Creating a Budget
Creating a budget can be intimidating for many people, but it is an essential tool for good financial planning. If the word
'budget' scares you, think of it as a 'spending plan' instead, or think of it as assessing your 'monthly cash flow'. Keep in
mind, whichever term you decide to use, your plan, budget or cash flow is not written in stone - you can and should
reassess your situation on a regular basis. Here are six basic steps to get you started:
1. Set goals
2. Calculate your living expenses
3. Estimate your income
4. Compare your income with your expenses
5. Develop a spending plan
6. Review your spending plan
Step 1 - Set goals:
Think about the things that are important to you and your family. Involve the entire family in prioritizing these items so
everyone understands that each family member needs to make compromises. Try to set both long term (like paying off
the mortgage by a certain date) and short term (buying a new car or appliances) goals. Make sure your goals are
realistic, measurable and achievable. Writing down your goals is extremely important. Studies have found that written
goals are more often achieved than non-written goals.
Step 2 - Calculate your living expenses:
Make a list of all the expenses you must cover each month, like food, housing, transportation, and clothing. Include fixed,
flexible and periodic expenses. Fixed expenses are those that you are committed to on a monthly basis, like rent, loan
payments, hydro, etc. Flexible expenses are more difficult to forecast but can be controlled or managed to some extent,
like food, clothing, fuel, phone and personal care. Periodic expenses are things that you usually pay once a year, like
insurance, gifts, vacation, etc. Next, make a list of discretionary spending, like magazine subscriptions, that cup of coffee
you buy on the way to work every morning and those magazines you buy 'on impulse' at the grocery store. Don't forget to
include savings for future purchases like a new car, vacation, etc.
Step 3 - Estimate your income:
This may seem simple if you receive the same pay every month. However, don't forget about cash gifts, or the sale of
unwanted items. Just be careful not to over-estimate your income.
Step 4 - Compare your income with your expenses:
If your expenses exceed your income, you have three basic options.
a) Consolidate your debts. This is not always the best option!
b) Increase your income by taking a second job, adding another earner to the family (i.e. spouse or teenage children get
jobs) or selling unused items. Finding another job may be difficult or impossible and adversely affect your family's
lifestyle. Used items may not have a strong resale value.
c) Cut low priority items out of your budget, or reduce spending in several budget areas. This requires sacrifice,
determination and discipline, but will most likely affect your lifestyle the least.
Step 5 - Develop a spending plan:
Write down how much you plan to spend in each category, try to stick to your plan, and keep track of how much you
actually spend in each category every month. If your actual spending is quite different from your plan, make adjustments
so you can improve the next plan.
Step 6 - Review your spending plan:
Revise your plan if it's too difficult to stick to, doesn't accurately reflect your actual spending, or if your goals change.
Don't expect to get your plan right the first time. With each succeeding budget you can expect improvement. An annual
review of your budget will allow you the flexibility to adapt to any changes in your financial situation or goals. By thinking
through your expenses, setting goals and keeping records you'll develop a good idea of what is important to you and