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Budgeting basics

Well-managed income. Highly positive outcome.

Are you making the best use of your money? Getting a good handle on your current expenses begins with establishing a budget – and sticking to it. Here are some steps to help make sure you stay on track financially.

Some people think budgeting is like dieting; depriving yourself of things you want to make up for overindulging. Budgeting isn't, however, something you should do only when your money (or waistline) gets tight. It's a habit that should be practiced constantly, no matter what your income.

Tracking and managing your spending is one of the most important components of financial wellness, giving you a better picture of where you stand financially, helping you make better decisions and, in the end, giving you greater peace of mind. Here are a few tips to help you establish and maintain good budgeting habits.

1. Establish your financial goals.

Budget planning begins with setting goals. What do you want? Where do you want to be? Not just this month or next year, but over the next five, ten, maybe even 30 years? Group your goals into categories: short (a vacation, maybe a car); medium (a house, your children's education); and long term (retirement). Then rank them in order of importance and cost. Like anything, your goals will be flexible, but they'll give you a starting point.

2. Examine your current expenses.

Start by totaling your income, not including amounts you can't be certain of like tax refunds, bonuses or investment gains. Next use account and credit card statements to help list your expenses. After recording fixed costs, such as rent or mortgage, utilities, gas, cable and insurance, consider the rest of your variable expenses. These are items you spend money on, but may vary every month, such as groceries, clothing and entertainment.

3. Develop your savings plan.

Once you see what's left over, you can plan for your savings goals, short-term and long. One of the easiest ways to build up savings is to set up pre-authorized transfers from your chequing account to your savings account, TFSA or RRSP. If you don't have enough left over after your expenses are paid to reach your savings goals, go back over your expenses and see what you can trim from those that are discretionary.

4. Differentiate between needs and wants.

It's important to be able to separate the things you need from the things you want. You need shoes; they don't need to be Italian. You need to eat; your every meal doesn't need to be at a gourmet restaurant. Treats are good, but a little discipline can go a long way. That $3 coffee before work is costing you more than $700 a year. Some of these incidental items may not even make it to your expense list, but they can certainly add up, and they need to be taken into consideration.

5. Track your spending – all of it.

It's easy to remember larger expenses like mortgage and car payments, but other smaller expenses may be harder to capture. If you don't like saving receipts or writing things down, you can try putting all your expenses on one debit or credit card, so you have a clear picture of your spending, consolidated in one place. Another option is to withdraw a set amount each week or month and pay for everything with cash. Whatever you do, make sure you pay your credit card balance off every month. Paying interest on things that aren't long-term investments like your mortgage or an education fund is a drain on your finances.

6. Budget by month, not pay period.

If you get paid bi-monthly, monthly budgeting will force you to lengthen your time frame, but not so much that you get off track. By adjusting to a 30-day window, you can prepare for a month of heavy expenses knowing that it's followed by one that's easier on the budget.

7. Plan for the expected – and expect the unexpected.

You can budget for expenses that are predictable but don't occur monthly, like Christmas and birthday gifts, and special occasions like weddings. You know these events are on the horizon, so try to be prepared for them. For example, instead of piling up debt on your credit card in December, buy presents all year long. (Yes, easier said than done.). Of course, life has a way of throwing a few curves at you to knock your budget off kilter. A leaky roof, a major car repair, or new hockey equipment when your child has a growth spurt. A rainy day fund is a good way to help deal with any unexpected expenses.

8. Review and revise.

Tracking your budget on a daily basis takes discipline but ultimately will keep you focused and in touch with your spending habits. One of the toughest challenges is ensuring that everyone in the family is on the same page. Talking about it helps. Keeping lines of communication open is an important part of keeping your budget on track. Try to sit down as a family on a semi-regular basis and talk over where you are now, upcoming expenses and overall goals. If you need to make changes because you're spending more than you earn or aren't on track to realize your savings goals, talk them over. It's a great way to build financial literacy for your kids.

Make the best use of your money. Contact BlueShore Financial to help set and meet your goals.

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