How to Create a Basic Budget: A Step-By-Step Guide
Do you find yourself wondering where all your hard-earned money keeps going every month? Do you have certain financial goals in mind, like taking a trip next year or buying a car? Maybe you want to save for a rainy day or fund your retirement? If any of these sound like you then it might be time to create a budget.
But what is a budget and how does it work?
A budget is a plan you create that keeps track of your income vs. your spending within a certain time frame (like a month). You can then use this plan to help achieve your short-term (i.e. building up an emergency fund) and long-term goals (i.e. saving for your retirement).
Typically, you track your spending and measure it against your income and make sure you are living within your means. If you aren’t living within your means, your budget can help you decide where you need to cut back to have extra left-over cash at the end of the month to put towards those short-term and long-term goals.
So how do you go about creating a budget?
Well first you need to decide what budgeting style works for you. If you haven’t read it already, you can check out our blog post “7 Kinds of Personal Budgets and How They Work” to find the right one for you. But in this blog, we will go over step-by step-how to create a “traditional” or “basic budget”.
1. Find out your total Net Income
This is the amount you take home from all income sources after taxes (if you pay taxes), EI and CPP are deducted.
2. List all your Fixed Expenses
These are all your monthly “must have” expenses that don’t typically change very often month to month. Like your rent, hydro, car loan, other utilities, and subscriptions.
3. List out all your Variable Expenses
These will change every month like groceries and gas, etc. It’s a good idea when listing these expenses to look at your bank and credit card statements to make sure you list your frequently purchased items and how much they cost. While these items vary, you can get a sense of an average monthly cost for each item and work with that. If you primarily use cash, keep the receipts, or take notes in a journal as you spend, or use a budgeting app.
4. List your “nice to have” expenses
These will be items that you would like to have in your budget like takeout, date nights, getting your nails done or going to sporting events.
5. Decide on both your Short-Term Goals and your Long-Term Goals
Next you want to set out your financial goals for the immediate future and the long-term. This could be for things like funding a trip you want to take in a few months, or building an emergency fund, to paying off debt, to saving more long term for retirement.
6. Add up all your Fixed and Variable, (“must haves” and “nice to haves”) Expenses and compare them to your Net Income
Are your expenses higher than your income? Then you can look in the list of expenses to see where changes can be made as soon as possible to get your finances in line.
If your income is higher than your expenses that is fantastic. But ask yourself, is the money left over enough to put towards your short-term and long-term financial goals? If not, you can then go back to your list of expenses and see where changes can be made to bring your cashflow in line with those goals.
7. Revisit your Budget Regularly
We recommend keeping track of your spending along the month to make sure you’re in line with your budgeting goals. Especially as things can change over time or sometimes spending unconsciously can happen. So, in addition to monthly tracking, it can be good to have a birds-eye view of your budget every few months to make sure you’re on track with your goals.
Now you understand the basics of a budget. So, you’re thinking thanks for the steps, but where do I keep all this information? I am so glad you asked. There are lots of tools you can use to create your budget and keep track of spending. You can use something manual like Google Sheets or Excel or a journal to track everything. Or if you want to go more automated you can download a budgeting app to help track your expenses in real time by linking your accounts. Any tool is the right tool so long as you use it and use it consistently. So be sure to pick one that sounds easy or fun and give it a try.