Why make a budget
A budget is a plan that helps you manage your money. It helps you figure out how much money you get, spend and save. Making a budget can help you balance your income with your savings and expenses. It guides your spending to help you reach your financial goals.
A budget is especially important if you:
- don’t know where your money is going
- don’t save regularly
- have problems paying off your debts
- feel overwhelmed by your finances
- feel like you’re not in control of your finances
- want to make the most of your money
- are planning for a major purchase or a life event
Making a budget can help you:
- set spending limits
- find ways to pay down your debts
- reduce costs and save more
- live within your means
- reduce stress
- have more money for things that are important to you
- feel in control of your money
What to consider before you start a budget
Take these simple steps before you make your budget.
Think about your financial goals
Identify your short-term and long-term goals. Make saving for those goals part of your budget.
For example, goals may be:
Short-term goals:
- paying off your credit card
- reducing your weekly expenses
- starting to build an emergency fund
Long-term goals:
- paying off all of your debts
- saving to buy a home, a car or booking a trip
- saving to have children, to go to school or to retire
To deal with unexpected situations, create an emergency fund. Your emergency fund should provide you with enough money to cover your living expenses for 3 to 6 months. These amounts can sometimes seem out of reach. That is why you should start by saving a small amount on a regular basis.
Having an emergency fund will help you reduce financial stress and avoid getting trapped in a debt cycle.
Learn how to build an emergency fund.
Know where your money is going
Tracking your money will help you figure out what comes in and what goes out of your pocket. Every dollar you spend affects your overall budget.
For example, if you spend $2.50 a day on coffee, it will cost you more than $900 a year.
To keep track of where your money is going, take note of what you spend.
Try this exercise for 1 or 2 months:
- keep track of everything you buy, from groceries to a daily cup of coffee
- keep a copy of bills you pay during this period
- try dividing your expenses into 2 categories: “needs” and “wants”
Small changes to spending habits can have a major impact on your budget and your ability to save.
Use the Expenses Calculator to see how small purchases can add up over time.
Evaluate your needs and wants
Knowing the difference between your needs and your wants is key to making a smart budget.
A “need” is something that is necessary, required or essential. For example, a roof over your head, clothing, food, or medication.
A “want” is something that you’d like, but don’t necessarily need. For example, meals at a restaurant, a trip, a gym membership, or designer shoes.
Needs and wants aren’t the same for everyone. One person’s “want” may be another person’s “need”. For example, if you live near a bus route, a car may be a want rather than a need. However, if you don’t have access to public transit and can’t cycle to work, you may need a car.
Your needs and wants may also change over time. For example, a large house may be a need while you’re raising a family. However, a condo or a smaller home may be what you need when your children move out.
Once you’ve figured out your needs and wants, you’re ready to start your budget.
Source: https://www.canada.ca/