With the ratio of household debt to disposable income climbing to a staggering 163% as of late, personal budgeting is of increasing importance to the financial budgethealth of Canadians.

Creating a budget is one thing, but sticking to it is another story altogether. Here are some simple steps that will help develop, and more importantly, stick to a plan that will help you avoid taking on debt in order to keep up with your expenses:

1) Write down all of your streams of income, and express it as a monthly amount.
This includes items such as salary, rental income and dividends. Avoid including unpredictable items like bonuses or gifts.

2) Write down all of your monthly expenses.
This includes all items you plan on spending money on, such as mortgage, utilities, phone, insurance, loan payments, transportation, food, clothing, and entertainment.

3) Compare your income to your expenses.
If your income is greater than your expenses, you’re in a perfect position to build up some savings. You can even enjoy some tax savings if you decide to use these funds to contribute to an RRSP or TFSA.

If, on the other hand, your expenses are greater than your income, you have some decisions to make. Allowing your expenses to exceed your income is a recipe for continued and increasing hardship. Food, clothing, and entertainment are the first categories one should consider when looking for areas to trim.

4) Separate out high-risk categories to avoid going over-budget.
This step is the most important in helping you stick to your plan. Often, high-risk categories (those that are easiest to go over-budget on), include food, clothing and entertainment. Withdrawing this money from your bank account on the first day of your budget, and using cash for all of these types of purchases is a simple way to separate this money from the rest. This allows you to easily gauge how closely you are sticking to your plan throughout the month, enabling you to make necessary adjustments to your spending. It also keeps you from going over budget. Once the cash runs out, so does the spending.

While planning a personal budget isn’t the most entertaining activity (or so I’ve heard), it is an important exercise that can help Canadians avoid a debt spiral that is becoming such a trend.

Written by:  Melissa McCready