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How to create a budget when your income is reduced

Finances can be unpredictable. When your income is unexpectedly reduced, you have to be able to adjust your household budget – and maybe your expectations.

There are many reasons your income could be reduced. From seasonal layoffs to illness, parental leaves, new jobs and more, the majority of people will experience income fluctuation in their lifetime. While this can cause a disruption in your household finances, it’s not a time to panic. You will need to adjust your budget, and maybe reset some expectations for how you spend your money, but you can do this.

Here are 7 steps to create a budget when your income is reduced:

Step 1: Grab a calendar

To make sure you stay on top of your revised budget, you’ll want a calendar (digital or printed), which you can use to track the dates when money is coming in and going out. Knowing your dates for income and expenses will help you ensure you never miss a payment – avoiding the potential for late fees.

Step 2: Reassess how much money will be coming in monthly

Now that you’re experiencing a change in income, you’ll want to be sure you know exactly how much money will be coming in each month. Calculate income from all sources, including government benefits, and know the dates when income will be coming in. Mark those dates on your calendar for the next few months (or as long as you expect your income will be reduced), so you’ll remember to watch for that money to come into your account.

If you received or will be receiving income as a lump sum (for example, if you are a student and received a grant), split the sum into monthly portions to build your monthly budget. For example, if you received $6,000 for 12 months, you can break the amount down into $500 per month. If you’re able to, place the entire amount into a separate account and then set up automatic transfers each month to move the money into your spending account as income. This will help you avoid overspending.

Step 3: Understand where your money has been going

Take a look at the last few months’ worth of spending, either by printing off your bank account statement or by looking at it online. Organize your expenses into categories, such as:

  • Household bills (e.g. utilities, internet, phone)
  • Housing costs (mortgage/rent)
  • Groceries (including meal subscriptions)
  • Transit (car payments, gas, bus passes, etc.)
  • Debt repayments (any loans or other credit products you’re making payments on)
  • Savings (how much you’re putting away in a TFSA, RRSP, RESP, emergency fund or any other savings account)
  • Entertainment (takeout or dinners out, movie rentals, music or audiobook subscriptions, fitness apps, crafting costs, etc.)
  • Other

The categories you choose should make sense to you and help you get a full picture of where you are spending money. If you need additional categories like donations, special occasions, pet costs or anything else, create the categories and assign expenses to them. Then, take an average of the last three month’s spending in those categories to find approximately how much you spend in each area on a monthly basis. Don’t forget to write the dates of known bills or expenses on your calendar, so you stay on top of when these costs will be coming from your account.

Tip: Some financial institutions offer built-in apps that can assess and categorize your spending for you.

Step 4: Estimate the difference between monthly spending and your new income

Once you’ve averaged out monthly spending, add up all of your expenses to determine approximately how much you spend each month, and subtract that number from your new monthly income. If all of your expenses still fit within your revised income, great – your budget is balanced. However, if you (like many people) find you need to reduce spending in order to make ends meet within your new income, it’s time to revise your budget. Even if your budget is balanced, you may want to proceed with the next steps to refine your budget further.

Step 5: Determine mandatory and optional household expenses

Now that you know where your money is going, you have an opportunity to make adjustments. Are there some expenses that you’d consider mandatory, and others that are truly optional? Use this mindset when going through your spending categories to see if there is room to reduce. Here are a few methods to reduce spending within your household budget categories:

  • Could you consider shopping at a less expensive grocery store or at farmer’s markets to reduce costs?
  • Would using flyers and making a grocery list help you avoid unnecessary spending at the grocery store?
  • Could you reduce utilities payments by changing your phone plan, removing cable or getting rid of additional TV or streaming packages?
  • During warmer months, would riding a bike or walking help you reduce transit costs?
  • If you made more coffees or meals at home rather than getting takeout, how much money would you save?
  • Could you cut back on paid apps like music, audiobooks, fitness, games or other?
  • Is this the time to reduce savings and focus on making ends meet? While it’s not ideal to go without saving for the future, there are times when it’s more important to maintain a healthy household and reduce debt instead.

Once you’ve reviewed your household spending with these (and similar) questions in mind, estimate how much money you would be spending each month without the optional expenses. Once you can go through this exercise and your expenses fit within your new income, you have a budget that works.

Step 6 (Optional): Rejig to make room for emergency savings

When you’re already facing a reduced income, the thought of an emergency expense popping up might fill you with anxiety. If you don’t already have a sum of money set aside to help you get through a financial emergency, you may want to consider finding room to build one. Although this can be tough, especially if you’ve already had to cut back on some expenses you wished you could keep, an emergency fund can be a lifesaver if the unexpected were to occur. It’s better to be prepared for the worse than to find yourself in a very tight spot later – and if you don’t end up needing it, you may have a nice little nest egg building for your future.

Step 7: Decide if you need to increase household income, and what your options are

If you simply can’t make your budget work within your reduced income, it’s time to start looking at options to increase the amount coming in. Here are a few methods to earn extra income to support your budget. If you aren’t able to find an income option that will work for you, you may want to consider routes like a loan or a line of credit, which can get you through a short-term financial crunch.

While facing a budget challenge is never easy, taking this type of in-depth review of your finances will help you be more aware of where your money is going, and allow you to make better financial decisions in the future. Remember, budgeting is not a “set it and forget it” type of activity. Continue to do regular budget tracking and reassess if you find your spending isn’t aligning with how much you estimated. You may find you have seasonal or other budget fluctuations throughout the year, and know that this is normal – a budget is a living plan, rather than something set in stone.

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