If you’re new to budgeting, it’s important to understand what a budget is and how it helps you look closely at your income and plan for the future.
Simply put, a budget is a financial plan that accounts for your income or earnings and expenses and provides estimates for how much you make and spend over a period of time that you can customise your budget to suit your needs.
When assessing your financial situation, creating a budget is an essential tool for honing in on areas where you are overspending and how you may cut back to create a balanced budget that allows you to live within your means and save money.
Check out these steps for creating a monthly basic budget:
Distinguish between your needs and wants – Make two lists named needs and wants then divide the items you buy into those categories, bearing in mind these questions: Why do I want it? How would things be different if I had it? And which things are important and essential to me? These lists may be instrumental in tailoring your budget for your lifestyle so that you can feel empowered and not restricted by your plan.
Calculate your monthly income – List all your sources of income for the month from your job, interest, supplemental income such as from a spouse, then add it all up.
Important note: If you earn a salary, be sure to list your monthly take-home pay rather than your gross pay. And if taxes aren’t automatically taken out of your paycheck, remember to include them as another expense. Your budget should have a figure that is as close to accurate as possible.
Estimate your total expenses – Total expenses = Fixed + Flexible expenses.
Fixed expenses – These are your expenses that stay the same from month to month such as rent and items under your “needs” list.
Flexible expenses – These are items that vary slightly from month to month such as utilities, transportation, groceries.
Figure out the difference – Once you’ve totaled up your monthly income and total expenses, subtract the expense total from the income total to get the difference. It’s a simple step that can reveal a lot about your spending habits.
If the result is a positive number, congratulations – you’re spending less than you earn.
If it’s negative, your expenses are greater than your income, and you will need to trim them in order to maintain financial health.
Track your spending – Creating a budget is just the first step. Keep track of your monthly income and expenses to make sure you’re sticking to your budget. It may take time to find the balance that works for you. Using a budget worksheet may help you work towards where you would like your budget to be. You can even extend your monthly budget into a yearly sheet to get a full view of your expenses over time which can aid in your long-term goals.
Also, plan for the future by building an Emergency Fund – a fund that you set aside so that you are prepared to handle unexpected costs. Building a substantial emergency fund that covers between three and six months’ worth of living expenses is key to a secure financial foundation. Think about ways you can trim your budget and divert money to your savings on a monthly basis to start building or growing an existing.
Remember that budgeting is not a one-time exercise. Revisit and rework your budget if you have a financial windfall or setback so it reflects your current situation. Let these budgeting basics help you understand your finances so that you can start planning for your best financial future.
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This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
