Free In 30! -> Personal budget

Make a budget

Making a budget is usually not much fun, and sticking to it might not be easy.  However, this is an important step.  You must be a good manager of your money in order to have the financial freedom to do whatever you want.

In order to prepare a budget, it is important to track your spending to see what your expenses are.  You can do this on paper, or on the computer in a spreadsheet.  If you don't have spreadsheet software, you can use the free Google™ spreadsheets, found at www.spreadsheets.google.com.  You could also use a software program such as Quicken™ or Microsoft® Money.

Track your spending by categories such as

Once you know where your money is being spent, you can allocate a certain amount of money to each spending category.  If you are spending more than you are making, or if you are not using  at least 10% of your gross income to pay yourself first, then you need to reduce or eliminate some expenses.  For expenses that are paid annually, save 1/12th of the total each month.

The first thing you should do (if you don't have debt with over 8% interest) is to get your employer to deduct  your pay yourself first money from your pay, and transfer it directly to an RRSP.  By making this a payroll deduction, the income tax taken from your pay will be reduced.  See our article on Recommended stocks/ETFs for how to make 9% on your RRSP.

You should monitor your progress by periodically making a summary of your net worth.  To calculate your net worth, you simply add up the value of your major assets and any investments, and deduct any debts.  To make this task easier, try our Net Worth Calculator, which can be found on the Calculators page.

                                                Budget

This couple obviously didn't read our website before they took out a car loan and ran up their credit card debt, but they are on the right track now.  They are paying themselves first with the 10% of gross income, which they are using to make extra payments on their highest interest debt (credit card).  They have reduced some other expenses in order to do that.  Once they have the credit card debt paid off, they can pay the $700 per month (pay yourself first) on the car loan.  They will also have $240 more per month from the credit card debt payments, which they can use to pay down their car loan faster and/or allocate to other expenses.  Once the car loan is paid off, they can use the $700 per month as extra payments on the mortgage or to invest in RRSPs, and use the $300 per month car payment to save for a new car.

Tip:  Stick to your budget.

If you do not own a home, you have no debt, and you have already put aside your emergency money, put a further $25,000 into your RRSP.  This can be withdrawn under the Home Buyer's Plan when you buy your first home.  Any other savings for your down payment should be saved in a Tax-Free Savings Account (TFSA).  Once you own a home, you should use the pay yourself first money to make extra payments on your mortgage, or invest in RRSPs.

Tip:  Pay yourself first.

If you have children or grandchildren, it is never too early to start teaching them how to budget their money.  This can be as simple as giving them an allowance, and teaching them to allocate their money.  When they are very young, start by giving them a small amount of money which can be used for discretionary spending, long term savings, and special occasions.  As they get older, their allowance can increase, and they can be responsible for paying for their own sporting activities, clothing, and gifts.

Tip:  Teach your children to manage money.

See our Save Money page for more ideas.

Your financial plan should include the following steps:

1. Pay yourself first!

2. Emergency money

3. Define your goals

4. Personal budget

5. Buy a home

6. Get out of debt

7. Save and invest

Revised: October 28, 2011