up budget limits — you set your monthly targets for your budget categories, link up your spending accounts, and Mint will alert you when you’re nearing your target.
You can check out Mint’s website for more info on the app.
When I first sat down and made my first honest budget, I was shocked at some of the areas (and amounts) my money was going to. A big drain on my bank account was take-out food and restaurants. I would often buy my lunch at work. After crunching the numbers, I saw those $10 lunches were costing me $50 a week, or $200 a month! Just a daily coffee from Tim Hortons was $50 a month out of my pocket. While tackling debt repayment at the same time, it really was no wonder I was often struggling to get to the end of the month. However, if it weren’t for making that budget, I’d probably still be mindlessly buying my lunch at work each day, wondering why I was always broke.
Did you find any “surprises” when building your basic budget? Let us know by replying in the comments below!
Subscribe to the RateSense.ca mailing list to receive personal finance tips, tricks, and news!