Budgeting Basics: Planning for your income and expenses in 2023

In today’s economy, it seems like everything is going up – inflation is up, interest rates are up, food and fuel prices are up, rents and mortgages are up. This means that having control over your finances is more important than ever before. What’s the best way to have and keep control? A budget. If you have questions about budgeting, we have answers.

What is a budget?

A budget is a detailed plan of your income and expenses that is usually done monthly, but the frequency can be whatever works best for you, such as every payday (paycheck planner). It is the first and most important step in maximizing the power of your money to achieve both short-term and long-term financial goals. It takes planning, discipline, and decision-making. Without a budget, you may not be able to control your unmonitored finances and will always fall short of your goals. It is crucial to know what is coming in and how it’s going out.

Who should budget?

Everyone should budget their money regardless of how much or how little they make. It is recommended that you begin budgeting as a youth or teenager, with your allowance or first job. Budgeting is a skill that can be taught at any age but must begin at home because many schools do not teach this fundamental life skill.

Why should I budget?

A budget provides awareness, and control, and reduces financial stress. However, budgeting has other advantages, such as:

• Making sure you don’t spend more than you earn
• Helping you save for unexpected expenses by having a nest egg
• Identifying exactly where your money goes and what may be costing you too much
• Providing certainty in knowing what you can afford when making your shopping list
• Helping you meet your long-term goals, such as saving for a down payment on a house
• Creating a natural habit of distinguishing between a want and a need
• Feeling less fearful about your finances by addressing issues as they arise rather than avoiding them
• Making you feel better knowing you’re in charge of your financial future

How do I create a budget?

Well, you could start with a simple pen and paper.

Make three columns on a piece of paper. One column will be for listing your income from all sources; another for expenses that MUST be paid without fail (rent / mortgage, car payments, insurance, phone, and power); and the last column will be for regular expenses where you have some wiggle room for adjustments (food, gas, clothing, debt repayment, entertainment, gifts, savings, etc.).

Add up all your necessary expenses and subtract that amount from your total income. The remaining amount is what you have left for other expenses, and it’s those expenses that you should examine closely to see where you can make changes to fit your budget. If you’re constantly going over your budget, identify the main culprits and ask yourself if you’re exercising enough self-control. Are you eating out too frequently instead of cooking at home? Do you choose name brands over store brands? Are you buying things on sale but never using them? Are you making too many payments on the same day, leaving you short until the next payday? Are you paying in cash?

Never underestimate the value of cash. A cash budget is very effective because it serves as a physical, visual reminder of how much money you really have. Take a few envelopes and label them food, gas, clothing, debt repayment, entertainment, and savings. Split up your cash into each envelope based on your budget. Spend out of the envelopes and keep your receipts to hold yourself accountable and identify areas where you can save. Make a habit of leaving your debit and credit cards at home. Whatever remains at the end should be put towards savings, an emergency fund, or debt repayment. We recommend that you pay off your debt as soon as possible.

As you gain confidence, you can progress to digital options such as free apps or online templates to help you stay organized. Make it work for you, not against you.

Here are some more excellent budgeting tips:

• Check when your automatic bill payments are made and consider changing the day of the month if they are not evenly spread out over each paycheck.
• Use the Calendar feature on your device to set recurring reminders so you don’t have to scramble or deal with costly NSF fees. Some financial institutions charge up to $50 for a returned payment, which can be equivalent to a day’s worth of food for a family of four.
• Use online banking to pay bills like insurance, internet, and phone.
• Pay other bills as soon as they arrive. Don’t wait until the due date.
• Pay off your entire credit card balance weekly and you will no longer have to worry about interest.
• Make a grocery list and stick to it. Create a column for estimated costs of each item so you know exactly how much you’ll spend. Don’t go grocery shopping when you’re hungry.
• Consider no-name versus brand-name products. A brand name can simply be brand marketing and has no bearing on the quality of a product, whether it’s food, clothing, or electronics.
• Quit or reduce major habits such as smoking and drinking.
• Cut back on eating out and cook more at home. Dining out is a major expense for many people. It is cheaper to plan your meals for the week using ingredients that are on sale.
• Shop for used items in thrift stores or browse online marketplaces before buying new.
• Consider switching credit cards for ones with lower interest rates and better loyalty programs. Applying for too many credit cards at once will hurt your credit score. You can find credit card comparison tools online. There is nothing wrong with having only one credit card.
• If you recently paid off a car, keep it for as many years as possible to save on car payments. Use the savings to make a down payment on a new or used replacement when the time comes. A new vehicle requires less maintenance but consider the monthly maintenance costs of an existing vehicle versus the monthly payment of another vehicle. If possible, vehicle loans should not exceed a 60-month payback period to avoid paying more interest.
• Look through local flyers for competitive pricing; see if your favorite store offers price-matching.
• Remember that a sale is only a good deal if it’s something you’ll use.
• Consider walking or biking instead of driving for short distances.
• Direct tax refunds and GST cheques to savings or an emergency fund.
• Create an emergency fund! If you saved $5 per day for a year, you would have $1825.
• Take your time and think about the purchase you are about to make.

Introduce your children to budgeting

As mentioned earlier, many schools do not teach money management, so most children grow up not knowing that saving money or keeping track of their spending is an important skill to have. It can begin at young age at home with their allowance.

If your child gets $20 per week and spends it all in one day, they must wait until their next allowance date; do not give them more money. It will be appreciated if you teach them to save some of their money for later in the week.

It might also be a good time to teach them about taxes. Teaching them to save 15 percent of their allowance in a savings account will give them some real perspective into the consumer world, but they will still be able to keep their 15 percent for later use.

Another fun exercise would be to pretend to be a shopkeeper. Ask your child what they spent most of their allowance on. It could be treats and snacks, games, clothing, books, or makeup. Buy those things yourself, and have your child buy them from you, including taxes. Having a homemade store would be less intimidating and appealing to kids. They’ll be able to pick the items they like or need without being overwhelmed by options.

You can start talking to your child about setting goals, borrowing money, interest costs, savings accounts, student loans, insurance, and retirement as they get older.

Start the budgeting process now and reap the benefits later. Control your earnings, meet your goals, eliminate financial stress, and maintain good financial health.