Paying attention to your cash flow is the first and most important step in taking control of your finances. This means knowing exactly how much money you have coming in and going out each month. If you don’t know how much you have to spend, save, invest and give each month it makes it very difficult to live within your means and easy to go down the dark rabbit-hole of high-interest debt. It’s also nearly impossible to meet your financial goals without a solid plan in place; a plan that stems from having a good grasp on your money situation.

Okay, so having a budget will allow you to make and achieve your financial goals AND help you avoid following Alice down the (debt) rabbit-hole but how do you actually MAKE a budget? Read these 5 steps then download our Cash Flow Snapshot Worksheet and actually create your own budget!

5 Steps to Creating a Budget that gets you on Track

1) Set or revisit your financial goals

Make a list of what you want to achieve in the short-, medium-, and long-term and make sure you set impactful goals. SMART goals are specific, measurable, attainable, realistic and time-based. Here are some ideas to get you started:

  1. Save up $2500 in a savings account for a trip to Paris by September 30, 2020
  2. Create an emergency fund of $10,000 in a savings account by December 31, 2020
  3. Pay off all credit card debt by April 15, 2020
  4. Invest $1000 per month until my 65th birthday to create a retirement fund.

2) Gather your financial information.

Start with your fixed inflows and outflows then list your variable inflows and outflows. Your fixed expenses will help accurately predict how much you will need to budget for whereas your variable expenses can act as a guide for your behaviours to help predict your future expenses.

  • Cash outflows: Collect your most recent receipts, bills, credit card statements, etc. to know what you spend in a month on expenses and recurring debt payments such as a mortgage, credit card debt, and car loans.
  • Cash inflows: Gather pay stubs, investing statements, bank statements, or any other record of how much income you collect each month. Remember to subtract deductions for taxes, health benefit contributions, EI and others to get a net income (take-home) figure. Include any extra sources of income from hobbies or rental properties.
  •  If you receive regular income, this will not be difficult; however, if your income is irregular you could use an average from your last 8-12 months of income. Another option is to choose your lowest, middle, or highest monthly income from the last 8-12 months depending on how conservative you wish your budget to be. Choosing the lowest income figure will provide you with a worst case scenario while choosing the highest income figure will demonstrate a best case scenario. Sybil cautions against using the highest income.

3) Create your budget!

 Enter this information into a budgeting template like this one. Create categories for your expenses and income sources to stay organized and keep things simple. Your categories can be as broad or as specific as you like as long as they make sense to you and allow you to use your budget to achieve your financial goals. Some general examples are automotive, household, food, and clothing. You can also use a pen and paper to create your budget but an electronic version will have increased functions to analyze where your money is going (and can do the math for you).

4) Review and double-check 

Check your figures to ensure they are giving you an accurate snapshot of your cash flow. Ask yourself these questions:

  1. Did you miss any income or expense items?
  2. Are your categories too broad (giving little awareness of how to change) or too specific (too time-consuming and not impactful)?
  3. Does your budget give an accurate snapshot of your financial situation? If not, what do you need to add, remove or change?

5) Make a plan to achieve your financial goals based on your budget.

Take a look at what your snapshot is telling you; what types of actions you can take to modify your behavior to reach your goals? Are you spending money where you don’t need to? Do you need to set up failsafes to help you follow through on your goals? Could you be a more efficient and effective spender and saver?

Here are some suggestions to achieve your goals:

  1. Set a specific dollar amount needed for the goal
  2. Set a deadline to achieve the goal by
  3. Calculate how much money per month is needed to accumulate the dollar amount by the goal deadline
  4. Look for ways to find that money by cutting out unnecessary or unimportant expenses such as cable bills, magazine subscriptions or parking
  5. Set up an automatic savings plan to a separate account. This is like a bill payment but the money gets saved without you thinking about it. This is a great failsafe to keep you disciplined.

Once you know what your overall goals are, you can create sub-goals to form a plan. Breaking down something that may seem too large to be achievable will help keep you accountable and motivated to achieve your larger goal. Here is an example of how you can create sub-goals to support your overall goal:

Now you know how to create your personal budget, the only thing preventing you from getting on the road to achieving your financial goals is you. Get out of your own way and download our worksheet and put your knowledge into action if you haven’t already.