A bank account where you can put your money to save it for future expenses.
An agreement to use money that belongs to someone else and pay it back at a later date.
Extra money paid to someone else when you borrow money or money that may be paid to you when you have invested money.
Financial protection against possible loss or damage. You could have insurance on your house, car or life. In the event of accidental damage to the insured property or person, you would receive money to help deal with the situation.
The amount of money a person has coming in to their household.
Harmonized Sales Tax. A tax that, in BC, is 12% added on to most goods and services that you buy. (There are some items that are exempt, or are not charged, HST.)
Items that money is spent on, such as rent, food, bus fare and clothing.
A card that represents a credit agreement. A bank or financial institution may give a credit card that can be used to pay for goods or services before the money is actually deposited in the account. The credit card owner agrees to pay back the borrowed money at a designated time. If full payment is not made on the payment date, interest will usually be charged.
Money that a bank, business, or person allows someone else to use and then pay back in the future.
A benefit received from the Government of Canada that provides financial assistance to help eligible families pay for some of the costs of raising their children who are under the age of 18.
A piece of paper that you can use to give permission for a bank to give money from your bank account to someone else. You can use cheques instead of cash. Cheques are usually printed by your bank and you fill in the information about who you want to give the money to and how much money you want to give, and then sign it. The amount you write on the cheque is withdrawn from your account, by the bank, and given to the person/business to which you wrote the cheque.
A document used to organize and track income and expenses.
This section gives you a good understanding of what a budget is, shows you how to create one, and helps you stay on track once your budget is created. It is broken down into three subsections:
How Does a Budget Work?
Before we can discuss how a budget works, we first need to understand what a budget is. A budget is a document that lists all the income you expect to come into your household (money in) compared to all the expenses you expect to pay out (money out). Often people find it easier to make a budget than to stick to the budget. But, like anything else in life, budgeting takes practice and the more you practice the better you will be at it.
A budget is a great tool to help you become more financially fit. It helps you understand where your money comes from and where it goes. It’s easy to spend a couple bucks on a cup of coffee or to grab some fast food because, at the time, it’s only a couple bucks. But when you start to add those costs up over time, they can become a huge expense and a big part of the reason that you don’t have enough money for the things you really want! A budget not only helps you look at where your money is going, it helps you plan for future goals that could include buying a house or car, taking a vacation, or saving for retirement.
The important thing to remember when you create a budget is that you’re creating it for you. You might want to save money, pay off debt, or just keep track of where you’re spending your money. Your reasons for keeping a budget will probably change over time. No matter what your reason is for creating and following a budget, your budget needs to be realistic, flexible, and accessible for you.
If your budget is not realistic (perhaps it leaves out some items that you really can’t live without), you are more likely to abandon your budget and go back to your old spending habits. However, no matter how carefully you plan your budget, unexpected expenses still come up. Your budget needs to be flexible so you can adjust for those situations without feeling that you need to give up the budget completely. Finally, a budget is more accessible if you keep it simple and usable. When your budget is easy to understand and use, you are more likely to stick to it.
Understanding Income and Expenses
Since budgets are based on money in (income) and money out (expenses), knowing your potential income and expenses for a given month is the key to a successful budget.
Income is any money you have coming in to your household. It could include wages or earnings; benefits you receive from the government such as child tax credit, HST rebates, and child care subsidies; tips (if you’re in the service industry); and investment income (savings accounts that pay interest or interest on investments). The money you receive from all of these sources added together is your income.
When you plan your budget, estimate your monthly income based on your regular income sources. Although unexpected sources of money, such as a “bonus” cheque, surprise inheritance, or lottery win, also count as income, they don’t happen for many people and can’t be counted on. If you’re fortunate to receive some money that you weren’t expecting, you can always add it to your budget later.
Expenses are everything that you pay for during the month. Expenses include major items, such as rent/mortgage payments, debt or loan payments, utility bills (including hydro, natural gas, oil, water/sewer, telephone, cable, and so on), childcare fees, groceries, insurance payments, transportation, dining out, as well as miscellaneous items, such as gifts, haircuts, and pet expenses, coffee, magazines, lottery tickets, and so on.
The important thing to remember when you create a budget is that you’re creating it for you.
Expenses can be a little more difficult to predict because our lives are always changing and we often don’t notice the little things we spend money on. It’s helpful to look back over the months to see what kind of expenses you had in the past and use that information to help you with your budget.
Identifying Needs and Wants
On a simple level, needs are those things you must have while wants are things that you would like to have but could live without. In reality, determining which items are needs and which are wants can be quite challenging. When planning a family budget, in particular, the topic can become a heated discussion because everyone’s interpretation of needs and wants is different!
We know the basic needs for survival are food, water, and shelter. We also understand that this is the very minimum of our needs and a budget must be realistic. If you leave out items that are really important to you or your family members, you won’t be able to stick to your budget. When you plan a budget, it is worth the time and effort to sit down with your partner/significant other and other family members to discuss what the family’s needs and what they want.
Further complicating needs and wants is that items you need may have different levels of cost. For example, you might need a cell phone for work, pleasure, or communicating with family. However, do you need the top of the line cell phone plan or can you get by with a less expensive plan? Only you can make that decision. If you decide that you must have the better cell phone plan, then include that cost in your budget. To afford it, you may need to sacrifice something else that you want.
Other things to take into consideration are expenses that don’t have to be as costly. Do you need to have a brand new bike? How about skates, snowboard, or winter coat? There are many good deals to be found at second hand stores or in the classifieds. Although it may take a bit more effort to find what you’re looking for, there are many good deals out there and the savings could be significant!
Discussing these issues will help you and your family set your priorities.
Getting Started on Your Budget
You can use these steps to create your own budget or simply copy the template on the following page.
- List all potential sources of income for each month.
- List all potential expenses.
- Make sure your expenses aren’t greater than your income. This is the tricky part where you need to take a good, hard look at where your money is going (especially the wants) and adjust it to suit your personal priorities.
- If the expenses are greater, look at which categories you can cut back on so that your expenses equal your income or, ideally, that there is some income left over after expenses. Remember your budget has to be flexible, realistic, and fair. Don’t make your budget too difficult to stick to and be sure there is money set aside for things you enjoy.
- Evaluate and adjust. Remember your budget will change as your day-to-day life changes. The key to a successful budget is recognizing the changes and having the ability to adjust your budget as needed.
Recognizing Budget Blowers
Budget blowers are those purchases we make that don’t fit into our budget. Sometimes, we make the purchase and don’t think about the impact on our budget until later and, sometimes, we think about the impact but make the purchase anyway.
One of the biggest budget blowers are those “little” expenses—a morning coffee, a soft drink, a lottery ticket. It’s important to remember that small purchases add up over time and these “little” costs can do a lot of damage to our budgeting efforts.
For example, many people like a nice, hot latte on their way to work. After all, there’s nothing wrong with a little coffee to jump start your work day…and it’s only pocket change, so it won’t impact your budget…right?
Well, you be the judge. On average, a latte costs $5. If you stop for a latte every day on your way to work, it will cost you $25 a week! Here’s a snapshot on how that adds up over a year:
Daily Latte Cost = $5
Weekly Latte Cost = $25
Monthly Latte Cost = $100
Yearly Latte Cost = $1200
$1200 is enough money to insure your car for year or go on a vacation!
Another sneaky budget blower can be found lurking in your relationships. Maybe you have a friend or relative who’s always asking to borrow money. You want to help them out and they only need a little bit like five or ten dollars. However, these small loans can add up quickly, especially when they don’t pay you back. If you lend a friend $10 a month and they never paid you back, it’s like throwing $120 dollars out the window each year.
We’ve covered two examples of budget blowers, but it’s important to know there are a lot more. Budget blowers include shopping trips, gambling (bingo, casino, poker nights), online auctions, buying tabloid magazines, and any other expenses that you haven’t included in your budget. To be successful with your budget and achieve your financial goals, you need to be aware of budget blowers that get you off track and have a plan to address them. For example, if you like to read the weekly gossip magazine that costs $5, you could spend $20 a month. But, if you start a magazine exchange group with three of your friends, you could take turns buying the magazine and then circulate one copy. This would bring your costs down to $5 a month and you would save $15 each month and still get to read all the latest gossip!
|Magazine Budget Blower||Magazine Budget Balancer|
|Weekly Cost $5||Weekly Cost $5 (but only one week per month)|
|Monthly Cost $20||Monthly Cost $5|
|Yearly Cost $260||Yearly Cost $60|
|Budget Blower $260!||Savings $200|
How to Organize and Track Spending
Keeping track of where your money comes from and where it goes is the most important step in understanding your spending habits. Have you ever found yourself asking the question “Where did all my money go just a few days after payday?” Well, the good news is that tools and tips are available to help you keep organized and on track with your spending.
Keep track of every penny in and every penny out.A spending journal is a cost effective method to help you track your spending and stay organized. All you need is small notebook or pocket calendar. Shop around and see if you can find one with a folder to hold receipts.
For just a few dollars you can use this tool to track your spending for the entire year. Each time you make a purchase keep your receipt and enter the purchase in the notebook / calendar. Once a week, add up all your receipts and make sure they match your notes and are entered in your notebook / calendar. At least once a month, add up all your spending and compare it to your budget.
This low cost method is helpful for people who are visual learners and want to keep things simple.
To track your spending using cash envelopes, simply label each envelope with the appropriate expense and put the appropriate amount of money in the envelope. You may want to have two categories of envelopes; one for needs and one for wants. When you have used up the money in an envelope, you cannot spend any more money on that expense unless you adjust your budget.
For example, if you budget $30 a month for dining out, you would put $30 in an envelope labelled dining out. If you go out for lunch three times and spend $10 each time, you would have no money left to dine out for the rest of the month. If you really wanted to go out to eat again, you would have to adjust your budget to find money in some other category that you could spend on dining out.
Important: If you use cash envelopes to manage your money, be sure you keep them in a safe place.
|Rent or Mortgage||Movie with Spouse|
|Hydro||Swimming with Family|
|Phone||Savings Account for New Couch|
|Gas and Insurance|
Electronic Budget Tracking
There are hundreds of free tools available on the Internet that can help you track your expenses electronically. Your financial institution may also offer personal finance trackers that can assist you in tracking your expenses. Some of these tools are linked directly to your online banking services making this option very simple and convenient.
The most important thing to remember is to record every time you spend money—whether you are paying bills or buying a lottery ticket or paying for a fitness class—write it down. Keep track of every penny in and every penny out. Increasing your awareness of where your money goes will help you take control of your financial situation. When you are aware of what spending habits are getting you off budget, you can take corrective action to get back on track.
You may think that tracking expenses is a lot of work, but once you get into the habit, it does get easier and will become second nature. If you take the time to make a budget you owe it to yourself to stick to it. Tracking your expenses helps you to determine if your budget is working and, if it isn’t, where you need to make changes.
What to Do When You Get Off Track
If you’ve ever used a GPS to help navigate to a destination, then you know that if you take a wrong turn, a friendly voice will announce “recalculating.” Well, that’s what you need to do if you have gone off track from your budget—you need to recalculate.
First of all, recognize that making the budget is the first step. If you’ve taken the time to make the budget, then you are off to a strong start. If you’ve gone off track, it indicates that something isn’t working and you need to reassess. Ask yourself these questions:
- Where did I go off track?
- How did I go off track (for example, using the credit card or borrowing money)?
- How much did I go off track?
Then you need to recalculate. If increasing your money in is not an option, you will need to trim your expenses somewhere.
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