Looking to reduce your spending and save more money? While many dread the word, the best way to accomplish these goals may be creating and following a budget.

Before you can set up a budget and look for ways to improve, you’ll need to know what you are doing now. This could be done in Excel or even on paper. First, gather up all your regular bills, including your mortgage or rent. While some bills may be the same amount every month, for the bills that fluctuate from month to month you may want to look  at a few months to figure out their average expense. If you want to be more conservative, use the largest bill instead of the average.

You’ll need to have a realistic idea of how much you spend on other things like food, gas, clothing and entertainment. Do you use a credit card or bank card for all your purchases? Great, you’ll be able to log in to your bank’s web site and view at least a month’s worth of data, if not more. If you use cash and have not kept track in the past, a simple way to see what you’re spending on is to carry around a notebook for at least a month. Every time you spend money, record how much and what it was for. Once you have this, you may find some monthly totals were not what you would have guessed. Are there any areas you can cut back on?

The other expenses that some forget to include in their budget are the occasional expected expenses like property taxes, holidays, birthdays and membership or subscription renewals. For these expenses, divide then by 12 and put money aside for them each month. There are also unexpected expenses, like car repairs or having to pay an insurance deductible, but we’ll get to how to deal with them in a bit.

After you have figured out how much money is spent on expenses each month, you better add your monthly income in there to pay for it all. Have a look at how much of your money is available after the expenses. Is there as much as you expected?

You’ll likely get the best improvement in your finances by using the money that is left to pay down any credit cards or loans that you have a balance on. Start with the highest interest rate first and continue until your debts are eliminated.

Once you have reduced your spending and are debt free, the final part of your budget should be allocating your remaining money to savings. Your first priority should be to have an emergency fund for the unexpected expenses I mentioned above. Chances are, your minimum emergency fund should be $1,000 to $2,000, so plan out your savings to achieve that amount as soon as you can. With the emergency fund taken care of, you may want to focus on an RRSP, TFSA, RESP or maybe paying down more of your mortgage.

And the most important thing… stick to your budget! If you set a limit for entertainment don’t go over. If you set a minimum savings amount, make sure you meet that goal. A budget can be a great tool, but only if you use it properly.

I’ve previously mentioned how websites like Wesabe, BudgetPulse and Mint (Mint is still not yet available in Canada) can help you track your spending and create a budget. Check back tomorrow for a review of a new  budgeting website that does a few things differently and also works for Canadians!

Image by Jeff Keen

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