The hows and whys of creating a basic budget

Best practices for managing your income and expenses

Are you making the best use of your money? Getting a good handle on your current expenses begins with establishing a budget – and sticking to it. Here are some steps to help make sure you stay on track financially.

You might assume that budgeting is like going on a crash diet – depriving yourself of things you want to make up for overindulging. That’s far from it! Budgeting isn't something you should do only when your money (or waistline) gets tight. It's a habit that should be practiced constantly, no matter what your income, spending habits, or financial situation.

Tracking and managing your spending is one of the most important components of financial wellness, giving you a clearer picture of where you stand financially, helping you make better decisions, and, in the end, giving you greater peace of mind. Here are a few tips to help you establish and maintain good budgeting habits.

Establish your financial goals

Budget planning begins with setting goals. What do you want? Where do you want to be? Not just this month or next year, but over the next five, ten, or even 30 years?

Start by grouping your goals into categories: short (a vacation, maybe a car); medium (a house, your children's education); and long term (retirement). Then rank them in order of importance and cost. Like anything, your goals will be flexible, but this will give you a starting point.

Review your current expenses

Start by totaling your income, not including amounts you can't be certain of like tax refunds, bonuses, or investment gains. Next use account and credit card statements to help list your regular expenses.

After recording fixed costs, such as rent or mortgage, utilities, gas, cable, and insurance, consider the rest of your variable expenses. These are items you spend money on, but may vary every month, such as groceries, clothing, and entertainment.

Develop your savings plan

Once you see what's left over, you can plan for your savings goals, both short-term and long. One of the easiest ways to build up savings is to set up pre-authorized transfers from your chequing account to your savings account, TFSA, or RRSP. If you don't have enough left over after your expenses are paid to reach your savings goals, go back over your expenses and see what you can trim from those that are discretionary.

Differentiate between needs and wants

It's important to be able to separate the things you need from the things you want. You need shoes but they don't need to be designer. You need to eat, but every meal doesn't need to be at a gourmet restaurant. Treats are good, but a little discipline can go a long way. That $4 daily latte before work is costing you more than $1,000 a year. Some of these incidental items may not even make it to your expense list, but they can certainly add up, and they need to be taken into consideration.

Track all of your spending

It's easy to remember larger expenses like mortgage and car payments, but other smaller expenses may be harder to capture. If you don't like saving receipts or writing things down, you can try putting all your expenses on one debit or credit card. That way, you have a clear picture of your spending consolidated in one place.

If you do use a credit card for these day-to-day expenses, make sure you pay your card balance off every month and on time. Paying interest on things that aren't long-term investments like your mortgage or an education fund is a drain on your finances.

Budget by month, not pay period

If you get paid twice a month or every two weeks, setting a monthly budget will force you to lengthen your time frame, but not by so much that you get off track. By adjusting to a 30-day window, you can prepare for a month of heavy expenses knowing that it's followed by one that's easier on the budget.

Plan for the expected – and expect the unexpected

You can budget for expenses that are predictable but don't occur monthly, like holiday and birthday gifts, and special occasions like weddings or graduations. You know these events are on the horizon, so try to be prepared for them. For example, instead of piling up debt on your credit card the month of the big event, buy your presents throughout the year.

Of course, life has a way of throwing a few curves at you to knock your budget off kilter. A leaky roof, a major car repair, or new hockey equipment when your child has a growth spurt. A rainy day fund is a good way to help deal with any unexpected expenses.

Review and revise

Tracking your budget on a regular basis takes discipline but ultimately, it will keep you focused and in touch with your spending habits. One of the toughest challenges is ensuring that everyone in the family is on the same page. Talking about it helps.

Keeping the lines of communication open is an important part of keeping your budget on track. Make sure to sit down as a family to talk over where you are now, any upcoming expenses, and your overall goals.

If you need to make changes because you're spending more than you earn or aren't on track to realize your savings goals, discuss what that might look like. It's also a great way to teach and build financial literacy for your kids.