A quick way to build up your budget
1. Start with your expected annual income and work out your effective monthly income.
- I recommend starting with your gross annual income and then working your way to income net of taxes.
- Many people are paid weekly or biweekly, so it is important to look at your annual total to determine how much to allocate per month. On average a month is 4.33 weeks (52/12), so we will smooth out the months that end up with "extra" paychecks.
- Similarly, if you routinely received a tax refund, that should be added to your net income.
| Category of income | Example Amount |
|---|---|
| Gross Annual Income | $75,000 |
| Net Annual Income | $60,000 |
| Tax Refund | $ 2,400 |
| Effective Annual Net Income | $62,400 |
| Effective Monthly Net Income | $5,200 |
2. List your monthly expenses
- Include annual expenses by dividing by 12 to get monthly amounts
| Category of Expense | Example Amount | Notes |
|---|---|---|
| Savings | $520 | |
| Housing | $1,200 | Rent or House payments + taxes |
| Power/Water | $200 | |
| Phone/Internet | $180 | Cable if you have it |
| Transportation | $280 | Car payments, bus, Uber |
| Medical Costs | $80 | Out of pocket, not insurance |
| Insurance (Auto, Home, Life, Health) | $200 | Any insurance, might be paid annually |
| Groceries | $480 | family of 4, most cooking at home |
| Kids | $100 | Diapers, etc |
| Daycare | $1,200 | |
| Entertainment | $300 | I include restaurants here |
| Date day | $80 | Could go to entertainment |
| Auto repairs | $100 | We pay in an estimated annual maintenance cost. |
| Travel | $100 | Both vacation and family travel |
| Gifts | $100 | Birthdays and holidays |
| Pets | $80 | Food and vet |
| Total | $5,200 |
Summary view
| Category of Expense | Example Amount | Notes |
|---|---|---|
| Effective Monthly Net Income | $5,200 | |
| Monthly Expenses | $5,200 | Including portions of annual expenses |
| Remainder | $0 |
- Add categories as needed, but make sure you end up with a zero remainder. If you have a positive remainder, increase your savings line.
- If you are not saving separately, you should also consider paying yourself a car payment for when it is time to replace the vehicle.
- What do you do if you underspend? Annual categories "roll over" to the next month, monthly categories sweep to savings.
- What do you do if you need to spend more? Find additional funds by reducing discretionary spend such as entertainment. Seek to cash flow anything that comes up. Stick to your budget except in a true emergency.
- My health care is paid for through my taxes (Canada), but I do know that can be a significant cost.
- I strongly recommend aiming for a savings rate of at least 10%, as it provides you wiggle room for emergencies and gets you accustomed to spending less than you make.
At the beginning of each month, I redo the budget for the month to make sure that it is accurate. Some categories can be swapped -- if I want to allocate entertainment funds to travel or gifts, I can do so.
Any comments, questions or feedback?