Put up your hand if you just looooove making a budget! (Looks around the room… tumbleweeds… a financial planner furiously waves their hand in a distant corner.)
If you don’t have a budget, you’re not alone. In North America, about half of all adults regularly maintain a household budget.
A budget is a kickstart to releasing anxiety about your money. Before you can know what you can invest in savings for your future, you need to know where you stand and become more aware of your current spending habits. If you deal with worry and anxiety over your finances, putting your head into the financial sand and hoping for the best might put you at unnecessary risk for even more debt.
If making a budget sounds like the last thing you want to do, we get it. Budgeting ranks somewhere between taking cough medicine and filing your tax return on The Enjoyment Scale™. But just like getting rid of a cold or potentially getting back a sweet, sweet tax return, the rewards of putting together your budget are great! We promise.
The best budget is one that you’ll actually follow
There’s a ton of advice and budget options out there. It’s easy to feel overwhelmed by the complexity and variety. At the end of the day, the right budget is one you’ll stick to. Budgeting is an excellent example of “something is better than nothing.”Below we’ll focus on how you can start with a basic, easy-to-follow plan to get your budget ball rolling.
Don’t let perfect be the enemy of the good. Budgets don’t have to be 100% flawless to work well. Aim to get as detailed as possible, but remember that budgeting is an ongoing process.
The first step is the hardest. Get started today, and later on, you can finesse your approach as you become more comfortable. It might even be fun! (Ok, it probably won’t be fun, we’d never lie to you. But you will feel better after.)
Start with a positive mindset
Money carries fear and shame for many of us. That’s one of the main reasons why our finances can spiral out of control in the first place.
You’re taking a significant step toward financial control by building a budget. If you feel worried or nervous about what you’ll discover, that’s ok. Remind yourself that a budget will help you take charge of your money and help you build a stronger future.
Sure, you might unearth some scary stuff — “I’m spending WHAT on shoes!” — but it’s better to face up to any problems now and fix them rather than let them get potentially worse.
Positive Thinking In 7 Steps
1. Get organized
Information is key to a solid budget. Start on the right foot by gathering all of the financial info you’ll need. First, you want to know how much money you made and spent over the past three months.
To do this, you’ll need to gather:
- Pay stubs or direct deposit info
- Credit card statements
- Mortgage and car loan statements
- Utility, mobile phone, internet, and insurance bills
- Detailed bank account info or receipts
2. Calculate your monthly income
Next, you’re going to figure out how much you take in each month.
- If you get paid a regular amount, calculate your total net pay (how much you make after taxes and deductions) for the month.
- If you get paid hourly or irregular amounts (like if you’re self-employed or a freelance worker), calculate how much you made over the past six months to determine your average monthly income.
- Don’t forget to add any financial support you might receive from other sources, like childcare benefits.
3. Calculate your monthly expenses
Now that you know how much you make in a month, you will determine how much you spend. Don’t get stressed here about tracking every single purchase. If you can, that’s great, but focus on monitoring as much as you can for now.
Go through all of your financial statements for the past three months from Step 1 and figure out how much you spend monthly on these common major categories:
- Housing (rent or mortgage payments)
- Utilities, insurance, mobile phone, internet
- Transportation (car loan, gas, transit pass)
- Groceries and home care items
- Education and training (tuition, books)
- Debt payments (credit card, loan payments, student loans)
- Savings and investments
- Clothing and personal care
- Lifestyle (gym and fitness memberships, sports equipment, lessons and hobbies, tech and electronics, etc.)
- Miscellaneous (anything that doesn’t fit in the categories above)
4. Set up your fixed and variable expenses
One of your budget’s key benefits is breaking down your fixed expenses (the regular items you can plan for and must pay each month) vs. your variable expenses (things that change cost each month and have some control over).
Using the categories from Step 2, make a list of your fixed monthly expenses. This will include anything you pay a set monthly amount for, like your rent or mortgage payments, insurance, fixed utilities, entertainment subscriptions, daycare, car payments, fixed loan payments, etc.
An excellent step here is to plan for fixed monthly savings. Even though it’s optional, considering regular contributions to your savings and investment goals as a recurring expense will help you stick to it. If you’re not sure how to start saving, we’ve got a free Health Program for that!
- Add them all together. This amount is your fixed monthly expenses.
Next, you’re going to make a list of all your variable expenses. These are categories where your spending changes from month to month. This will include everything from Step 2 that’s not a fixed expense, with common major categories being Groceries, Transportation, Entertainment, Personal Care, etc.
- Add up how much you spend in your variable expense category monthly. Again, focus on getting as much info together as you can. Don’t worry about being perfect.
- Calculate the total for all variable categories. This amount is how much you’re spending, on average, on your variable expenses.
- Now you have two totals: one for your fixed monthly expenses and one for your variable monthly expenses. Add them together: this is your total monthly expenses.
Jumpstart to Paying Down Credit Card Debt
5. Compare your monthly income vs. total monthly expenses
This is the moment of truth. Remember that the whole point of building a budget is getting a solid picture of your overall finances to fix any problems.
If your monthly income is more than your monthly expenses, you’re already in a good place. This means you’re making more than you’re spending. You might want to look at the 50/30/20 rule to maximize your budget and aim to save as much as possible.
If your monthly income is less than your monthly expenses, then take a deep breath and think of these three things before you keep going:
- It’s better to know this now that to have let it get any worse. Pat yourself on the back for taking control.
- You can address your excess spending and find more balance now that you’re making a budget. That’s an excellent thing.
Next, you need to adjust your expenses to spend less than what you’re bringing in.
- Look at all of your variable expenses for any amounts that stand out. Typically these are in areas like Clothing, Entertainment, and Personal Care, where you might have been treating yourself more often than you realized. It’s not fun, but cutting down in these areas is usually the most accessible place to start.
- Bring down the total amounts you would be able to spend across your variable expenses to spend the same amount as you make. This is a balanced budget, and that’s what you’re after.
Bonus points if you take another look at your fixed expenses and see if there are opportunities to spend less:
- Often banks will negotiate interest rates on credit cards
- Look at moving to cheaper mobile phone, cable or internet plans
6. Prioritize and automate savings
Around 20% of your income should go toward debt repayments and savings. Ideally, as you pay off debt, you start allocating more and more of that amount into saving each month.
Aim to pay off as much of your high-interest consumer debt as you can. As your overall debt (and corresponding interest payments) go down, you’ll start freeing up more and more money to add to your growing savings.
Set up automatic withdrawals to pay off debt or add to savings so that you don’t have to think about it and aren’t tempted to use that available money to spend outside of your budget.
7. Accept your awesomeness
If dealing with financial worries and regularly budgeting was simple, everyone would do it. Everyone does not do it. No matter what result you found from your first budget, you’ve taken an enormous step. Massive. Major.
Don’t gloss over the importance of what you’ve just done for yourself. You’re closer to financial security than you were before you began.