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How to Create a Budget

Having a budget can help you manage your money better. A budget doesn’t mean you can’t enjoy life. What it does is keep your spending in check and allows you to create a savings plan.

Before creating a budget, you should determine your goals. Do you want to buy a home, pay off credit card debt, save for retirement, or send your children to school? Maybe it’s some or all of the above.

Here are the steps you to take when creating a budget:

Step #1: Determine your total monthly income

Gather all of your recent pay stubs. Be sure to include use your net income (after taxes and deductions) and not your gross income. Otherwise, you won’t have an accurate picture of your take-home pay. It’s a good put everything down on paper or in a spreadsheet. Let’s assume your net income is $3,000 a month or $36,000 a year. Here’s an example of how to keep track of your income:

Step #2: Determine your monthly expenses

Include everything you spend your money on such as your rent/mortgage, wireless services, property taxes, clothing, and food. You’ll also want to keep track of every small expense, too. That means every coffee or lunch you buy while at work. You can use an app like Mint or Goodbudget when you’re on the go. Let’s assume your monthly expenses are $3,250. Here’s an example of some of the expenses to keep track of:

Step #3: Subtract your expenses from your income

Once you’ve done the math, do you have a surplus or a deficit? Tracking your expenses can sometimes be a wake-up call. You should be honest with yourself about how much you’re spending on every single item you purchase. If you don’t, you won’t have a clear picture of where your money’s going. The example budget shows a monthly deficit of $250. After a year, that’ll add up to $3,000. To cut your deficit, you’ll have to make some cuts somewhere. For example, you could reduce your spending on clothing ($250 a month or $3,000 a year), eating out ($230 a month or $2,760 a year), or cut back on saving in your RRSP or TFSA ($300 a month or $3,600 a year).

If your goal is to save for retirement, you’ll want to rethink whether you want to save a smaller amount of money. But if your goal is to eat out less, you should definitely cut back on getting coffee and going out to eat.

The bottom line

Creating a budget is a great way to see where your money’s coming from and where it’s going. It also helps you track your spending habits, especially the bad ones. If you find yourself with a surplus, that’s great! But if you have a deficit, look for expenses you can reduce or eliminate in order to balance your budget.

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