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.
Put It In Writing
Getting your income and expenses down in writing helps you manage your money and track your spending behaviour, 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.
Track Your Spending
Like many others, you may not know exactly how you spend all your money outside of covering obvious monthly payments for housing, an automobile, regular monthly bills, etc.
This is why you should track your monthly spending - including purchases of little things such as coffees, candy, magazines, and cigarettes - when you first prepare a personal budget.
You should track your spending for at least a month (or ideally for 2 to 3 months) every day at home, at work, and at play.
The most important skill for financial health is the ability to budget.
Learn from a group of credit counsellors, account admins and educators about the importance of budgeting in this video testimonial.
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. 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.
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. In fact, just creating a monthly budget can open up opportunities for increased savings, since personal spending ends up being better understood and better managed.
Set Budget Priorities
For those who are short on savings, the first budget priority should be to start an emergency fund to cover 3 to 6 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.
Pay Yourself First
As part of the budgeting process, you should also plan to save for all the great things in life, too. This means “paying yourself first” by establishing a program for regular savings with funds solely devoted to meeting your financial life goals.
Each time you receive income, take a percentage of it and put that money into your savings account, or some other type of investment vehicle. Your bank can help you set up an automatic withdrawal to take money out of one account and put it into another account every time you get paid. Or you can set it up yourself if you have online banking.
Credit Canada Expert Tip:
Try to save 10-15% of your net income. If unemployed, try to save 2-3% of net income.