Get control of your finances. A simple guide to creating a budget
By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, January 21, 2023
With rising interest rates, inflation, rising prices, and economic challenges, many Canadians are feeling the financial stress.
In the annual fall 2022 Debt Survey conducted by Manulife Bank of Canada and Ipsos, it was found that:
• Most respondents (87 per cent) said they believe we will soon enter a recession or are already in one. The majority (56 per cent) said they think it will last at least a year. • In fact, six in 10 (59 per cent) of the people surveyed claimed that increased spending is now outpacing their income growth. • Forty-eight per cent of those who participated in the survey said they feel overwhelmed by their financial situation. • One in four homeowners with a mortgage responded if rates rise much further, they will be forced to sell their homes when their mortgage renews
This is the time to take control of your finances. One of the best ways to understand where your money is going and where you can make changes, is by creating a monthly budget. Budgeting is a core ingredient that helps alleviate the stress associated with money issues.
The key is to create a realistic budget based on your situation and goals. Track your spending and make your dollars go further by sticking to your budget once it’s in place. Budgeting offers a step-by-step formula to figure out how your income is compared to your spending. It also helps you review all your costs and helps you make changes either to increase your monthly cash flow or just feel less stressed.
The following are steps that can help you get started:
1. Determine your income
When creating a budget, you need to know exactly how much money you are bringing in each month. This amount should be what you bring home every month and what gets deposited into your account. If you use your (gross) income before taxes are deducted, you will end up overspending.
2. Track your spending
Once you know how much money you are bringing in each month, you will need to review what your expenses are. Reviewing all your monthly bills will help you know exactly where your money is going. It is important to put down in your budget every expense you have, including fixed and variable expenses. Fixed expenses are items such as mortgage payments or rent, loans, strata fees, internet and cell phone bills, and child care, to name a few. Your variable expenses would be things like groceries, gas, gifts, clothing, entertainment, and eating out. Variable expenses are typically the costs that you can cut back on. You can start by averaging your costs and keeping track of all your expenses by saving the receipts for a month and entering the amounts into your budget.
3. Set realistic goals
Setting up realistic goals is key. It is critical to determine what you can live without and where you can cut costs. Ideally, when doing a monthly budget, you can consider the 50/30/20 rule:
• 50 per cent of what you spend is for needs such as your rent, mortgage payments, utilities, car payments, groceries, gas. • 30 per cent of your income goes to wants such as gifts, entertainment, vacations, eating out, etc. • 20 per cent of your income goes to savings or paying down debt such as an emergency fund, retirement, children’s education, paying down credit cards, and loans.
4. Make a plan
Once you have your goals, you can plan to improve your monthly cash flow and have realistic spending limits for each of your categories. By taking a look at what is important and re-prioritizing, it can help you free up some cash, while at the same time, stop you from spending money on things you don’t really want or can do without.
5. Adjust your spending
Now that you know how much money you are bringing in each month and what you are spending it on, you can take a look at adjusting where you spend your money to ensure that you stay within your budget and identify your wants and the things you can do without. This is a great time to also review your fixed expenses, such as your mortgage payments (for example, can you extend your amortization period or change your payment schedule?). Before considering this option, it is always best to talk to a mortgage expert to see what makes the most sense for you.
6. Stay on track
This exercise is not about just doing your budget and forgetting about it. In order to be in a better financial position and feel less stressed, it’s important to track your budget on a monthly basis to catch any changes in your spending habits. It’s always a good idea to review your budget on a quarterly basis and take into account any increases in expenses or wages that may require adjustments to your original calculations.
There is a free, online budget planner tool offered by the federal government that can help you. It can be found at https://itools-ioutils.fcac-acfc.gc.ca/BP-PB/budget-planner