Budgeting

Budgeting is the process of creating a plan to spend our money. This spending plan is
called a budget. Creating this spending plan allows us to determine in advance whether
we will have enough money to do the things we need to do or would like to do.

importance of budgeting

Since budgeting allows us to create a spending plan for our money, it ensures that we
will always have enough money for the things you need and the things that are
important to you. Following a budget or spending plan will also keep us out of debt or
help you work your way out of debt if you are currently in debt.

Creating a budget plan

Step 1: Identify the goal

Write down what is important to you and use your list to help you determine goals for
your money.

 To curb un-necessary expenses

 Build up savings

Step 2: Identify Income and Expenses

Once we have established some goals for our money, it’s time to look at where it
comes from and where it goes right now.

Start by making a list of all our household income sources and the amounts.
Include everything: wages (after taxes), commissions, self–employment income,
child tax benefits, pensions, child maintenance & spousal support and other regular
income.

Now it’s time to record your spending. It includes everything we spend our money
on; (utility bills, groceries, transportation costs), but savings for a rainy day, debt
payments, life insurance premiums and RRSP contributions are all expenses as
well.

Annual Expenses

School Fee
Music Class Fee

Property Tax

Income Tax

Car Insurance

Vacation

Half yearly

Health Insurance

Home maintenance

Quarterly

Car service

Monthly expenses

Utilities

Groceries

Transportation

Recurring Deposit

Wages – maids

Daily Expenses

Eat outs

Fruits and Vegetables

Unexpected Expenses

Electronic Gadgets
Fuel expenses

Repairs

Health

Guardian

We may need to gather spending information from bank account or credit card
statements, cheque register books, receipts or bills.

Some of our spending is on a weekly or monthly basis, e.g. fuel for the car,
groceries, paying utility bills. There are also seasonal or annual expenses that need
to be accounted for in our budget, e.g. gifts, vet bills, holidays, home repair, new
glasses or clothing. To calculate monthly amounts for your annual expenses,
simply divide the amount that you spend each year on these items by 12

Looking back and identifying expenses is a valuable start. You may, however, have
noticed that there seems to be more money going out than you have records for.
That’s because every family has spending “leakage” – the little things that aren’t
accounted for, but add up

Tracking Expenses
Tracking is a very important part of identifying our expenses. When we start
tracking, we may be tempted to track how we think we should be spending. Try not
to do this, because our results won’t accurately reflect our spending. This is the
time to learn what we are currently doing with our money – there will be time later
to make adjustments and choices when you prepare to put your plan into action
(step 4). Do the best you can; you may be surprised by what you find.

As people track their spending, they discover that some of their money gets used
for things they really don’t need. Instead, they merely want them and often buy
them impulsively. Impulse spending is unplanned spending; purchasing things that
you may or may not need, or spending more on an item than you’d planned.

People spend impulsively for a variety of reasons. If they’re in a good mood, they
spend out of pleasure and to keep the good mood. If they’re in a bad mood, they
spend to try and make themselves feel better. Some people spend in certain places
or at certain times because they feel obligated to do so, e.g. on vacation, during
special holiday seasons, when they’re with certain people, or while engaging in
specific activities. Impulse spending habits are often linked to stress levels. A little
stress can be motivating but a lot of stress can rob you of your ability to make wise
choices between needs and wants. If you would like to learn more about why you
 spend impulsively and what you can do to change your spending patterns, have a
look at this.

The key to good money

management is separating needs
from wants. If you aren’t sure if
an item is a need or a want, do
without it for a period of time. If after that time you truly can’t live without it, it
may be a need. However, even the essentials like shelter or transportation involve a
want vs. need calculation. For instance, you may have evaluated all possible
transportation methods for you to get to work and determined that you need to
purchase a car. Fine, but which car you buy is another choice you make.

Do you buy the more expensive SUV that you want, or will a less
expensive, more economical vehicle meet your need? Almost everything you buy
involves a want vs. need determination and ultimately, how you make these
choices will determine if you reach your goals or not.

Many people don’t like the word

“budget” because they think it
means limitations, deprivation and
no money to spend on the fun
stuff. Relax, your budget is your
spending plan – it will allow you
to live within your means, avoid
the stress of money troubles and
give you the freedom to make
choices with what you have. Most
importantly, a budget will allow
you to map your way to reaching
your goals. Remember the goals
you created in Step 1?

Before you can go any further,

you need to ensure that your
expenses are not more than your
income. This is where you need to
make some choices based on what
you learned when you tracked
your spending and when you
separated your needs from your
wants. Expenses include
everything you spend your money
on, not just the bills. Money you
deposit to your children’s RESP is
an expense. Money you deposit
into your savings account for your
vacation next year is also an
expense.

Turn back to your Budget

Worksheet that you filled out, and
use the “revised” column to make
your budget balance – your total
spending can not be more than
your total income. Also, ask
yourself, will this budget allow
me to reach my goals? This might
mean that you are not able to
spend as much in one area of your
budget as you did in the past. Your
money could be needed
somewhere else in your budget. If
you have a surplus, you need to
make some choices about what to
do with the extra money and may
want to add it to your savings for
now.

Protecting Yourself
Against Financial
Disaster - Emergency
Savings
If you are experiencing financial
difficulty, savings may be the
furthest thing from your mind,
however, even during this time, it
is vital that you plan to have
money for the unexpected. Setting
money aside for savings is the
difference between having a
budget that works and one that
doesn’t. Not only does it protect
you from financial disaster, it also
helps you to meet your financial
goals.

People who have savings

available to pay for living costs
and seasonal expenses if an
emergency arises, do not need to
rely on credit that they may not be
able to afford to pay back.

Emergency savings covers your

basic living costs in case there are
changes in your income. For
example, in the event of a job
loss, it typically takes 3 months to
get back on track with either a
new source of income or outside
assistance. During this time, you
still need money for rent,
groceries and other essentials; this
is what your emergency savings is
for. If you face an expensive car
or home repair bill, emergency
savings will be available to pay
for it. Using income tax refund
money, unexpected bonuses or gift
money can jump start the
emergency savings account.
For more places to find money to
create emergency savings, click
here.

In addition to emergency savings,

it is necessary to have general
savings which you can use to meet
your financial goals and ensure
your sound financial future. Some
people refer to this as “paying
yourself first.” This savings is for
the seasonal expenses you
identified in your budget as well
as for your goals. The best way to
build savings is to have the money
put aside before you see it. Talk to
your bank or credit union about
automatic transfers to savings
accounts each time you are paid.

How Much Should You

Save?
There is no magic number that
tells you what you should be
saving each month. It depends on
your income level, your debt load,
your life stage, if you are
employed, unemployed or retired
as well as your financial goals.

At first you may find it difficult to

set savings aside. If you have
outstanding debts to pay or you
aren’t in the habit of saving, it’s
important to get started. Save a
small amount from each pay
cheque at first and increase the
amount as you are able to. You’ll
be amazed at how quickly your
savings can add up once you just
get started!

Step 5: Put Your Plan into Action

You’ve set goals, identified your income and expenses, determined how much to
save for seasonal expenses, and made choices around needs and wants. Take
another look at your Budget Worksheet and fill in any revised monthly amounts
that may still be missing. Now it’s time to put your plan into action!

Use a pay cheque plan to match your spending patterns to your income schedule. If
you are paid every two weeks, then align your spending to a two-week schedule; if
monthly, then a monthly schedule. Use this Pay Cheque Planning Worksheet to
help you get started:

1. In the budget column, record what you need to spend. Money that you
set aside in a savings account is an expense that you deduct from your
income.

2. Note your pay dates across the top.

3. If you have money in your bank account that you need for this month’s expenses,
note that as income for this month as well. Don’t forget to subtract any cheques you have
written that have not cleared your account yet.

4. Record your net pay cheque amount for each pay date. List any other income you
receive during the month in the week you will receive it.

5. Decide when the expenses from your budget column will be paid. This will
depend on your pay dates. Start with expenses that are due on specific dates, e.g. rent,
hydro or car insurance. Try to balance the expenses evenly throughout the month.

6. Total your income from each pay period and if there is any left over, add it to your
savings account. If you are short, re-examine your expenses to see what you are able to
reduce or evaluate if you are able to increase your income.

Irregular Income
Not everyone has a steady job with a steady paycheque. You may have seasonal
work, be self-employed or you may be on commission. In these cases, you can’t
count on money coming in on a regular basis. That doesn’t mean that you can’t
create a budget, but it does mean that you need to plan in more detail. Part of the
planning process must include a separate savings account for income tax payments
at the end of the year. And if you are self-employed, you must take deliberate steps
to separate your personal and business finances.

If you have had irregular income for a few years, one strategy is to calculate the
average net income you’ve had per year for at least 3 years, divide by 12 and use
that amount to build your current budget. If this amount is not enough to meet your
expenses, you must consider how you can increase your income or decrease your
expenses to make your budget balance.

Another way to build a budget if you have irregular income is to set up a holding
account. All of your income is deposited into the holding account. You pay
yourself a monthly amount based on what you have identified you can afford and
what will allow you to meet your obligations. During months of higher income, the
holding account will have a larger balance. During the leaner months, the holding
account balance will decrease. However, the amount you pay yourself does not
vary from month to month.

The holding account method also works well for students. If you have a sum of
money saved from employment, or if you receive a lump sum of student loan
funding, set it all aside in a separate account so that you don’t spend it all at once.
Pay yourself a monthly or weekly amount to meet your obligations. You may also
choose to supplement your weekly amount with part-time income while you are
attending school. This will not only beef up your resume, but can lower your long-
term educational costs as well.
A third way to deal with irregular income is to have two budgets, one for the better
months and one for the leaner months. For most people, this is the hardest way to
manage their money effectively because it’s easy to get into a spending habit
during the better months and then feel deprived during the leaner months. People
are tempted to spend because they expect to have money again in the better months
ahead. Then they use credit to supplement their leaner times. As a result, they
develop a debt cycle that becomes expensive and difficult to break

Now that you have created a workable budget and have planned your pay cheques,
the last step is to plan your savings money so that you are able to track and manage
your seasonal expenses. This
Seasonal Expense
Worksheet will help you get
started.

Set up a binder with one page

for each seasonal expense item Arrange your debit card so that you can
listed on your Budget not debit from your line of credit.
Worksheet. The first page is
what is actually in your savings
account (A). List the date and
how much you deposit or withdraw each time. The subsequent pages are for the
items you will need money for when the time comes, e.g. car repairs, vacations,
gifts, clothing, etc.

For example, you deposit $300 to your savings account twice a month and record
this on the first page of your binder (A). Then, based on your budget, you record
the amount you need for your seasonal expenses on each of the next 4 pages
(clothing (B), car repairs (C), gifts & festivities (D), travel & vacations (E)).

When an expense occurs and you

spend money from your seasonal
savings account, e.g. $40 on a
gift for a friend, record on the
first page (A) what you withdrew
(e.g. $40). Then on the “gift”
Add unexpected money you receive to page (D), subtract $40 from the
your seasonal expense savings account. amount listed there and note the
It’ll add up to a nice surprise when you reason.
least expect it!
The important thing to remember
is that the total of your seasonal
expense pages (every page except page one) must total what you actually have in
your savings account.
Planning how to spend your
saved money, just as you do
your pay cheques, will allow Make your savings account hard to
you to have the money you need access: move it to the “other” spot on
when you need it. This will help your debit card or remove it completely.
you avoid the stress of debt and
give you the freedom to make
choices.
As people track their spending, they discover that some of their money gets used for things they
really don’t need. Instead, they merely want them and often buy them impulsively. Impulse
spending is unplanned spending; purchasing things that you may or may not need, or spending
more on an item than you’d planned

transportation methods for you to get to work and determined that you need to purchase a car.
Fine, but which car you buy is another choice you make. The key to good money management is
separating needs from wants. If you aren’t sure if an item is a need or a want, do without it for a
period of time. If after that time you truly can’t live without it, it may be a need. However, even
the essentials like shelter or transportation involve a want vs. need calculation. For instance, you
may have evaluated all possible
Sources of income

Father’s Salary

Mothers Salary

Rent

Expenses