Money is critical for living comfortably in human society, so it’s wise and good for your stress levels to stay on top of your finances. We can stay on top of our financial situation through budgeting; however, when it comes to budgeting, you may have no idea where to begin. Below is a breakdown to becoming a budgeting master.
- Understand Your Expenses
Expenses can be broken down into two categories: bills and discretionary expenses. Bills are predictable, often fixed payments that come in every month, such as rent or mortgage, utility bills, loan repayments, insurance payments, internet, and phone services. Discretionary expenses, also known as flexible or variable payments, are based on personal choice and may vary significantly from month to month based on personal preference, such as food, entertainment, clothing, travel, and hobbies.
You may not be able to do much about your monthly bills, but you have more personal freedom over discretionary expenses. You can decide to cut back on treats or high-end brands at the grocery store, opt to cook at home instead of dining out, choose cheaper travel destinations, or bus it to work instead of paying for gas.
- Decide What You Need
Discretionary expenses could often fall into the “wants” category, rather than “needs,” though something one person wants could be something you need. For example, you may need more luxurious clothing than someone else due to work circumstances. Someone else could consider selling their car and taking public transit or walking, if they live and work in the same city, but you may need your car if your daily commute is long and public transit is unreliable in your area.
Make note of what’s important to you and what you need as you examine all your recent purchases from the last few months. Collect receipts and check bank statements then list every payment you made, noting whether they fall into the bills category or discretionary expenses category. Total your amount of spending.
- Calculate Your Take-Home Income
Take-home income is the paycheque you bring home after taxes are subtracted. You want to make sure you know exactly how much money you’re taking home every month. You can determine your monthly take-home income, once taxes are deducted, by reviewing your most recent pay stubs.
Or you can grab your last paystub and calculate monthly income by how often you get paid. Someone who earns a bi-weekly cheque at work will receive 26 paycheques in a year. If you’re paid weekly, you get 52 paycheques in a year. Multiply the amount on your paycheque by either of these numbers, depending on how often you get paid, and then divide the results by 12—you’ll end up with your monthly take-home pay.
You may also still calculate an estimated monthly pay if your paycheques fluctuate from month to month. Take three months of your earnings, add them up, then divide them by three.
- Compare Income to Expenses
Now for the fun part: subtracting expenses from your take-home pay. This is the simple process of subtracting your payments from what you earn. The results may vary depending on how much you’re spending compared to how much you’re being paid.
If you still have money left over, you’re in a surplus and that’s fantastic. You don’t have a lot to worry about at that moment. You could even get away with spending more money. If you have only a few dollars left or you’re at zero, you’re living paycheque to paycheque, and you may want to tweak your budget if your goal is to save any money. If you’re seeing a negative sign, you’re living beyond your means, then it’s a good time to re-evaluate your spending habits.
- Adjust Spending to Meet Financial Goals
Your financial goals are personal. You may want to save for a house, reduce your debt, pay for classes, save for an expensive hobby, or some combination. Whatever you’re hoping to do with your money, you won’t be able to accomplish it if you’re spending more than you’re earning. If you’re not in surplus, it may be time to take a good look at your expenses and ask yourself if there’s anything you could cut back on.
- Save For Emergencies
Regardless of your financial goals, you should always consider putting a little bit of funds into a separate savings account for emergencies. You never know what life will bring you, so it’s smart to ensure you have money tucked away for any crises you experience.
Luke Miles | Staff Writer