3 steps to drawing up a monthly budget
Do you find yourself often in the red at the end of the month but don't know why?
Drawing up a monthly budget will help you know exactly what goes in your pockets and what goes out. It takes a little planning at first, but you will have the satisfaction of getting a clear picture of your spending as compared to your income.
Here's how to do it, in 3 steps:
1. Know what goes in your pockets and what goes out
Whether you are a salaried employee, self-employed worker or retiree, make a detailed list of your income: salary, tips, bonuses, commissions, annuities, investment income, etc. Making a list of your expenses may be a bit challenging at first, but knowing where your money goes is the key to effective financial management.
Of course, you know how much you spend on your rent or mortgage, and you know roughly how much you spend per week for groceries. But then there is everything else—and that's often how you end up in the red.
To get an accurate picture of your spending, use these 2 strategies together:
Go back 1 year
Print account and credit card statements for the last 12 months or ask your financial institution for them. You'll have a portrait of most of your expenses, bill payments and cheques. Gather up any bills you've kept, as you can use them to record your purchases for recent months.
Write down all spending for the next few months
Keep track of every cent. This may seem tedious at first, but the idea is simply to develop a habit that will be part of your daily or weekly routine. Here are some tips that may help:
Each time you buy anything, keep the receipt. Whether it's a coffee, magazine or CD - everything should be recorded.
At the end of each day, put all receipts in an envelope or folder dedicated to that purpose. Enter your data every day or every week on a computer spreadsheet that will give you the totals automatically.
At the end of the month, review your account and credit card statements: you can catch any expenses you missed.
2. Structure your budget
For your budget to be complete, it must include 4 types of expenses:
1. Weekly expenses: Groceries, pharmacy purchases, dry cleaners, petrol, and outings (restaurant, cinema, etc.).
2. Monthly expenses: Payments for housing, electricity and gas, insurance, car payments, public transportation, communications (telephone, cable and Internet).
3. Annual expenses: Driver's licence, registration, car maintenance and repair, insurance (auto, home, life insurance, etc.). Clothing, recreation, vacations and furniture. Home maintenance and repairs if you are a homeowner. Divide these expenses by 12 for a monthly figure.
4. Savings and investments: This money is used for special projects in the medium term for such items as renovations and retirement savings. It's also used to repay loans.
A budget includes fixed expenses (housing, car loans, monthly bills, etc.) and variable expenses (groceries, gasoline, clothing, recreation, travel and other). Once you have a clear idea of your income and expenses, insert the monthly data in a budget table. This will give you a picture of your monthly situation.
3. Take stock
Whether your budget is balanced, in deficit or showing a surplus, it's important that you set realistic goals:
If your budget is balanced…
Congratulations! Maybe you can optimise it by analysing the distribution of your expenses. For example, the maximum percentage spent on housing should represent 35% of your gross income. Depending on the result, you may decide to save a little by reducing some of your expenses. Or realise that your car is costing you more than you thought.
If your budget is in deficit…
Don't be discouraged. At least you now have a clear idea of your situation, which is the first step to taking financial control. Several solutions are possible: cut back on some expenses, lower your credit and interest costs. The important thing is to go slowly and set realistic goals.
Don't hesitate to get help. Debt Sage offers debt counselling services and will assist to get out of debt.
If your budget shows a surplus…
Congratulations! There are options available to help you carefully plan the use of your extra funds. Would you like to invest, buy a house, and try your luck on the stock market? Anything is possible when you're disciplined, which you already are! Maybe the advice of a financial planner like Debt Sage would be helpful.