Every single person needs a budget that helps them reach their goals; whether those goals are practical or adventurous the need is still there. However, that does not mean that the application follows. With the average Canadian household overspending by 150% of their income it is safe to say that people now a days either have no budget, or do not stick to the one that they have made. We could extend the question of “Why not…” today but with a plethora of reasons and circumstances such as “it’s just not as fun”, “it’s too hard”, “sticking to a budget stresses me out”, “I have a fear of commitment”, and so on; the speculation of this question would be endless. So instead let us focus on a popular excuse: “I don’t know how to make a budget.”
The reason why I identify this reason as an excuse is because making a budget involves addition, subtraction, and some multiplication; skills that we master at a young age and an application we all have readily available through shortcuts on our cell phones and laptops. Here are the steps to making a budget that will increase your financial awareness, get you closer to fiscal goals, and prepare you for and monetary life changes that may occur.
Income- multiplication and addition.
Take your hours worked, times it by your hourly wage; this is your gross income. Times that by 0.8 (leaving 0.2 or 20% for tax and other deductions) and voila – you’re estimated monthly income. Income is not always as easy as it seems to calculate and project. You need to take into consideration things that will decrease income such as sick days. Things like vacation pay or overtime should never be included in your monthly income budget unless it is guaranteed. If you are someone who punches the clock and works a varying number of hours then you need to calculate income on the lower spectrum of hours worked. If you are self-employed you need to ensure that you are taking off enough money for taxes so you are not hammered when they are due. If you are on salary, count yourself lucky for the consistency of income. The important part about determining your projected monthly income is to ROUND DOWN.
Expenses; possible multiplication and addition.
Expenses are separated into two categories: fixed and variable. When identifying your fixed expenses you need to be very basic and minimal (especially if you are a household or person who falls under the umbrella of spending 150% of your income). Shelter, transportation, food, communication, pet and child needs, minimum bill payments, and insurances, if applicable, are necessities and in certain situations can still be trimmed down. Things like movies, bar hopping, clothing, vacations, eating out, haircuts, pedicures and manicures, wings and beer, etc. are not necessities and should not be included in your fixed expenses. These are variable expenses. You should add up your variable expenses separately from your fixed expenses and see how they stack up against one another. Using credit card or debit statements is a great way to identify where you are spending your money, informs you of your banking fees, and helps you remember automatic withdrawals or payments you set up like a Netflix subscription. Applications such as Mint can also help you track where you spend a majority of your money, i.e. at restaurants or clothing stores. Variable expenses are where the most financial trimming happens, and most people are shocked with the ratio of fixed and variable expenses; finding that they spend quite frivolously on things they don’t need. The important part about adding up your (fixed) expenses is remembering to ROUND UP.
Once you identify your ROUNDED DOWN income you subtract the ROUNDED UP fixed expenses. The number that you have left then gets allotted to your most important variable expenses. The importance of variable expenses should be based off of the goals you have set forth, and the reason you are making the budget in the first place. Try to trim down anything that you don’t need, or cut down on the things that you do like to do such as changing your six dollar latte to a two-fifty cup of Joe that you add your own milk and sugar to, which could save you $1,200/year. Or look into going for Wing Wednesday’s once a month rather than every week. If you work downtown or on a public transit line look into taking the bus or train rather than having a vehicle; even cycling or walking to close amenities will save you on fuel and maintenance costs. If you are a two vehicle household talk to your partner about sharing a vehicle. If you eliminate a car that you make monthly payments on you could save $16,000/year! You should try to set aside money for fun activities even while you’re on your budget so that you don’t get frustrated or upset with your “quality” of life. Resenting your budget will only bring you closer to ripping it up and going back to the old habits, which will obviously not get you closer to your goals.
If the number that you get once you compare your income to fixed expenses is small and doesn’t give you any room for your variable expenses then you’ve identified where your debt is coming from. You should then look at ways to increase the surplus, such as getting a second job, or working more hours at the job you have. Regardless of if you have a monthly surplus of $20 or $200 the key is to STICK TO IT. The first step in getting out of debt is not creating more. Going on a cash diet for your variable expenses is a great way to ensure you stay on track and don’t start swiping plastic in the middle of the month. Leave all but one plastic card at home, and wrap a note around it that reminds you that swiping is ONLY for emergencies like gas or groceries, not movies or dining out.