A budget is a simple and effective tool that gives you a bird’s eye view of your overall spending habits and shows you where you can make any necessary adjustments. When I say simple, I mean it. We can do it right now. Get a piece of paper and a pen.

Got it?

Good.

What’s coming in?

First, total up and write down your gross income and cash flow. This includes:

• your pay cheque from your job,
• money from any side hustles you may have,
• interest or dividends from investments, and
• any other money coming into your bank account every month.

Now that you have your total income, we’ll track your deductions.

Pay yourself first

First, you’ll want to take at least 10% of your gross income and put that money directly into your savings.

Taxes

Next, if your employer does not withdraw taxes from your pay or you report other income on your tax return, you will need to put aside the tax collector’s share now so you aren’t hit with a giant tax bill in April.

Expenses

Finally, tally up your monthly fixed expenses. These include:

• rent or mortgage,
• car payments,
• utilities,
• phone bill,
• gym membership, and
• any other payments that you make every month.

Now, subtract your savings, taxes, and expenses from your gross income. The number you have left is your spending money.

Spending money

Let’s tally up your variable expenses to get an idea of where your spending money is going. Write down everything else that you spend on in a month. Consider things like:

• dining out,
• coffee to go,
• clothing and accessories,
• groceries,
• entertainment, and
• gifts.

Be brutally honest with yourself and check your bank statements for the last couple of months to see where your money is really going every month.

The verdict

Subtract your variable expenses from the amount of spending money that your budget allows.

If you arrive at a negative number, you’re spending too much. Review your expenses and decide how much you’d like to be spending on each category, and set goals for yourself. Think about what is important to you. Do you really enjoy that coffee on the way to work, or could you make it at home and bring it with you? Small changes can make a big impact on your budget.

If you arrive at a positive number, that’s a great start! But there’s always room for improvement. Review your expenses and see if you’re spending money where you want to be spending money. Is your Uber Eats bill a little higher than you would like? Can you commit to making one or two meals at home instead of ordering in? If you have extra money, you can put it away for something like a vacation or the new iPhone. Or, you can add it to your long-term savings toward buying something like a house in the future.

It’s important to track your spending and revisit your budget monthly to ensure you’re following it. Consider copying the information you’ve just calculated into a spreadsheet or budgeting app. There are so many apps out there that will do all the work for you and even give you alerts if you are straying off-budget. It takes time and diligence to change your spending habits and commit to saving more, but you’ll be happy you did it when you see your savings increasing and your debt decreasing.