Okay this is my one and only post on how to bust out a budget because there are a plethora of blogs out there that talk about this and I feel a bit like a hack rehashing the information.
1. You need to know what you earn each and every month, net.
No brainer. You need to know what you’re getting every month to allocate to each category. So dig out that pay slip!
2. You need to know what your fixed expenses are
I’m talking about rent, utilities, telephone, internet, cable TV, minimums on debt repayments. Stuff that doesn’t change every month. If you pay $575 in rent, that’s what it’ll be next week. No surprises there.
3. Set up your budget categories with just your fixed payments for each of the categories now.
Set up your budget for stuff that you MUST PAY for every month.
4. Now, fill in the variable categories.
I’m talking about groceries, shopping, eating out, anything that is NOT FIXED, meaning you don’t know how much month to month you’d spend.
5. Now you should have the following in your budget
Budget categories, Fixed expenses and Variable expenses, plus the balance (minus your expenses out from your net monthly income)
6. Check to see if you’re over or under
If you’re under, great! Let’s move on to the next step and think about Savings.
If you’re over, you need to re-assess what you want to put in your variable expenses, considering giving the ax to a fixed payment like cable TV, or at least trying to lower the monthly bill by getting rid of the deluxe cable package.
Don’t forget, you still need to think about Savings and Debt Repayment.
7. Think about what you want to do with your surplus of money now.
Again, if you’re under, you can take your surplus now, and figure out how much you want to save and/or put towards debt.
8. On Savings:
If you have debt, save at least $100 a month until you have $1000 as your “Emergency Fund” (minimum, but I’d suggest $5000 if you are paranoid and antsy), then stop and channel the rest into your debt.
If you don’t have debt, save at least $100 a month until you have $1000 as your “Emergency Fund”, and then re-assess whether you want to split that $100 (or more!) 50% into retirement and the other 50% into beefing up your Emergency Fund until it holds 6-8 months of living expenses.
9. On Debt:
If you have debt, you still need to save $100 a month until you have a $1000 cushion in your EF, and then re-assess and either put the entire $100 into retirement or do a $50/$50 thing between EF/Retirement.
Or put it all towards debt, because now you have a cushion of $1000 or so. I don’t recommend this unless you have a fairly reliable job that will keep paying you.
Another alternative if you’re nearing retirement is to decide between clearing your debt quicker by putting more money towards it after the EF fund or saving for retirement while clearing your debt. It’s a tough call, but you need to assess those hard questions if you’re nearing 65.
If you’re younger, the choice is yours. I did both at 23.
Then, I’d put the rest of your surplus towards ONE debt (the one with the highest interest rate), and when that’s paid off, put that debt repayment amount plus your surplus towards your next debt.
When you’re done paying off your debt, then put it all towards your savings until you have 6-8 months in living expenses, and then re-assess and figure out what you want to put towards retirement etc.
10. Now track your expenses diligently
Sure, you busted out a fab budget. Now you need to see if it’s realistic. Track your spending for a month, and compare what you spent in each category to what you had originally estimated.
Are you way over? Way under? Adjust your budget amounts until they’re realistic, and able to account for Savings AND Debt Repayment (if you have any).
Need some guideline percentages to start building a budget?
Note: I don’t entirely agree with all of these “set” budget percentages.
When I cleared my debt, I scrimped and put 50% of my net income towards debt, and kept around a $1000 – $2000 cushion for emergencies.
I lived on the edge, but I had a ’steady’ corporate job and felt comfortable doing that.
Housing = 30% - Mortgage Payments
- RentLiving Expenses = 25%
- Food
- Entertainment
- Clothing
- GiftsSavings = 10 – 15%
- Emergency Fund
- Retirement
- InvestmentsTransportation = 15%
- Car Payments
- Gas
- Tolls
- Parking
- Insurance
- Public Transportation (Bus, Train)
OTHER NOTES
Don’t ever say no to free money.
If you get a matching retirement plan with your employer (401k matching, or RRSP matching), contribute the maximum amount, and figure out what you’re paying automatically out of your paycheque towards that matching and count it as “Retirement Savings”.
I hear this a lot “Oh I can’t afford to take $200 out of my income”.
Oh Lordy, you can afford it, believe me.
I thought the exact same thing at first, but when I let them take it out automatically, I didn’t even miss the money.
Free money is free money, especially if it comes from an employer.
Unless you are TRULY tight (you can only cover shelter, food, transportation and minimal clothing) then you have the money.
If you have to cut cable TV, or scrimp somewhere else, YA DO IT because it’s FREE MONEY.
You can always tell them to scale back on the amount they’re deducting later on.
But give it a shot for a couple of months.
You can live without the cash, you’ll see.
Even without debt, track what you spend.
And even if you don’t have debt (like me), tracking your expenses and keeping a budget is still a good idea so you can keep yourself in check.
If not, you may slip and slide back into your old habits without knowing it.
Think of your income as NET not GROSS.
I find a lot of people think of their income each month as their gross income. So if they earn $50,000 a year, they think it’s $50,000 / 12 months = $4166.67/month.
You’re forgetting taxes, deductions, and a whole host of other things you pay from your gross paycheque before it even reaches your bank account.
So think about it in NET income, what you actually bring home each month, not what your payslip says you earn each year.
…which means you have less money than you think.
This sounds contradictory to what I just said about the retirement matching plan ,but it isn’t, because you didn’t know what you had to begin with, or where it was going, so what difference will it make to you now if you put $1 to get another shiny $1 from an employer?
I know banks would have you believing that you’re richer than what you think, but you’re not.
If you were, you wouldn’t be in debt or be clueless about where your cash is going.
What you are, is unaware, and that’s okay. I was too, and it’s a real relief to know what you actually make each month, and where it’s REALLY going, not where you think it’s going.
And then knowing that you’re earning $1 for every $1 you put in (that’s a 100% return).
Some resources:
- FB Budgeting & Expense Tracking (15% of proceeds goes to the Canadian Cancer Society)
- Canadian Income Tax Calculator (Pick your poison..er..province and type in your gross yearly income)
- U.S. Take-Home Pay Calculator
- September 2009: Budget End
- Reader Request: Budgeting for a Nervous Wreck Self-Employed Person
- 5 Steps to Taking Control of your Finances
- What are your emergency fund rules?
- Reader Question: Help me figure out where to allocate my cash
Jillian
on Feb 13th, 2009
@ 11:11 AM:
great post…and truly realistic and simple…no excuses when presented that way…
Anny
on Feb 13th, 2009
@ 1:49 PM:
“Even without debt, track what you spend.”
This is so true! Once I cleared my debt and established a budget I relaxed and money just started slipping away.
Fabulously Broke
on Feb 13th, 2009
@ 5:53 PM:
Thanks
Anny: I totally slipped in Nov/Dec. It was a nightmare.
Then if I hadn’t budgeted in January, I would have been screwed! I almost over spent AGAIN
Miss M
on Feb 13th, 2009
@ 7:54 PM:
Everyone has a different way of budgeting, doesn’t hurt to learn something new. I think these sorts of posts are necessary, I call them the vegetables. It can’t be all fluff and candy, you got to make your readers eat their veggies once in awhile
frugal living central
on Feb 14th, 2009
@ 12:53 AM:
I especially like point 10 since it is key to understanding where the money goes. I actually do this routinely and tweak my spending based on what I discover. It was quite valuable a few years back when I was in debt. By doing this I realised that even though I bought the groceries every month, I spent approximately half that amount eating out at lunch times. Another thing was buying the newspaper daily…which all my colleagues read! So I reduced my spending in these two areas (as well as others) and used the money toward debt reduction.
Everyone should be doing step 10 even if they are scared of doing a budget!