Most of us have pretty specific goals in mind when it comes to our money. And if you’re looking to reach those financial goals, having control over your spending habits and creating a budget is important to your success. With a recent report showing that 48% of Canadians are living from paycheck to paycheck, creating and sticking to an effective spending plan is more critical now than ever.
While budgeting might not be the most exciting thing to think of or even get started with, there’s nothing to fear when it comes to creating one. In fact, it’s an underutilized exercise gives you an overview of how much income you’re making and where your money is going, in other words your expenses for a given time period.
One of the best parts of a budget is that it shows you can cut down or out entirely, making room for more savings, paying off debts, or setting up an emergency fund.
A good budget should provide as much detailed and accurate information as possible when it comes to your spending habits and income. With that being said, your first month of budgeting will likely need improvement along the way, but as you begin to get used to budgeting, you’ll be able to pin down more accurate estimates and plan your expenses much better. Coming up with a spending plan is necessary to see where your money is coming from, where it’s going, and how much is left for you to spend or save.
An effective spending plan can help you reach your financial goals faster — from building a solid retirement plan to finally becoming debt-free. Here are six steps to follow for creating and keeping your budgeting on track:
Before you even get started with the budgeting part, having realistic goals in mind is important to keep you focused on improving how you manage your money. There will be times when you’ll be tempted to stray away from your budget, but by setting goals, you’ll understand that your “small” choices can compound.
For instance, if you’re carrying a chunk of consumer debt, one of your long-term goals might be paying that off — especially consider having less consumer debt and good credit can affect many aspects of your life. This includes whether or not you can get approved for a mortgage, or even a car loan.
Regardless of your objectives, having short-term and long-term goals can make the budgeting process more palatable.
Whether you’re budgeting for the week, month, or even quarter, outlining exactly what you have to spend is the very first step to creating your budget.
If you’re unsure where to start, a good starting point is listing out two different costs: fixed and variable costs. Your fixed costs are expenses you cannot compromise on, such as rent or mortgage payments, utility bills, phone bills, or debts. Gather bills from previous months to create a workable average for each, so that you have something to work with for your first month of budgeting. Your variable costs on the other hand, are expenses you can cut down on, such as eating out and entertainment costs.
Laying these out can help you visualize your cash flow, allowing you to make adjustments such as reducing your budget for going out and putting it towards paying down your debts instead.
If you’re budgeting solo or with a partner, add up the total income of the household after taxes. Don’t forget to include any passive income you might have, such as rental income or investments.
Now it’s time to add up your total list of expenses and your total income, doubling checking to make sure you’ve including everything of course. If your total income is larger than your expenses — great! You can prioritize the excess cash and place it either towards your savings or debt, depending on your goals.
However, if your expenses are larger than your income, then it’s time for you to look at your variable costs and see where you can cut down on expenses.
To help you avoid overspending and make your life a little easier, personal budgeting apps like Mint or Trim can be great tools for keeping you on track. You can even use our monthly budgeting calculator to get a quick snapshot of how you’re managing your money. Our best piece of advice when it comes to choosing a tool to use for your budget would be giving them a try and see which one you’re most comfortable with.
As the economy moves, inflation rises, and this can impact your savings. For a quick comparison, in 2005 movie tickets on average costed roughly $8, but today, a movie ticket goes for $12. What you could buy in 2005 for $8 no longer costs the same now. There are also plenty of other factors to consider such as interest rates and tax rates, to name a few.
With this in mind, the economic calendar featured on FXCM provides a detailed overview of different events that may affect your savings. You can look for economic factors that will directly impact Canada, or choose to consider regional and global circumstances when it comes to your planning.
Planning ahead helps you determine where your savings should be going and how you’ll be using them to align with those financial goals you had in mind at the beginning of this post.
Life happens and situations change, meaning that there might be some changes in your life that you need to accommodate for. We highly recommend reviewing your budget (and your financial plan) every couple of months, and make it flexible enough to make room for any potential changes. Regardless of your budget, make sure you’re leaving enough room for savings — as saving isn’t just an option, but a necessity.
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