Keeping a Sensible Budget

A budget is simply an account of income and expenditure, useful because it replaces a vague impression with figures which may be acted upon.

Many men earn, spend, and inspect the balance only when anxiety suggests it, after which they experience the familiar surprise of finding less than expected. Surprise has never been a satisfactory accounting method.

Use a spreadsheet, notebook, or suitable application, whichever you will actually continue to use. Record every sum which comes in and every sum which goes out; approximation is the method being replaced.

Begin with fixed costs: rent or mortgage, utilities, insurance, transport, debt payments, and subscriptions. The last category commonly contains one or two services which have been forgotten; cancel them before subtracting the total from income.

What remains must cover variable necessities, savings, and discretionary spending. Food, household supplies, clothing, and some transport costs are necessary even though their amounts vary. Social activity and other optional purchases belong in a separate category. Seeing these figures plainly is the single most useful thing a budget does.

Allocate savings before optional spending where your income permits it. A fixed amount transferred when you are paid is easier to maintain than a hopeful calculation at the end of the month. Ten per cent is a common example, though no percentage suits every income, household, or period of life.

The first reserve should usually cover emergencies and irregular costs: a repair, an annual bill, a period without income. High-interest debt may deserve priority over further general saving, while an employer contribution to a pension or retirement account may alter the calculation. Record these decisions instead of relying upon a rule which was devised for somebody else’s household.

For the first month, change nothing and confine yourself to recording. The review will probably reveal a category of small purchases whose total bears little resemblance to the harmless impression made by each one. Elimination is not always required, but visibility is.

Adjust modestly, since a severe budget is difficult to maintain and often followed by an equally severe rebound. One additional meal cooked at home, a lower subscription tier, or a weekly allowance checked in the middle of the week is more likely to survive than a month in which every ordinary pleasure has been forbidden.

A budget allows you to enjoy your money deliberately. That is more satisfying than wondering, again, where it went.

Further guidance

• Making a budget, Financial Consumer Agency of Canada
• Paying back your debt, Financial Consumer Agency of Canada