What is a monthly budget?
A monthly budget is a tool that helps you manage your money. It allows you determine how much money you are earning, spending and saving. Devising a budget can help you balance your income with your regular expenses and guide your spending habits to help you attain your monetary objectives.
Creating a budget can initially be overwhelming and a difficult feat, yet as you read through the following five steps, you’ll see that it’s feasible and definitely worth the effort.
What are the steps to creating a monthly budget?
Overall, the steps for creating a monthly budget are as follows: 1. Track your spending to determine where your money is going, 2. Divide your expenses into various categories, 3. Record your daily expenses, 4. Assess where you can cut your expenses and 5. Define your financial goals, make a plan and stick to it.
1. Track your spending to determine where your money is going. For a month or two jot down every single cent you spend, yes even that $3.75 caffe latte you sip at your daughter’s ballet practice and the chow mein meal you devour after dancing the night away with your girlfriends.
At the end of the month add the total expenditures and subtract this total from your net earnings to see whether or not you’ve spent more than you’ve earned. This calculator will show you how seemingly inconsequential purchases can add up over time. For instance, if you spend $2.50 on a daily coffee, it will cost you more than $900 per year. On the flip side, if you make small changes to your spending habits, such as reduce the amount of coffee you buy, this minor change can have a positive effect on your budget and your ability to save.
2. Examine what you spend money on during the 1 to 2 month period and divide your expenses into various categories. You could divide your expenses into broad categories such as housing, car, food, and then set up sub-categories within them. For instance, under the category housing, you could further divide it into mortgage payments, rent, utilities, and repairs.
3. Consistently keep a tab of your daily expenses. Write down all your purchases on a Post-it Note and keep it conveniently in your wallet. Then when you get home, transfer your purchases to an excel spreadsheet or a budget app. Here is an excellent budget calculator worth checking out.
4. Assess where you can cut your expenses. This is where the real fun begins. It’s now time to examine each category (see step 2) and determine where you can trim your expenses. You may be surprised by the seemingly minor purchases that are eating away at your credit card, such as the extra $50 you rack up at the grocery store simply because you are purchasing food when you are hungry or not adhering to a grocery list. Carefully review your spending habits and devise a list of items to par.
The accompanying activity might help you figure out which spending to cut from your budget. Divide your expenses into two classes: “needs” (e.g., groceries and utilities) and “wants” (e.g., tickets to a show). Assess your needs and wants. A need is something that is important, required or fundamental. For instance, a roof over your head, heat for your home, nourishment, clothing or medicine. On the contrary, a want is something that you’d like, however, don’t really require. Dinners at restaurants, coffee from Second Cup, tickets to a concert, a gym membership or designer clothes and shoes are examples of wants. Needs and wants aren’t the same for everybody. One individual’s want might be someone else’s need. Let me explain. If for instance, you live in a metropolitan area near a bus route, a car may be more of a want rather than a need. On the other hand, if you live in the suburbs, and don’t easily have access to public transportation or can’t walk or cycle to work, a car may be a need.
Some suggestions on how to cut your expenses include: borrowing books from your local library instead of buying them on Amazon; borrowing movies from the library instead of going to the movie theatre; running or walking outside instead of purchasing a gym membership; getting rid of one car and relying on public transportation; using the washer and dryer during off-peak hours; and shopping at discount food stores or using the app Flipp, which could help you price match and save on weekly food essentials. These changes no matter how small may save you hundreds or even thousands of dollars each year.
5. Define your financial goals, make a plan and stick to it. Creating a budget won’t magically transform your spending behaviour. You will need to consistently monitor your spending and define your goals and priorities and stick to them. Monitoring your spending could be done by consistently writing down your weekly budget and reviewing it to see if you are spending less than you earn. Whereas defining your goals involves sitting down and reflecting on where you want to be financially in a year, three years or five years from now. One important goal you should consider is to increase the amount of money you deposit into your savings account each year. Yet, this goal should be a priority only after you have paid off your debts because it won’t make sense to put money away while you are paying interest on your debts. Other goals that are worth attaining include setting up an emergency fund, paying off your mortgage in x amount of years or saving money for your children’s post-secondary school education.
What are some tips that could help you to adhere to your budget?
- Minimize your spending behaviour as much as possible to what is in your budget. try to stick to buying products and services that are needs rather than wants.
- Record your receipts and bills in your budget app or excel spreadsheet.
- List your income and expenses and compare the two at the end of the month to see if you are spending more than you earn.
- Evaluate your monthly budget to see if you are your spending greatly differs from your budget. If this is the case, you may need to reevaluate the figures to make it more sensible and realistic.
- When contrasting your budget with your actual spending, ask yourself the following:
- Are there huge or little differences between your actual spending and budget?
- Which categories have the biggest differences?
- Are differences due to an atypical circumstance (e.g., repairing the washer) or is this prone to happen every month?
- Are you able to save enough money to achieve your financial objectives or pay off your debts?
- Continue to reflect on your spending behaviour and to ask yourself these above questions every month.
- You are going in the right direction if your spending differs a bit from your budget.
Are you looking for more info on how to make smarter financial choices?
A great resource to check out is MyMoneyCoach.ca.
MyMoneyCoach.ca is a free public service provided by the Credit Counselling Society (CCS). The Credit Counselling Society is a non-profit, government registered, charitable organization dedicated to helping individuals and families find solutions to their debt and money problems. CCS provides consumers with confidential and free counselling services, credit education, and debt management programs.
About S & P Accounting Services
S & P Accounting Services is a professional accounting firm situated in North York, Ontario. We are chartered accountants with extensive experience with audit, review, tax and bookkeeping. We strive to operate in accordance with our principles of quality, professionalism, and integrity and are dedicated to excellent service. We aim to ensure that our clients receive the highest quality of financial, tax and accounting services and advice. We happily serve clients in Toronto, North York, Mississauga, Vaughan, Richmond Hill and in other cities in the GTA.
If you have any questions or inquiries about our accounting services, please contact S & P Accounting Services.
S&P Accounting Services LLP
2727 Steeles Ave. W. Suite 300
North York, ON, M3J 3G9
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