Step 4: Design & Plan Your Budget
Many people don’t like the word "budget" because they think it means limitations, deprivation and no money to spend on the fun stuff. Relax, your budget is your spending plan – it will allow you to live within your means, avoid the stress of money troubles and give you the freedom to make choices with what you have. Most importantly, a budget will allow you to map your way to reaching your goals. Remember the goals you created in Step 1?
Before you can go any further, you need to ensure that your expenses are not more than your income. This is where you need to make some choices based on what you learned when you tracked your spending and when you separated your needs from your wants. Expenses include everything you spend your money on, not just the bills. Money you deposit to your children’s RESP is an expense. Money you deposit into your savings account for your vacation next year is also an expense.
Turn back to your Budget Worksheet that you filled out, and use the "revised" column to make your budget balance – your total spending can not be more than your total income. Also, ask yourself, will this budget allow me to reach my goals? This might mean that you are not able to spend as much in one area of your budget as you did in the past. Your money could be needed somewhere else in your budget. If you have a surplus, you need to make some choices about what to do with the extra money and may want to add it to your savings for now.
Protecting Yourself Against Financial Disaster - Emergency Savings
If you are experiencing financial difficulty, savings may be the furthest thing from your mind, however, even during this time, it is vital that you plan to have money for the unexpected. Setting money aside for savings is the difference between having a budget that works and one that doesn’t. Not only does it protect you from financial disaster, it also helps you to meet your financial goals.
People who have savings available to pay for living costs and seasonal expenses if an emergency arises, do not need to rely on credit that they may not be able to afford to pay back.
Emergency savings covers your basic living costs in case there are changes in your income. For example, in the event of a job loss, it typically takes 3 months to get back on track with either a new source of income or outside assistance. During this time, you still need money for rent, groceries and other essentials; this is what your emergency savings is for. If you face an expensive car or home repair bill, emergency savings will be available to pay for it. Using income tax refund money, unexpected bonuses or gift money can jump start the emergency savings account. For more places to find money to create emergency savings, click here.
In addition to emergency savings, it is necessary to have general savings which you can use to meet your financial goals and ensure your sound financial future. Some people refer to this as "paying yourself first." This savings is for the seasonal expenses you identified in your budget as well as for your goals. The best way to build savings is to have the money put aside before you see it. Talk to your bank or credit union about automatic transfers to savings accounts each time you are paid.
How Much Should You Save?
There is no magic number that tells you what you should be saving each month. It depends on your income level, your debt load, your life stage, if you are employed, unemployed or retired as well as your financial goals.
At first you may find it difficult to set savings aside. If you have outstanding debts to pay or you aren’t in the habit of saving, it's important to get started. Save a small amount from each pay cheque at first and increase the amount as you are able to. You’ll be amazed at how quickly your savings can add up once you just get started!
Next Up: Put Your Spending Plan into Action
Match your spending to when you receive your income. Decide ahead of time what you’ll use each pay cheque for. Ask yourself: Have I allocated money for my necessities (housing, food, utilities, transportation, etc.)? Have I put money aside for my debt payments, unexpected expenses, savings and the fun stuff? This will protect you from going into debt further because you won’t rely on credit to pay for your living expenses.