Module 1: How do I prepare a budget?

From: Financial Consumer Agency of Canada

Transcript

How do I prepare a budget?

Narrator: How do I prepare a budget?

Budgeting is the first step in managing your money.

It doesn’t have to be hard, complicated or full of sacrifice.

Twitter exchange (on-screen)

Sarah: @vince Hot deal on the coolest boots! Half price for only $250 #loveshopping

Vince: @sarah More shopping? We're saving to go to Cali in a few months, remember?

@FCACan Help! My girlfriend is a shopaholic! #howtosave

Narrator: You may be asking yourself: why is managing your money so important?  We’ll start by answering that question.  Then we’ll look at how to create a budget, how to know the difference between wants and needs, and then we’ll share some easy ways to reduce your expenses.

Managing your money

Narrator: Learning how to manage your money can determine what you can do and where you can go in life. The first step on the path to financial success means understanding that you are in control of your financial future.

By developing good money management skills, you can save money, plan for your future, pay off your debt, achieve financial independence, and become a savvy consumer.

Twitter exchange (on-screen)

Sarah: @vince Shopaholic, huh? You should do a bit more shopping yourself … especially gifts for me

Vince: @sarah Actually, I got you something today! It's called a #budget

Steps to create a budget

Narrator: Do you cringe when you hear the word “budget”?  Sure, a budget involves a bit of work on your part.  But the payoff is financial control and peace of mind. A budget will help you understand how much money you have coming in and how much money is going out. If the amount going out is more than the amount coming in – there’s a problem!

Let’s start by reviewing what you make and what you spend each month.

Step 1. Add up your monthly income. This is the easy part. We don’t often have many sources of income. Money coming in could be your income from employment, an allowance, or interest.

Step 2. Add up all your monthly expenses.

First we will look at fixed expenses. Fixed expenses are those that come up every month and are roughly the same amount each month.  Things like housing, insurance, utilities, or telecom services like cable or internet.

Next, list your variable expenses.  These expenses can change each month.  Things like groceries, eating out, transportation, clothing, and entertainment.

The final type of expenses are irregular or periodic expenses, that don’t occur every month, and include things such as tuition, travel, car repairs, gifts, and other unexpected costs. Every good budget should include these expenses.   

You can account for irregular expenses by budgeting a set amount, say fifty dollars every month, for unexpected costs. Or by spreading a known expense, like tuition, over several months so you have the entire amount saved when you need it. 

Step 3. Subtract the expenses from your monthly income.  If you have a surplus, think about what you can do with it.  Maybe start an emergency fund, or make an extra payment on a loan. 

If you always have something left over every month, add a Savings category to your budget.  Saving some money every month is a good habit to get into.

If your expenses are more than your total income, you have a deficit and you need to cut back on non-essential items.  That is, knowing the difference between wants and needs.  More on that later. 

Let’s review the three steps again:

Step 1: Add up monthly income

Step 2: Add up monthly expenses

Step 3: Subtract expenses from income

The Financial Consumer Agency of Canada has a Budget Calculator that allows you to enter your income, savings and expenses into an interactive  tool.  The Budget Calculator will do the adding and subtracting for you. There is also a Student Budget Calculator available. 

Once your numbers are set – stick to them! Learning to stick to a budget can seem difficult at first, but the more you use your budget, the easier it will become.

Evaluate your budget from time-to-time.  Circumstances change.  Life changes. So you want to make sure that your budget applies to your current situation. 

We’ve just looked at adding up your expenses as part of your budget but many of us have trouble keeping track of all our expenses.

The best way to keep track of expenses is to record them as soon as possible.   Record all purchases,  bill payments and savings.  Keep receipts and use them to check your bills at the end of the month and to keep track of cash payments. 

Once you start tracking your spending it’s easy to know where your money is going. Then you can make adjustments to your spending habits as needed.

Even if your current expenses are less than your income, this is a valuable exercise to complete.

Twitter exchange (on-screen)

Sarah: @vince Ha! Nice one! My budget is as red as my face! #embarrassed How about an iced cappuccino for my bruised ego?

Vince: C’mon @Sarah! You’re saving, remember?  Think about how to cut back on your expenses.

Wants versus Needs

Narrator: An excellent way of reducing expenses is to understand the difference between a want and a need and cut back on wants.  A want is something nice to have, while a need is something essential.

For example, shopping is not always a need. You may want another pair of boots, but you don’t always need them.  …Of course clothing is a need, but a need that you can fulfill more economically.

Examples of needs include food, shelter, clothing, electricity and transportation.

And for wants how about electronic gadgets, eating out, video games, travel, sports events and concerts.

What are the WANTS in your life? By identifying the WANTS and making an effort to reduce your spending on these items you will find enormous satisfaction and hopefully a balanced budget!

Twitter exchange (on-screen)

Vince @sarah Great job on balancing your budget.  I can’t believe you returned the boots! California, here we come!!

Sarah @vince Thanks for the support! It’s fun saving money. I even returned the very expensive birthday gift I bought for you! Ha ha

Vince @sarah WHAT?!?!  No need to go overboard. ;-)

Reduce your expenses

Narrator: Looking for more ways to reduce your expenses?  Whatever your age or income, there are always changes you can make to your spending habits.  Remember, small savings add up quickly.

  • Take advantage of seasonal sales.
  • Shop around and negotiate.
  • Use free services like your local library.
  • Scale back on the nice-to-haves.
  • Replace a product when necessary, not because the newer version came out. 

Twitter exchange (on-screen)

Vince: @sarah Did you really return my b-day gift? I guess it’s okay…

Sarah: @vince Just following your advice. You told me not to buy anything! ;)

Vince: @sarah I know, but ... 

Sarah: @vince Just kidding. I got you something!  Not as expensive but just as sweet as you!  xox

What did we learn?

Narrator: Let’s summarize what we’ve learned today.

We’ve talked about the importance of managing your spending.  Studies show that people who are in control of their finances have greater peace of mind.

We discussed how to track spending and create a budget and how to categorize your spending into wants and needs. 

And finally there are many excellent ways to lower your expenses, such as buying on sale and using free services.

I know this isn’t always easy to do, but take it slowly, step by step, and enjoy each victory you achieve. 

I wish you financial success.

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