Step 1: List Income, Expenses & Spending
The first step in budgeting is to determine how your net income (commonly known as your after-tax income) measures up against all your expenses and discretionary spending.
Getting your income and expenses down in writing helps you manage your money and track your spending behavior so you can fulfill your goals.
Your net income should be easy to list, including only the regular source (or sources) of income you expect to receive over time. Listing your expenses and spending, however, will require close attention.
Download our Budgeting Worksheet found in our Money Management & Budgeting booklet to start building your monthly budget.
Like many people, you may not know exactly how you spend all your money outside of covering obvious monthly payments for housing, an automobile, regular monthly bills, et cetera.
This is why you should initially track your monthly spending - including purchases of little things such as coffee, candy, magazines, and cigarettes - when you first prepare a personal budget.
You should track your spending for at least a month (or ideally for two to three months) as you are on the go everyday at home, at work, and at play.
Step 2: Set Saving Goals
Next you will need to put into writing short-term, medium-term, and long-term goals based on your needs, wants, and dreams in life.
Be realistic in your monthly budget about what you want, need, and can achieve based on real income. Our budget calculator makes understanding your own spending habits much easier so money saving goals seem like less of a challenge.
Short-term goals might include saving up for a computer or for travel. Medium-term goals might include saving up for a car or a mortgage down payment. Long-term goals might include saving up for a child’s education, or for your retirement.
Once you have set your goals, you can figure out how to achieve them in the framework of your income and expenses. You may need to rethink some of your spending patterns, pay down more debt,or even introduce lifestyle changes that lead to the happy fulfillment of the goals you have outlined.
Just keep in mind that circumstances and goals in life can always change, so you should be prepared to re-evaluate and revise your budget as time goes on.
Step 3: Develop a Savings Plan
Every personal budget should include a plan for savings. As a matter of fact, the mere act of creating a monthly budget often opens up opportunities for increased savings, since personal spending ends up being better understood and better managed. The Credit Canada budget calculator is a great tool for gaining clarity on your spending habits so you know what you can stop spending money on and start saving instead.
For those who are short on savings, the first budget priority should be to start an emergency fund to cover three to six months worth of expenses. In the event of unforeseen circumstances, such as a job loss, the emergency fund provides reasonable breathing space for weathering unwelcome storms.
Start Paying Yourself First
As part of the budgeting process, you should also plan to save for all the welcome things in life. This means “paying yourself first” by establishing a program for regular savings with funds solely devoted to meeting your financial and life goals.
Each time you receive your pay cheque, take a percentage of it and put that money in your savings account or some other type of investment vehicle. Your personal banker can help you by setting up an automatic withdrawal to take money out of one account and put it into another account every time you get paid.
There are general rules for determining how much money you should devote to savings. If employed, try to save from 10 to 15 percent of net income. If unemployed, try to save two to three percent of net income.