Budgeting Made Easy in Five Steps

Creating a household budget can be a daunting task. You’re setting up to record where your money is coming from, where it’s going and what you want to do with it. Making a budget from scratch is complicated, but if you follow these five simple steps, you’ll be able to keep your budget on track.

1. Track your income and expenses in detail.

Show where your money is coming from and where it’s going. Make simple categories to file each expense.

Things like groceries, rent or mortgage payments, car payments, insurance and personal expenses are good categories. Don’t divide it up too much or the categories lose meaning, but keep it separate enough to show how much you spend on each.

Keeping records of your purchases, expenses and income is the most important aspect of budgeting.

Without these records, you can’t have a basis for planning your future expenses. Save your receipts, write down records of the bills you pay online, and plan to save this documentation for at least a year. It might come in handy.

2. Consider putting money in savings to be a critical expense.

On the order of food and shelter. If you’re not putting money away, you can almost definitely find ways to cut back in other areas of spending to do so. You need money set aside for unplanned expenses, medical bills or large purchases. The amount you put into savings varies depending on your income, but you can use various retirement calculators to see how much you would have to set aside per month to comfortably retire.

You need to pay yourself now so you don’t have to work until the day you die.

3. Add flexibility to your budgeting.

Just because you’re putting together a budget, doesn’t mean you need to be counting every penny and where it goes. In fact, the more detail you put into tracking pennies, the more frustrated you’re likely to get and the less you’ll be willing to keep it up. With a little flexibility, you have a bit of padding to avoid counting cents. If you typically spend $350 a month on groceries, you can budget room for yourself to go as far as $400. That way when you go under, you don’t have to worry about it. The extra money can be funneled directly into savings or be set aside for a luxury purchase somewhere down the road. The important thing is to live within your means. If you make $1500 a month and you spend $1800 a month, you’re losing money.

4. Face reality, don’t run from the hard truths your budget may show you.

If you’re actively losing money, the last thing you want to do is deny it and ignore the problem. If you’re going into the red each month, you need a budget more than ever to keep you from going over your limits.

Sooner or later your savings will run out, and then you’ll go into debt. Loans from family or banks only go so far and often cost more in the long run.

If you’re spending more than you make, you have two solutions. The first is to make more money. If you can do this, great! That doesn’t mean you don’t need to budget, just that you have more room to work within your budget. The second option is to cut spending. Buy cheaper groceries, eat out less and avoid large purchases you don’t need.

5. Cut back on your debt.

That is, if you have any. If you’re completely debt free, good for you, but most people are not. If you have car payments, house payments, student loans and credit card bills to juggle, it’s easy to be overwhelmed.

The trick is to focus as much as you can on eliminating debts. Simply making minimum payments maximizes the amount you have to spend in the long run. Focus on debts with high interest rates first, especially the small ones. Refinance if you can, and make minimum payments on the debts you aren’t focusing on. By paying off each debt in turn, you can be debt free sooner than you might think possible.

Following these five tips will help you build a budget and get your financial life on track. The sooner you budget and the harsher you are with yourself, the more you’ll be able to put away and the sooner you can retire.

If you want to learn more about how to build a budget, you should read Kanetix’s article, written by Daniel Watson, for more in-depth budgeting tips and resources. Kanetix is the premiere online insurance marketplace in Canada. Save time and money on your insurance by comparing quotes online at Kanetix.ca.

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