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. Budgeting can be a great tool, but only if you use it properly.
I’ve previously mentioned how websites like Wesabe, BudgetPulse and Mint 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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Tom Drake is the owner and head writer of Canadian Finance Blog.
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I have been tracking my spending for several years.
I always find it easier to simply know how much my wife and I spend in different categories, than to actually conceive a target amount and force myself to spend less!
Budgets are great things, until you actually have to change your lifestyle!
I recently did this activity (monthly spending targets), and found that we could easily trim $500/month! Once the credit card debt is paid off, I think we need to implement the (dreaded) envelope system!!!
All in the name of financial freedom, right???
.-= andrewbpaterson´s last blog ..Protected: QuikPic: So Many Hats…So Little Time! =-.
I just recently posted how I budget (spreadsheet included in Step#3), and I wonder if it might help your readers or just confuse the hell out of ‘em!
http://nodebtforus.blogspot.com/2009_12_20_archive.html
.-= TexasT´s last blog ..Control Your Finances – Budget Step #1 =-.
TexasT,
Looks like a good budgeting spreadsheet, worth a download!
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Great post, thanks! I’m a big fan of tracking expenses and budgeting. I use the envelope method, but I don’t like using cash (it tends to slip through my fingers and is very hard to track).
So I created some software – http://www.neobudget.com – to help me with it. I used to use a spreadsheet, but NeoBudget has saved me hours of manual entry time, since it can import my bank statement.
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Yay, a fellow Canadian! I don’t think I’ve ever come across another Canadian personal finance blogger before. I…don’t get out much.
I just use Google Docs for my budgeting. It’s like Excel, but online. I do have to do a lot of the work myself, though.
.-= Lainey´s last blog ..I Couldn’t Wait =-.
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I live paycheck to paycheck myself, that’s why for me it’s crucial to be able to track all of my spending and make sure I don’t go over my monthly budget. The envelope system works perfectly for those who want to get a strong grip on their personal finances and avoid overspending. I’m using https://www.inexfinance.com/ and it’s similar to the envelope budgeting approach. It also allows you to take the balance you still have left from a certain spending category and roll it over to the next month, which means that next month you can spend more:). And another thing I find quite useful is the warnings you get each time you enter a transaction that exceeds your budget limit. It sort of keeps your spending cravings under control.