Mark Heissler, money expert
budgetingcanada
(Sep.25.07)
Julie K. of Toronto, Ont. emailed us at expert@sweetspot.ca: How do I create a personal budget (and how do I decide how much to save and how much to spend)?
…and our money expert, Mark Heissler, answered:
While creating and working towards a budget are on your to-do list, getting them crossed off probably doesn’t happen too often. That said, working out a budget (a finance plan that allocates future personal income towards expenses, savings and debt repayment) is a great way to discover where all of your hard-earned cash is going.
Where to start. There are several guidelines to use when allocating money for a budget. Past spending is one of the most important priorities; a critical step in most personal budgeting strategies involves keeping track of expenses via receipts over the past month, which can then be reconciled with budgeted spending for the next month. You’ll be amazed to find out where all of your money is really going! One of the simplest ways to budget is "The 60% Solution" which follows the basic idea that all your essential spending (taxes, food, shelter, clothing and other living expenses) comes out of the first 60% of your gross income. The rest is devoted to retirement, long-term savings, short-term savings for irregular expenses and fun money.
Be flexible. Make sure to keep it simple and flexible: A budget will change from month to month, and require review as often. Cost overruns in one category should in the next month be accounted for or prevented. For example, if you spend $100 more than you planned on eating out in spite of your best efforts, next month's budget should reflect an approximate $100 increase and corresponding decrease in other parts of the budget. Don't be too hard on yourself if you "bust the budget" as it is a common pitfall. Anticipating budget-busting events and modifying your money allocations accordingly will provide a level of flexibility with your income and expenses.
Getting it on paper. There are several methods and tools available for creating, using and adjusting a personal budget with some of the easiest being spreadsheets and money management software like Quicken and Microsoft Money as they all allow you to change the data without having to rewrite the budget.
Mark Heissler, B.Comm, is a financial risk management specialist with a background in Canadian and European financial markets.