Money - Budgeting

Establishing a budget

It is important to plan your budget based on your take-home pay, not your pay before taxes and deductions. Your take-home pay is what you keep after you have paid such things as income taxes, pension contributions, employment insurance and union dues.

Most employers make deductions from your pay to cover these items. Depending on how much you earn, this could reduce your pay by as much as 25 to 35 percent.

If you are self-employed, you are required to set aside about 30 percent of your income in a separate account. You must give this money to the government for taxes, employment insurance and pension contributions. You can find out more about what you have to do if you are self-employed by reading the Guide for Small Canadian Businesses.

Five steps to a basic budget

1. Look at your income.

Calculate how much money you have coming in each month. This might include your take-home pay and money from other sources, such as investment income, government assistance, disability benefits and retirement pensions.

2. Look at all your expenses and list them.

Try to separate your expenses as follows:

Regular expenses that you must pay, such as:
- Mortgage
- Rent for housing
- Car payments
- Insurance
Variable expenses that you have control over, such as:
- Food
- Clothing
- Medication
- Entertainment
- Charitable gifts

3. Set your goals.

These can be long-term goals such as purchasing a home, saving for your retirement or your children’s education. They can also be short-term goals such as making home improvements or maintaining your car.

4. Pay yourself first.

By paying yourself first, you set aside a certain amount of money each month as savings. You may want to set up a separate account for this money.

5. Review your budget each month.

At the end of each month compare your actual expenses and income to your budget. Look at where you have spent more (or less) than you thought. This will enable you to adjust for the next month and see where you may be able to reduce your expenses and adjust for the next month.

>> Next — Tips for saving and spending

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