I’ve been requested several times to write a post on how to do this, so here it is. I will be posting on how to cut your budget later.
FIND OUT YOUR NET INCOME
Gross income is what they tell you that you make when you’re negotiating a job offer.
Net income, is what you actually get in the bank account after everyone dips their paws into your honey pot and takes out their cut, and this would include:
- Prepaid taxes (also known as ‘tax withholdings’ in the U.S.
- Health insurance
- Social Security (also known as CPP or Canadian Pension Plan)
- Employment Insurance (EI in Canada)
- ..and whatever else you have to pay for out of your cheque
If you don’t know your net income, you should at least know how often you get paid*, so look at the NET amount that gets put into your bank account or is printed on your cheque, then figure out what it should be monthly.
So if you get $2000 in your bank account bi-weekly (every 2 weeks), you earn $4000 net a month.
THAT is what you should budget with.
*Because everyone loves payday. It’s my favourite day of the week.
You also do not have to break it down the way I have with categories.
Pick and choose what works for you.
FIND OUT WHAT YOU SPEND AS FIXED EXPENSES
Now you’re wondering WTF a “fixed” expense is. It’s basically anything you MUST pay each month that doesn’t change as an amount.
This is stuff like Rent, or even your Cellphone if you don’t go over your minutes or data plan.
If you want a general idea of what fixed expenses are, here’s it is.
A GENERAL LIST OF FIXED EXPENSES
Just make a list of all the categories.
- Mortgage Payments
- Car Payment
- Debt Repayment (your minimums, assuming you aren’t incurring more debt)
- Cellphone (assuming you don’t go over your minutes and/or have an unlimited plan)
- Health Insurance
- Car Insurance
- Home Insurance
- Transportation — This can be a fixed expenses if you buy a metropass for instance
FIND OUT WHAT CATEGORIES YOU HAVE LEFT THAT ARE VARIABLE EXPENSES
Just like fixed expenses, you have variable ones that are under your control each month.
For the second part of your budget, figure out what your NECESSARY variable expenses are. This does not include eating out or entertainment.
I’m even debating putting Cellphone/Telephone/Internet on there as “necessary”, but for the sake of normalcy, let’s call them necessary.
Those are UNNECESSARY variable expenses for the purposes of setting budget priorities.
A GENERAL LIST OF NECESSARY VARIABLE EXPENSES
- Utilities to run the home — Electricity, Gas, Water, Heat
- Office — Postage, Delivery, Paper, Pens, Pencils and so on
- Household Supplies — Toilet paper, Cleaning supplies
- Toiletries — Toothpaste, Soap, Toothbrush, Floss, Shampoo, Conditioner
- Medicine — Vitamins, prescriptions, pills
- Parking/Gas — If you have a car
- Pet Food
- Basic Clothing
- Grooming — For a haircut twice a year
- Home maintenance
- Furniture purchases
Now that you have fixed expenses, you should list all the rest that is technically “fun” and unnecessary.
A GENERAL LIST OF UNNECESSARY VARIABLE EXPENSES
- Eating Out
- Alcohol — Drinking
- Clothing — Beyond Wardrobe Essentials (even my list is a bit over the top..)
- Starbucks/Teavana — Buying coffee outside, or other drinks
- Spa — Facials, Massages
- Grooming — Beyond just a haircut, includes Manicures, Pedicures
- Books/Magazines — There is a library for a reason
- Fees — They’re generally unnecessary if you avoid ATMs and incurring fees
THE CATEGORIES ARE FINISHED, NOW ESTIMATE ALLOCATING MONEY TO THEM
You will notice that you have separated your budget categories out by Fixed, Necessary Variable and Unnecessary Variable.
Those are your PRIORITIES of where you should think about adding or cutting money as required.
The actual budgeting comes in, when you apply percentages to them — here’s an ideal household budget with its percentages.
So if for instance, you’re spending more than 35% on Shelter, and more than 25% on Life (going out, eating, having fun), you need to either cut back in one or the other.
I’d actually try and cut back on ALL the expenses, including fixed ones (get a roommate, move to a cheaper apartment that’s a studio not a 1-bedroom), and see what you end up with.
You can’t have everything if you don’t have the net income to pay for it and save money.
Remember to use your net income against those percentages.
You probably haven’t been tracking your expenses at all, so in the meantime just estimate what you THINK it costs, track your expenses, and see what the actual cost per month turns out to be.
At the end of the first month, you will probably notice (as I did), that what I THOUGHT I spent, was way off from what I actually spent. In a bad way.
Once you continue to diligently track your expenses, and learn where you make mistakes, adjust your budget accordingly.
SOME BASIC BUDGETING NUMBERS TO START WITH
Here are some basic personal amounts to start with, and you can adjust as you go along your budgeting path:
(Real numbers are better, especially for fixed expenses like rent or mortgage or your debt.)
Note: These numbers are for a single person renting an apartment in Canada without a car and no debt.
- Rent: $700
- Apartment Insurance: $15
- Cellphone: $50
- Transportation: $130
- Groceries: $200
- Utilities: $50
- Household Supplies: $25
- Toiletries/Medicine: $25
- Parking/Gas: $250
- Internet: $50
- Clothing & Gifts: $50
- Eating Out: $50
Total = $1595 a month
As you run through the list, you may be thinking: Hey I pay more/less than that!
That’s where you have to adjust for yourself, and add in or remove categories that don’t apply to you.