If you’re tired of living paycheck to paycheck and never have any money left after paying your bills, it’s time to start budgeting. A budget can help you take control of your finances, reduce your stress levels, and help you save money.

We’ll show you how to make a budget plan that works, how to stick to your budget and avoid common mistakes.

What is a budget?

A budget is a plan that helps you track your income, bills and other expenses to improve your financial health. A budget allows you to track how much money you have coming in and going out, so you can make informed decisions about spending and saving your money.

While it is common to use a budgeting app, you can also create a budget using a spreadsheet or on paper.

How to make a budget plan: 5 simple steps

Now that you know what a budget is, let’s show you how to create a budget step by step. You’ll need to gather some information about your income and expenses to make a realistic budget.

1. Calculate your monthly income after taxes

The first step in budgeting is to calculate your monthly take-home pay. This includes your salary, commissions or bonuses, and other income sources.

If you earn a wage or a salary, the amount you receive after tax and deductions is your net income or take-home pay.

If you are paid hourly, you need to know your hourly wage, average weekly hours, and how many weeks you will work in a year to calculate your gross monthly income. Then, you need to subtract taxes and deductions to get close to how much you actually receive.

If you’re self-employed, it can be a little more complicated as you’ll need to deduct any expenses and taxes before calculating how much income you have available each month.

Consider other deductions when calculating your monthly take-home pay, such as group RRSP deductions which are automatically taken from your paycheque. While this isn’t money you can access immediately, it helps you save for retirement.

2. Work out your expenses

Once you know how much you have coming in each month, you need to calculate your spending. Make a list of all your regular fixed expenses, such as rent or mortgage, car payments and insurance. You also need to factor in student loans and debt repayments.

Make a list of these monthly expenses, and then figure out how much you need to allocate to each one. If you’re unsure of the cost, look at your last bill or bank statement.

Next, you need to account for how much you spend on variable expenses. These are items where costs vary from month to month. Examples of variable expenses include things like groceries, gas, utility bills, hobbies, entertainment, clothing and health. Examining your spending habits in these areas can help you pinpoint where you spend too much and save more money.

You can use a budgeting app to link your bank account and help you quickly track where you’re spending your money. These apps are particularly useful in identifying subscriptions that you don’t need.

There are always bills that pop up unexpectedly, like car repairs or veterinary bills, so it’s essential to put money away to cover these unexpected costs. Set aside a portion of your monthly income in an emergency fund, and you’ll be prepared for the worst.

Work out how much you’ll need for things like gifts and vacations every year, and spread the costs over your monthly budget. So, if you spend $350 on Christmas presents, save $30 every month to cover the cost.

Subtract your fixed and variable expenses from your monthly income to work out how much money you have left each month. Many people use a budgeting spreadsheet or app to enter their income and then assign a dollar amount to each expense category to quickly calculate amounts.

If you don’t have money left over, you’ll need to change your spending habits or find ways to increase your income. One option is to cut back on discretionary spending and put that extra money toward debt payments or savings goals.

3. Choose a budgeting rule or system

Although they all share the same goal, budgeting rules and systems are designed to help you manage your money effectively through spending limits. Some popular methods are detailed below.

The 50/30/20 budget rule

The 50/30/20 budget rule is a simple plan that lets you manage your outgoings by dividing your income into three categories based on importance: 50% for needs, 30% for wants, and 20% for savings (or debt repayment).

Needs (50%):

  • Rent or mortgage payments
  • Bills and utilities
  • Groceries
  • Healthcare
  • Transportation
  • Minimum debt repayments

Wants (30%):

  • Eating out
  • Entertainment
  • Shopping
  • Non-essential spending (and fun money)

Savings (20%):

  • Savings
  • Retirement goals
  • Debt repayment

This plan is simple and easy for managing debt and saving money, with room for extra spending over the long term.

The 50/30/20 budget rule

Envelope budgeting

The envelope budgeting system involves setting limits for each expense category and dividing the money into separate envelopes. You can only use the money in the envelope for that particular category. So if you put $150 in an envelope for groceries, you can only spend that amount.

If you don’t want to use paper envelopes, Goodbudget is a popular envelope budgeting app.

Zero-based budgeting

When you implement a zero-based budget, every dollar has a job. You allocate every dollar of your monthly income to expenses, savings and debts until no money is left.

After categorizing your expenses, your balance will be zero at the end of the month, but it doesn’t mean you have no money left – some money can be allocated to savings and other categories.

If you want to implement a zero-based budget, check out budgeting apps like YNAB and EveryDollar.

Pay yourself first

The pay-yourself-first method involves setting aside money from each paycheque for savings before paying bills and expenses. This will help you prioritize cash for your savings goals and use the leftover amount for everything else. Often, this will force you to save in other areas.

Pay yourself first before paying your bills and your forced to make savings elsewhere.

4. Set financial goals

Once you have created your personalized budget, you want to set smart financial goals. Examples of financial goals include saving for retirement, a mortgage, or a new car.

Most budgeting apps let users set financial goals by entering a target amount, date, and monthly savings amount. The app then calculates how long it will take to reach your goal and provides regular updates.

Here are some examples of financial goals:

Short-term financial goals

  • Pay off debt
  • Save for a down payment on a house or car
  • Home improvements
  • Save for a vacation
  • Create an emergency fund
  • Save for the holidays months

Long-term financial goals

  • Save for retirement or financial independence
  • Pay off your mortgage
  • Save for your children’s education

How to budget when in debt

While you should have included minimum debt repayments as part of your fixed expenses, you should try to pay more to eliminate debt as quickly as possible. This will help you become financially independent from debt, and you can save money on interest.

Focus on repaying your debts with the highest interest rates first, such as your mortgage, student loan, car loan and credit card balances. Some debt relief programs can help you reduce your debt faster.

Debt avalanche method

5. Monitor spending and track your progress

Unless you carefully track your spending, you don’t know where your money goes. Use a budgeting or expense tracking app or regularly review your statements to record what you spend on your debit and credit cards.

Many strict budget plans don’t work, so be sure to adjust the next month if you overspend or as your priorities change.

Creating a budget helps you manage your spending and save better for larger goals, like buying a home or taking a dream vacation. A well-planned budget can provide financial security and peace of mind.

Wrapping up

There’s no one-size-fits-all solution to budgeting, so don’t be afraid to experiment until you find a method that works for you. Your budget will be unique to your financial circumstances and lifestyle, so what works for someone else may not work for you.

The most important thing is to find a system that lets you track your income and expenses so that you can make informed financial decisions.

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