Drawing Up a Budget: The Key to Control
For most of us, drawing up a budget is a chore. But it's still the best way to keep control over your finances and know where you're going.
When it comes to personal finances, no matter how many plans you have to save or to pay down debt, you'll never get anywhere if you don't start with a realistic budget. It's often easy to determine your net income, but expenses can be harder to pin down. For your income, avoid overestimating. Be conservative from the outset and don't assume you'll get a raise, higher bonuses than in previous years, or a termination allowance that's not set in stone.
Your Step-By-Step Budget
For couples, it's best to go through the following steps together, since a joint budget is the best way to decide on the family's financial priorities.
Step 1 - A brainstorming session
Time: 15 minutes
- Sit down with a blank page and start jotting down whatever expenses you can think of, without going into too much detail. You can also use a preprepared worksheet, but this might lead you to overlook expenses that aren't listed.
- For ideas, look at the transactions in your account statements and credit card bills. This will give you all your regular expenses at a glance (mortgage, personal loans, vehicle lease, utilities, subscriptions, automatic withdrawals, etc.).
- Start a file called "Expenses" and keep your list and any worksheets in it.
You're finished with step one! Pat yourself on the back—you've done 40% of the job!
Step 2 - Find those other expenses
Time: 20 minutes (depending on your expenses and your memory!)
- Prepare detailled worksheets of your expenses.
- Add notes to your file as you think of any occasional expenses that can make a big difference (due to frequency or amount):
- Hairdresser, beautician, chiropractor
- Leisure activities (including restaurant meals)—yours and those of your children
- Clothes, shoes
- Household supplies and accessories
- Food
- Alcohol, tobacco, movie rentals
- Gas, insurance
- Cable, telephone, Internet, cellphone
- Pets (food, vaccines, etc.)
- Add photocopies or original receipts for various other expenses that may come to mind:
- Snow removal, firewood
- Registration for your yoga course or acoustic guitar lessons
- School and municipal taxes
Pay special attention to any extra expenses that you think might be necessary (e.g. roof repairs)
That's it! Your file's full and you're 80% done.
Step 3 - Get out your calculator!
Time: 30 minutes (if you followed steps 1 and 2 to the letter)
Choose a convenient time when you and your spouse are both available.
- Roll up your sleeves and add it all up, item by item,—and don't play any games!
- You may want to use some of the specially designed budgeting tools available on most financial institutions' Websites.
- Add an "incidentals" category and give it a value of about 5% of your total expenses. You'll see what the missing 5% is as the year goes on. Don't get bogged down in details.
Got your subtotals and grand total? Your budget is 95% complete.
Step 4 - Look at your results and make your choices!
Time: 1 hour (depending on how sure you are about your choices)
The results step is very important, because this is where you'll do any rearranging. You may decide to cut certain expenses to leave room for new, more important ones. Reconsider how you're paying off your debts (faster if you have extra cash and slower if you have a serious shortage).
Your budget is done. Congratulations!
Step 5 - Put it into practice
Time: for life!
This step is when you put your long term values to work in everyday life. You'll have to compare your actual expenses with what you've set out in your budget. This will help you learn to spend wisely, resist temptation, and avoid compulsive spending.
Keep your promises!
If you overspend today, you're taking way from certain long term projects—like a comfortable retirement.
Step 6 - Move into "financial planning" mode
Now that you have your budget, you can meet with a financial planner or your advisor at your financial institution for advice. For example, you may want to think about options like switching to equal payments at Hydro-Québec just before winter, saving for your child's postsecondary education with a registered education savings plan (RESP), consolidating your debts or choosing between an RESP and a tax-free savings account (TFSA).
If you need more life insurance to better protect your family or want to set up a retirement savings plan, your budget will help you see if those options are feasible.