Living costs are reaching for the skies in Canada in 2022, driven by rising inflation rates, a housing shortage, and ballooning food, fuel, and utility expenses. In fact, one survey found that as many as half of all Canadians can’t keep up with current living costs.
All kinds of strategies are being proposed to help households cope—from buying food in bulk and shopping the clearance racks to channelling the wisdom of Great Depression-era cooks and taking up a side hustle or three.
However, there’s a simple strategy that has the power to transform your finances. And that’s creating a monthly budget. Whether on paper or digital, a budget will help you define your priorities, boost your savings, and reduce financial stress.
Read on to find out how to create a budget of your own.
What Exactly Is a Monthly Budget?
If you want to create a monthly budget that sticks, it’s vital to understand what it is and why you need one. This way, you can craft a budget unique to your situation.
Why a Budget Is Essential
At the most basic level, you can think of a budget as a map of your finances. A budget lists the money you earn after tax (called your net income), what you need or want to spend money on each month, and your savings and investments.
Who needs a budget? Well, every Canadian, honestly, but especially people who:
- Don’t know where their money goes each month
- Aren’t putting any money aside for savings or investment
- Are struggling to pay off significant amounts of debt
- Suffer from financial anxiety, stress, or depression
- Have substantial financial goals or looking to make a big purchase (like a home)
A budget can extend for a week, a month, a year, or multiple years. It just depends on where you are in your financial journey.
Common Budget Strategies
A budget can be as complicated or as simple as you want. Essentially, a list of expenses versus income written down on a piece of paper is a budget. However, there are some tried and tested budgeting strategies out there.
Some of the most popular in Canada include:
- The “no” budget budget
- Envelope system
- Values-based (or priorities-based)
No two people are the same, just as no one’s financial situation is the same. This means while someone may find success with, say, the 50/30/20 budget, it might not work for another.
Don’t be afraid to experiment with different budget strategies until you find the one that’s right for you.
The Steps to Starting a Budget
Now that you’re familiar with the what and why of budgeting for Canadians, it’s time to start designing your own budget.
List Your Incomings and Outgoings
Before actually creating your budget, you need to write down a few dollar amounts. These include:
- Your total monthly income (after tax)
- Your estimated monthly expenses—how much you spend on needs and wants
- Debt repayments
You might not know all these figures yet, but you need at least the first three figures on this list.
With most Canadians getting paid weekly or bi-weekly and near the end of the week, it makes sense to organize your budget around your paydays. That means creating a weekly or bi-weekly budget. This makes it easier to manage and keep track of things like utility payments and debt repayments.
Also, not all partners combine their finances. Consider whether you and your partner will have individual budgets with shared expenses or a family budget.
Track Your Expenses
While you might think you know how much you spend in a month, it’s likely not realistic.
To get a realistic overview of your expenses, you need to track every single purchase or payment you make for at least a month—better yet, two or three months. Some people choose to track their daily outgoings permanently, well past finalizing their first budget.
You can do this in a spreadsheet, an expense tracker app, or a notebook you carry everywhere with you. Label your payments and purchases under categories, such as Groceries, Gas, Eating Out, Vacation, and so on.
This simple action makes Canadian budgeting so much easier. When you know exactly how much you’re spending in a month, it’s much easier to assign money to the essential categories and cut back on the non-essentials. This helps you plan for future expenses and gives you more flexibility.
Create Some Monetary Goals
Once you know what your income vs. outgoings situation looks like and you’ve tracked and analyzed your actual expenses, it’s time to set some goals. Here, you’re telling your money what you want it to do for you.
Building an emergency fund is one of the first and most important financial goals you need to include in your budget. Conventional financial wisdom says an emergency fund should be 3 to 6 months of living expenses. Keep this in an easy-to-access savings account.
You also need to take into account debt payments. The sooner you pay off high-interest debt, in particular, the better the financial situation you’ll be in.
Finally, write down any short or long-term goals related to vacations, education, retirement, and rebuilding your credit—basically, all the significant “wants” that are important to you or your family.
Define Your Priorities
Look at all the information you’ve collected so far. It’s time to work out where your money is best spent to get you the most lucrative outcome.
For example, do you have an overwhelming amount of high-interest debt? Clearing that becomes your priority.
Perhaps you don’t have any buffer if something unexpected happens. Make building your emergency fund your priority.
Essentially, you need to review the list of expenses (wants and needs), obligations (debt payments), and savings and investment goals and rank them in order of priority. Focus on what will make you the most stable financially now and in the long term.
Achieving your goals may require some reduction in your expense categories. For example, if you want to save 15% of your income, you may need to cut back on ordering dinner and cook more at home instead.
Organize Your Bank Accounts
Once you have your budget laid out and goals prioritized, it’s time to work out where your money will go.
While there’s no right or wrong way to your bank accounts, you should at least set up a savings account for your emergency fund. Plus, you’ll have the account or accounts your salary or income is transferred to from your employer.
Other accounts to consider are:
- Expenses account for bill and debt payments
- Additional savings accounts for specific financial goals
- High-yield or TFSA accounts
- Investment accounts
- Business accounts
Some banks also let you set up different “buckets” within your personal accounts that you can allocate to certain expenses or savings goals.
Once you have your accounts in order, set up automatic transfers for things like monthly utility bills, debt payments, and savings to ensure you never miss a payment.
Staying on Track
Now that you have these budgeting tips in your financial toolbox, you need to learn how to stick to your budget.
People who budget successfully:
- Keep copies of all their bills and receipts
- Continue tracking their daily expenses indefinitely
- Hold regular “financial meetings”
- Review and update their budget as needed
- Review progress on short and long-term goals
A budget isn’t a one-time thing. Instead, think of it more like a lifestyle change; once you master this skill, it’s something you’ll continue doing for your entire life. As such, you need to check it regularly and adjust it as your income, expenses, debt, and financial goals change over the months and years.
Once you see the great financial position you’re in because of your dedication to budgeting, you’ll be inspired to stick with it!
Get Started on the Road to Financial Success
A monthly budget is the first step to creating a financially stable future. By getting a grasp on what money you have and where it’s going, you can make your money work better for you.
Whether you write your budget in a notebook each week or use a sophisticated budgeting platform or app doesn’t matter. The key is committing to creating and managing a budget from month to month. Over time, you’ll see your expenses lower and your savings and investments increase.
Even lower income earners can benefit from a budget—arguably more so than those in higher income brackets. At the very least, it will tell you where and by how much you need to try to increase your incomings.
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