How to make an effective budget

So you diligently track your income and every expense that you have. But how do you know if you're spending reasonable amounts of money on things like housing, debt and groceries? Coming up with hard-and-fast budget rules is almost impossible because housing and living expenses vary dramatically across the country. But here are a few rules of thumb.

1. Canada Mortgage and Housing Corporation advises that no more than 32 percent of your income should go to housing (including heating, taxes and condo fees).
2. Less than 40 percent of your household income should go to servicing debt (including mortgage payments, car payments, personal loans and credit card payments).
3. A single person should be spending under $200 a month on groceries, compared to $400 for a couple and $600 for a family of four (if you've got teens, up it a bit).
4. It is suggested that you set aside 10 to 18 percent of your household income for RRSPs, RESPs and other savings.

Make, and stick to, a budget. A budget is the first step to instilling some financial order in your home. Author and lawyer Stanley Kershman has this six-step plan to accomplishing just that.

1. Don't attempt to do your entire budget in one sitting. Take a few days, breaking the work down into manageable pieces.
2. Gather up all of your income information, including salaries, interest and gifts.
3. Next, gather up all of your expense information. Do this thoroughly, even if it takes three days, a week or a month. Make sure you're not missing anything.
4. Using a budget worksheet, add up all of the totals for your income and outflows.
5. Figure out where you can do some fine-tuning, either to pay down your debt or increase your savings goals. However, above all, make sure you're making as much money as you're spending. Stay out of the red.
6. Redo the budget with the new totals and post it around your house, lest you forget you are now living within the cozy confines of a household budget.

Rather than going through the classic debate over whether to pay down the mortgage or contribute to your RRSP, why not do both? By all means, contribute to your RRSP, but when your tax refund comes, put it down on your mortgage.

Here's how it works: let's say you're in the top marginal tax bracket — close to 50 percent for most provinces. Assuming you make a $4,000 investment in an RRSP, you should receive almost a $2,000 refund. Take that $2,000 refund and put it down on your mortgage. Simply by paying an extra $2,000 a year, you can lower the amount of interest you pay on a $200,000 mortgage by thousands of dollars over 25 years. Talk about getting more bang from your buck!