Budget Planning

How to plan your budget and make your income, spending and savings add up

Planning your budget can help you decide how to slice your income pie. You should start by splitting it into three spending categories.

Essential expenses
: These are necessities such as taxes, housing, utilities, transportation, loan or debt payments, insurance and an adequate food allowance.

: One portion of this category should be a short-term emergency savings account that is sizable enough to support your household for three to six months. A second portion should be for a retirement-savings account. By investing now, you're giving your money more time for potential growth through earnings and compounding (earnings on your earnings). Prioritize your other long-term goals such as post-secondary tuition for the kids and any short-term goals - remodeling the kitchen, a new car, a family vacation - and fund them accordingly.

Optional purchases
: These may include such things as entertainment, gifts and personal indulgences. It's easy to go over budget in this category, especially if you're buying on credit and not keeping an ongoing tally of your purchases. Know your limits and, if necessary, switch from credit cards to cash and/or debit cards to help you keep better track of this non-essential spending. If you bank online, you will be able to stay on top of your monthly transactions rather than wait for your statement.

You may find that a yearly spending plan works better for you than a monthly version. Or try a hybrid: plan out your spending for the year to get the big picture of your finances, and also do month-by-month planning. This approach gives you more opportunities to find ways to boost the savings that will help finance your dreams.

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