Now you know what a budget is (Budget Basics – Part One), let’s talk about the components of a budget. Income and expenses are the 2 main components and within them are various categories.

Income is money earned. You get a paycheck or receive a pension, earn interest from investments. You may receive it regularly or sporadically. The important thing to know is how much you receive and when you receive it.

Most of us receive net pay which is what’s left after deductions from gross pay. Deductions such as income tax, Canada Pension Plan (CPP), Employment Insurance (EI), medical premiums, dental premiums etc. are calculated and deducted by your employer. If you receive income that has not had any deductions, then it is your responsibility to set money aside to make these payments yourself. Income tax can add up and if you don’t have it saved when you complete your taxes, it could be difficult to submit by the deadline. Costly penalties and interest charges can apply.

How often do you receive income? Weekly, bi-weekly (every 2 weeks), semimonthly (twice per month), monthly or sporadically. It’s easier to work with a monthly number so take your net income number and convert it to a monthly average. For example, if you are paid bi-weekly, take the net amount, multiply it by 26 and divide by 12. If the income you receive is infrequent then timing becomes important and a good strategy is to build up a buffer to cover your minimum expenses for a period of time until the next chunk of income comes in (don’t forget aside the income tax provision). You may receive additional income through the year such as a bonus or an income tax return. Note these but don’t depend on them.

Tip: If you are paid bi-weekly, you can force yourself to fit your expenses within a smaller budget and increase savings by working with a ‘monthly’ budget income of 2 times your bi-weekly pay. You will receive 2 ‘extra’ paychecks a year which you can use towards achieving a goal or putting aside for an irregular annual expense such as car insurance or vacations.

Expenses can be fixed or variable. For the most part, even variable expenses have are predictable which is where the budget comes in. List your expenses. It can be helpful to use categories such as Living, Entertainment, Gifts and Transportation. Within each category list the individual expenses starting with the necessities. For example expenses such as rent, food and utilities (hydro, cable, Internet, telephone) might fall within the Living category. Note which expenses are needs and which ones are wants. For each expense, note the minimum that you are required to pay. Maybe you can live on $200 per month for food but typically spend $275.

This is a good start. We’ll put some structure around your budget in the next post.