One of the fundamental cornerstones of financial health is making sure you can meet your financial obligations and day-to-day needs. That simply means, you can pay your bills, set aside savings, and still have money leftover at the end of the month. Sound impossible? Well it doesn’t have to be – it just takes a process – and that’s setting and sticking to a budget. Setting a budget is crucial for financial wellness. In fact, the 2019 Canadian Financial Capability survey found 39% of Canadians under age 65 feel they struggle to meet their financial commitments.
Those Canadians that use a budget (49%) are less likely to fall behind, borrow money to pay day-to-day expenses, or overspend. They are also more likely to be paying down personal debt or mortgages faster and have greater financial wellness.
The first step in budgeting is to set your goal. It doesn’t really matter what the goal is, it just matters that it’s achievable with a realistic plan to meet it. Budgeting goals are usually around reducing debt or expenses, increasing savings, or meeting a known financial goal like a trip or a major purchase. Once you understand where you are going, the next step is to understand where you are starting from.
To get started you need to dive deep into your expenses – all of them. Take a look at your last few months’ worth of receipts, bills, and statements and organize your monthly expenses into different types. The first is your regular fixed expenses, the ones you know you pay every month or quarter. This type of expense includes your rent, mortgage, insurance, or other fixed payments like a car loan.
The next category is also fixed expenses, except the amounts may differ month to month– like your cell phone bill, utilities, groceries, gas, and credit card payments. You can take a few typical months and average them out.
The next category is your discretionary spending – and often that’s the one we lose track of. It includes items like eating out, clothing, entertainment – really anything you spend money on that is not a necessity and you have the decision to spend on it or not. The remaining categories are for items that happen once in a while (i.e., taxes, licensing or registration for your car), unexpected expenses (car or house repairs), and your savings. That’s right, saving for the future is an expense that must be planned for. Once you understand your expenses you can set a realistic budget for how you will spend your money going forward. Then you will take all of this information and set an annual budget with monthly objectives.
Having a budget is not enough, you need to make sure your estimates were reasonable. So, it’s time to track your monthly expenses as they occur. You can use an app, a spreadsheet, paper and pencil – it doesn’t matter what tool you use as long as you track your expenses to make sure you are staying within the limits you set and see where your money is going.
There are ample tools available for setting and tracking a budget. There are templates on excel, phone apps, and online budgeting tools. Really what it comes down to is personal preference on what tool you use. The FCAC has recognized the importance of setting a budget and launched an online Budget Planner. This is an interactive tool, which along with additional calculators, helps get you started on a budget and meet your financial goals.
At Rapport, we understand how easy it is to get off track and sometimes how hard it is to face where we are financially. Setting a budget is an important first step in taking back control over your financial wellness by improving your financial capability. After all, information is power and when armed with the right information, we can all learn how to make smarter everyday decisions that have really big impacts on our financial wellness.