A budget can help you:
- keep track of your income and expenses
- stay on top of your monthly bills
- be prepared for unexpected expenses
- avoid overspending
- figure out how much you need to save to meet your financial goals.
5 components of a budget
- Income after taxes – This is the amount of money you have to work with every month. If you’re self-employed, a seasonal or part-time worker, or paid by commission, your income may vary. To create your monthly budget, take your annual income and divide by 12. Use this amount as your monthly income.
- Fixed monthly expenses – These expenses tend to stay the same (or close to the same) from month to month. They include bills such as your rent or mortgage, cable, Internet, utilities and fixed loan repayments.
- Variable expenses – These expenses change from month to month. They include things like gas, groceries, your daily coffee, meals out and entertainment expenses.
- Occasional expenses – These expenses come up from time to time, such as clothing, gifts and vacations.
- Savings – Make room in your budget for short-term emergency savings and longer-term savings to help you reach your financial goals.
If you’re self-employed, a seasonal or part-time worker, or paid by commission, your income may vary. To create your monthly budget, take your annual income and divide by 12. Use this amount as your monthly income.
Figure out your variable expenses
Use reasonable estimates to create your first budget. Then, track your spending over the next few months. Jot down every purchase in a notebook, keep receipts for everything or create a spreadsheet. After tracking your spending for a few months, go back to your budget and adjust it if you need to.
Plan for occasional expenses
Include room in your budget for expenses that come up from time to time, such as clothing, gifts and vacations. Learn more about planning for occasional expenses.
Budgets are for saving too
Pay yourself first – make savings a part of your budget. Plan to have this amount moved to a savings account as soon as your pay cheque gets deposited. When you make it automatic, it's easier to save.
If you have some money left over in your budget after you have paid the bills, add to your savings. Build an emergency fund for unexpected bills that come up (like a furnace that breaks in January). The more you save, the sooner you’ll reach your financial goals.
Balancing your budget
If you’re new to budgeting, your budget may not balance the first time you try. You might have to look for places where you can spend less and make adjustments along the way.