Whether you’re looking to save for a vacation, a down payment on a home, or you simply want to gain some insight into where your money is going, creating a budget is a great place to start. It’s a common belief that creating a budget can be stressful, time consuming and intimidating, but with these simple steps you’ll be counting pennies before you know it.
How exactly does one create the perfect budget? Let’s break it down.
Start by setting a goal and making it realistic. Are you looking to save for an emergency fund? A new car or vacation? Maybe you want to buy your first home in a year, or furnish your new apartment. Whatever the case, make sure to set some clear goals at the onset. Once you think of your goals, you’ll want to divide them into short- and long-term, which will help you prioritize which to tackle first. According to Mint, “you don’t have to justify your goal to anyone, and envisioning it can help keep you on track”.
This next step in the process is crucial: spend some time analyzing current spending habits by tracking all of your expenses. TD Canada Trust suggests reviewing statements and keeping receipts for everything for a few months. An even easier way to keep track is to download an app that does it all for you.
Analyzing your spending habits is essential to creating a budget that will work for you and your lifestyle. According to The Balance, there are two easy and basic options you can use to track your expenses. Here’s a simple breakdown of both options:
1. Try out the envelope budgeting system
The envelope budgeting system primarily runs on cash, meaning you might need to leave the plastic at home for a little while. This system targets daily spending decisions like eating out, taking cabs or Ubers, entertainment, shopping, and daily coffee runs. Here’s how it works:
• Divide your spending habits into categories like food, gasoline, clothing and entertainment (AKA “the big four”).
• For each category, withdraw a certain amount of money each week or two and place it in an envelope.
• The goal is to only spend the money in each envelope on that specific category listed, but if you decide to move money around from one envelope to the next, make sure to keep track! This will help you realize where most of your money is going.
2. If carrying around cash isn’t your thing, you can opt for using a spend tracking app
There are a ton of spend tracking apps out there, so it’s just a matter of which one works best for you. Take Mint for example, which was named the best budgeting app in 2018. It’s a free and creates budgets and makes suggestions based on your spending, plus it’ll track your bills and send you alerts when it’s time to make your payments. Lastly, Mint provides you with your credit score for free and offers tips on how to improve it. Other suggested apps from The Balance include:
• For the investors of the world: Personal Capital
• For people who dislike charts/graphs: Penny
• For people who run small businesses: QuickBooks
• For people who can’t take their eyes off their phone: Clarity Money
• For the Millennials who like pretty graphics and social features: Wally
• For the ones who just need a budget: YNAB (You Need a Budget)
“Once you’ve got a good picture of where your money is going, it will likely be clear where you could (or should) be spending less,” says Time Money. They go on to suggest that picking two or three “problem children” is a good place to start.
For instance, did you know buying a $2.50 cup of coffee every day amounts to $900.00 per year? That daily Tim Hortons coffee or latté from Starbucks (more like $1,400.00 per year) can be replaced with homemade brewed coffee and extra savings! And if you add in buying your lunch every day, you’ve racked up quite the bill. Try bringing your lunch to work rather than buying, and treat yourself if you’re successful. Rather than buying a Starbucks every day, only buy one if you brought a lunch, or aim to only buy one on Fridays if you’ve been good all week. There are ways around it, we promise!
After keeping track of everything you’ve bought, divide your expenses between needs and wants. “Needs” should be essential items like food, keeping the lights on, and transportation expenses. Your “wants” are things that you would like but don’t necessarily need, like a gym membership, eating out and expensive clothing. Realistically, our “wants” are what we spend a lot of our money on without batting an eyelid, because they make us feel good.
We’re not saying you can’t ever spend your money on wants, but when you do, try to be thoughtful about it. For example, if you love to shop, consider buying one good piece rather than several lower priced items, and maybe give thrift shopping a shot. It’s better for the environment – and your bank account. And if you do your research, you can learn how to save money on your needs too, like saving money on electricity, groceries, or learning how to commute for less.
To help with the urge to spend money, there are a ton of free budgeting tools and templates out there, so do some digging and find one that works for you. Or if you’re really feeling it, you can even create your own in Google Docs or Excel. A budget spreadsheet will help you track and compare your actual spending to your intended budget. According to Time, “your goal should be to reduce your spending to under 90% of your income, with the aim of saving the rest…” (hello, vacation!).
According to TD, your expenses, and therefore your budget, will vary from month to month. “By checking in regularly and monitoring progress, you’ll keep your budget effective and relevant to your savings goals, making it easy to see the positive difference.”
Basically, prepare yourself for the unexpected. Children get sick, accidents happen, layoffs are not uncommon. Everyone is bound to run into some life turbulence here and there. By revisiting and revamping your budget on a monthly basis, you will be lessening your chance of getting into financial trouble and staying on track.
Lastly and most importantly, do your best to stick to your budget. Remember that part about “needs” and “wants”? Make sure you budget for both so you don’t end up broken-hearted that the cute pair of shoes or expensive restaurant you’re eyeing just don’t make the cut this month. Continuously remind yourself what you’re saving money for (hey, it may be those shoes!), what your end goal is, and how close you’re getting to achieving it! Once you do, simply create new goals and repeat. But don’t forget to have a little fun!