Your Guide To Budgeting in 2018
2018 is already underway and if you haven’t already, it’s time to start budgeting and saving for the sake of your financial future. If you’ve never made yourself an effective budget, don’t worry, you’re not alone. That being said, budgeting is a very important step toward gaining financial freedom.
In order for you to create a realistic and successful budget, you need to understand how your money is coming in and how it’s going out. Your income and your expenses are the two main components of your budget. Without a comprehensive understanding of each of these components, you’ll be less likely to create a budget that works for your unique financial needs. So, if you’re wondering how to form a budget that does suit your lifestyle, Loans Canada has the answer!
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Strictly speaking, creating a budget is a relatively simple process. Then again, lots of people have trouble sticking to their budgets. Why is that exactly? Well, the answer can depend on any number of reasons. With that in mind, let’s take a quick look at what it means to budget, how to prepare yourself to create a budget and some common reasons why budgets so often fail.
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What is a Budget?
Essentially, a budget is a specific amount of money you allow yourself to use for a specific timeframe. It also helps you organize your finances, income, and expenses, and makes sure you don’t spend more than you make. It’s a breakdown of how much money you have coming in, and how much you are allowed to spend without putting yourself in unmanageable debt. Basically, it’s a spending plan.
Why is Budgeting Important?
Good question! Budgeting is an essential part of your financial well being, because it:
- Helps ensure you don’t spend more than you make
- Helps prevent debt
- Helps you get out of debt, if you are currently in debt
- Helps you see wasteful expenses
- Helps you evaluate your daily expenses
- Helps you see what you spend the most and least on
- Helps you clarify your spending habits
- Helps you see where you can save your money
- Helps adapt your lifestyle if financial your situation or income changes
- Helps you achieve your financial goals
- Helps you understand your financial situation
- Helps you save money
- Helps you prepare for emergencies (emergency fund)
- Decreases your stress levels
- Helps you achieve ultimate organization and peace of mind
- Helps you prioritize spending
- Ensures you always have enough money for the things you need
- Ensures happy retirement (and maybe even early retirement)
- Can help you gain control of your spending
- Determines how much money you need to satisfy basic needs
It’s a Way to Understand Your Financial Situation
A budget is a spending plan that will help you visualize and understand your financial situation. It shows how much you make and how much you spend. Thus, it is the most clear and precise way to see how much you’re spending. By seeing the exact amount you’re spending per month, you can start cutting down on the unnecessary expenses and eventually reach financial success. Additionally, your budget also helps you realize your financial position because it allows you to see how much you spend compared to how much you make. It will show whether you’re in debt or not, comfortable or not, and if you need to start saving or not. It is the map to your financial life.
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It’s a Way to Achieve Your Financial Goals
Having a budget forces you to plan out your goals, save your money, and keep track of your spending habits. By allocating a specific amount of money to yourself each month, you are not allowing yourself to live above your means. Thus, a budget can help achieve your financial goals, because no matter what your goal is, you have to know how much you’re allowed to spend.
To learn 10 ways of living in the present while saving for the future, read this.
Whether you want to save money, get out of debt, prevent yourself from going into debt, or save a certain amount of money, each of these goals includes managing your money. Your budget gives you information on your financial situation, which is what your goals are made up of. For example, if your goal is to save enough money to buy a car, you need to know how much you make and the minimum amount you should spend a month in order to save up for that car.
Why Do Budgets Often Fail?
- Unrealistic goals
- Not creating a budget that fits your lifestyle
- Too restrictive/No flexibility in the budget
- Forgetting irregular expenses
- Not tracking your expenses
- Overspending every month
- Forgetting to save and plan for emergencies
- Lack of planning
- Lack of commitment
- Lack of motivation
- No automated payments – lack of time and discipline can ruin your intentions to pay, so it’s beneficial to set up automated bill payments
- Shopping problems
- Budgets not related to personal goals – saving is more difficult when unconnected to real life desires. For example, it’s easier to save $1,000 for a car then just for fun
- Not updating your budget
- Didn’t give it enough time – budgeting requires patience
- Lack of financial education
- Bad spending habits – Not thinking about the purchases you’re making
Creating a Budget
As we mentioned earlier, the way you create your budget should reflect your financial situation and how you want to live your life. It should depend on your income, your regular and irregular expenses, etc. Remember, everyone’s budget is unique to his or her lifestyle, so if yours doesn’t match someone else’s, don’t consider it a mistake, consider it a learning experience.
Start by creating your budget with all your earnings available after government taxes have been removed and before any personal, voluntary deductions, like RRSPs. If you have an unusually large amount of expenses, like extreme debt or school tuition, you will need to reduce spending in other areas to make up for these expenses.
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What Should the Average Canadian’s Budget Look like?
- Housing: 30%
- Utilities: 5%
- Food: 10%
- Entertainment: 4%
- Transportation: 20%
- Clothing: 3%
- Medical: 3%
- Personal and discretionary: 5-10%
- Savings: 5-10%
- Debt payments: 5%
- Insurance: 5%
Different Types of Budgets for Different Lifestyles
Remember, everyone’s budget is going to look a bit different. That being said, there are 2 general types of budgets that you can make for yourself.
Long-Term Budgets vs. Short-Term Budgets
“Short-term” budgets are generally meant to cover 3, 6, or 12 months worth of income and expenses. For example, saving up for a nice pair of shoes or a weekend away. This type of budgeting is easier than creating a long-term budget because you have a good idea of what your income will be during this time and it involves less commitment.
However, in “long-term” budgeting, there is more uncertainty because there’s more room for life to get in the way. What if you lose your job? What if you get sick or injured and need to pay for medical assistance? You never know how your financial situation could change, as exterior factors shift easily in the long-term.
Essentially, long-term budgets cover several years in the future. Examples of long-term budgets include saving for a house, sending your children to college, and retirement planning. To create a long-term budget, list your long-term goals and estimate how long it would take you to save for them. After this, use a spreadsheet or other program to determine how much you must put away monthly for these goals to be reached.
For a better understanding of household debt in Canada, take a look at this infographic.
How a Personalized Budget Can Help You
Our number one budgeting tip is to always create a budget that works for you and your needs. Your income, your goals, and your lifestyle should all be taken into consideration. Create a budget that works for you will allow you to succeed, stick with it, and meet your goals.