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Financial Literacy Month: Your Complete Guide To Creating a Budget

Written by
Written by
Accredited Financial Counsellor of Canada (AFCC) and the founder and Executive Director of The Dollar Detectives

Guirlene Joseph is the founder and Executive Director of The Dollar Detectives – a national non-profit organization committed to empowering youth with the financial knowledge, perspective and skills required to walk confidently into adulthood.

Guirlene Joseph
Reviewed by
Reviewed by
Senior Editor – Debt.ca

Monique is the Content Manager for Debt.ca. An established writer, she uses her skills to offer sound knowledge to those looking to escape financial overwhelm.

Monique Bourgeois
Budget

What is budgeting and why is it important? Well, budgeting is estimating your level of income and expenses for a set period of time to achieve a goal. Budgeting is important because it disciplines us to spend on things we need and when to spend on things we don’t. We can sometimes spend on things we don’t actually care about or even not enough on things we actually need. Creating a budget can help you manage those costs and bring you closer to achieving your financial goals!

Creating A Budget Starts With Financial Goals

The first step in creating a budget is to determine your financial goals! Think of it like creating a map of where you want to go. These financial goals will help guide you in making better financial decisions and keep you on top of your finances. It will also help motivate you to keep budgeting.

Start by grabbing a scrap piece of paper or opening up an empty word document. Write the heading “Long-Term Goals” at the top of the page. Underneath that heading, start jotting down ideas of financial goals you want to achieve 10+ years from now. This could be something like buying a house. Next, beneath your long-term goals, write the heading “Short-Term Goals”. Underneath this, write down all the financial goals you want to achieve within 0-2 years. This could be putting away $1000 in my savings account by 2023.

What is Monthly Take Home Income?

The second step in creating a monthly budget is figuring out how much money you have. To do this, add up all your income. Make sure to include all sources of income coming into your household. Don’t forget your salaries, government payments, wages from working children, education payments and any other sources of income.

Now, calculate your total monthly income or your take-home pay:

  • If you get paid once a month, this is fairly straightforward, there’s no need to do anything.
  • If you get paid bi-weekly, multiply your take-home pay by 2.167. This will account for the two months in the year that you will be paid 3 times.
  • if you get paid semi-monthly, multiply your take-home pay by 2.
  • If your income fluctuates, we suggest adding up 12 months of take-home pay and dividing this amount by 12 to get a monthly average. Do the same for other irregular income such as investment income.

Once you calculate all your sources of income, add them all up to get your total monthly income. This is the income portion of your budget!

Where Is My Money Going?

You remember that candy bar you bought at your local grocery store, right? Me neither, so go collect all the receipts from the last 30 days. Afterwards, get a hold of your last month’s bank statement.

Once you have gathered all of that information, start categorizing your spending into broad categories. Sometimes people fall into the mistake of creating too many categories. We suggest you stick with three major categories. These categories include:

The Big 3

Items in this category include your top essential expenses such as housing, food, and transportation. This would also include anything else you think is essential in your daily life. Put differently, this category is for anything you absolutely cannot live without.

Values

These include things that provide value to you such as travelling, investing in yourself, and saving. You can frame this category as things that are not something you absolutely need but can help make your life much better.

Stuff

This category is exactly like it sounds, any non-essential spending like buying a big flat-screen TV or the latest and greatest phone. Another way to think about this is things you “want” not “need”.

Similar to your monthly take-home income, your financial expenses will likely fluctuate. We suggest adding up 3 months of spending for each category and then dividing it by 3 to get the monthly average per category.

Am I Spending Too Much or Too Little?

Now it’s time to put all your hard work to use by using your budget to figure out what your financial picture looks like. You do this by subtracting your total expenses from your total income.

A positive number means you are spending less than you earn. This is great news as it means you’re able to save more money to get closer to your financial goals!

A negative number means you are spending more than you earn. Knowing this information gives you a better idea of what expenses you can trim. Whereas not knowing this information could keep you from achieving your financial goals.

Make any adjustments needed to your budget to reflect your financial goals. Review your budget periodically to ensure you stay within your guidelines or adjust for changes.

Keep in mind a budget is versatile and you can make changes along the way.

Bringing it All Together

We now know that budgeting is an important tool for tracking your spending and income to achieve our goals. We have learned that we must first determine our financial goals. After that, we then figure out your monthly take-home income and expenses. Finally, calculate the difference between your expenses and income.

It’s important to remember that a budget is versatile. It can, and will, continually change. Make adjustments along the way to reflect your financial goals and to help you stay within your guidelines.

Being mindful of your spending, tracking your income and expenses, and revisiting your financial goals frequently are useful skills for developing better financial habits. These habits will give you valuable insights and more control over your finances.

Daily Tasks

Creating a budget can be a fairly involved process. To avoid overwhelm, break down the process and do a little each day. Here’s what that can look like.

Day 1: Determine Your Financial Goals

The first step in creating a monthly budget is to find a financial goal to work towards. This is important because it can be difficult to find and maintain motivation when you don’t have something that you are working towards.

Start off by grabbing a piece of paper or opening a blank document. Write “long-term goals” at the top and “short-term goals” in the middle of the page. Underneath “long-term goals”, start writing down what financial goals you want in the long run (10+ years). Whether it be owning a house or owning a car, etc. Underneath the “short-term goals”, jot down ideas of where you would like your finances to be in the short-term (0-2 years). It could be simple like saving $500 for that new PlayStation.

Revisit your list every so often to make sure your goals are up-to-date. With that done, you have determined your financial goals!

Day 2: Determine Your Monthly Take-Home Income

The second step in creating a monthly budget is figuring out how much money you have. To do this, add up all your income. Make sure to include all sources of income coming into your household. Don’t forget your salaries, government payments, wages from working children, education payments and any other sources of income.

Now, calculate your total monthly income or your take-home pay:

  • If you get paid once a month, this is fairly straightforward, there’s no need to do anything.
  • If you get paid bi-weekly, multiply your take-home pay by 2.167. The extra .167 will account for the two months in the year that you will be paid 3 times.
  • if you get paid semi-monthly, multiply your take-home pay by 2.
  • If your income fluctuates, we suggest adding up 12 months of take-home pay and dividing this amount by 12 to get a monthly average. Do the same for other irregular income such as investment income.

Once you calculate all your sources of income, add them all up to get your total monthly income. This is the income portion of your budget!

Day 3: Determine Where Your Money Is Going

The third step in creating a monthly budget is finding out where you spend your money. First, go and collect all the receipts from the last 30 days. Once you have finished that, get your last month’s statement from your bank.

Once you have gathered all of that information, start categorizing your spending into broad categories. We suggest you stick with three major categories. These include “the big 3” (your top essential expenses such as housing, food, transportation, or anything else essential), values (things that provide value to you such as travelling, investing in yourself, etc.), and stuff (non-essential spending like buying a big flat-screen TV or the latest phone).

Your expenses may fluctuate. That’s why we suggest doing this exercise for each of the last 3 months. Then add up all the spending for each category and divide each by three. This will give you the monthly average per category.

Congratulations, you now know where your money is going!

Day 4: Determine Your Results and The Difference

The final step in building a budget is to figure out the difference. You do this by subtracting your total monthly expenses from your monthly total income. A positive number means you are spending less than you earn. A negative number means you are spending more than you earn. Knowing this information gives you a better idea of what expenses you can trim.

Make any adjustments to reflect your financial goals. Once you create a budget, you can compare what you planned to spend to what you actually spent. You should review your budget periodically to make sure you are staying within your guidelines or adjusting for changes. Keep in mind a budget is versatile and you can make changes along the way. Being mindful and tracking for a couple of months will give you valuable insight!

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