President's Choice Financial|helpful stuff|financial wellness|the basics

working with a budget

Many people consider developing a budget to be a chore — ranking somewhere between washing the windows and organizing the basement on the list of undesirable tasks. That said, an effective budget is an important component of helping your life run more smoothly and ensuring both your short- and long-term objectives are met.

So, where do you start? The points below set out a process to follow to create your budget. Start by getting all your financial information together (including pay stubs, bank statements, and bills), then roll up your sleeves and dig in.

Determine your monthly net income — that's after taxes and other deductions. Remember to include all income sources (like your salary, rental income, and investment income, etc).
Figure out your monthly expenses and debt payments — both fixed (costs that are the same every month, like rent, mortgage payments, and regular investment plans) and variable (like your telephone bill or groceries). Don't forget to include your quarterly and annual expenses (like some insurance plans or subscriptions) — just calculate what they amount to per month.
When you subtract your monthly expenses from your monthly net income, you're left with your "discretionary income" — the money you have left over after your necessary expenses are paid.
Now, think about how much of your discretionary income you spend on entertainment and other things. Subtract an estimate of those expenses from your discretionary income. If you're left with a positive number, it's time to determine how you can use that extra amount to reach your financial goals. If, however, you're left with a negative number, you could be living beyond your means and may want to seek assistance. For more information, read how to manage your debt.

In any case, you should go through your records carefully with a view to analyzing your expenses. Chances are, you'll find ways to reduce your spending. For instance, think about how much you're spending on lunch or your daily coffee — maybe it's time to invest in a lunch box. Then, determine what additional steps you can take to save for the future.

A popular rule of thumb is to "pay yourself first". That means including your savings or investment amounts in your fixed monthly expenses. Arrange to have a pre-authorized amount withdrawn from your bank account on a monthly basis. You'll be surprised to see how quickly your savings will accumulate, bringing you that much closer to realizing your objectives. And in time, you won't even miss the money you're investing!

Finally, be realistic. By developing a budget with unattainable goals, you're setting yourself up for failure. Keep your budget flexible and reasonable, and don't forget to leave some money aside for fun.