Most of us face difficult financial times in our lives, even more often than you think. Including mortgages, Canadians owe an average of $73,000 in debt.

Luckily, with the right budgeting tools, we can bring those numbers down and secure our financial futures. Let’s talk about how to create a budget to get you debt-free as soon as possible.

 

How to Create a Budget

You don’t want to create additional challenges for yourself or your budget. Arming yourself with knowledge ahead of time is critical for creating a personalized budget. Here’s how.

Track Expenses

While this is such an obvious principle in personal finance, it’s rarely done in practice. The majority of Canadians don’t track where their money goes, so make yourself a part of the minority.

Trying to create a budget without knowing where you spend your money is like trying to run an obstacle course blindfolded.

If you only use one card for the majority of your purchases, look at your monthly statement and break your expenses down into categories. At the very least, they should be broken down into essentials and non-essentials, but you can do better than that. Eating out, groceries, bills, subscriptions, etc.

From there, write down any expenses you pay for with cash or check and double-check your other credit card statements.

Crunch the Numbers

Now is the time to take a hard look at your income. Check your paystubs and add them up. If they are biweekly, then only use two for the month, as there are only four months of the year where you will receive three within the month.

You can use 2.33 for more precision if you want, but you should be able to pay for every month’s expenses with only four weeks of paychecks. If the numbers are in the red after expenses (or too close for comfort), then it’s time to budget.

Prioritize

Now is the time to look at your expenses and figure out what matters most to you. Of course, it’s a lot easier to save money on groceries than it is on rent, but it’s still important to go down the list and see what matters most to you.

If you find that you can’t save on your essentials, then looking at your “fun money” is important. Use a budget template to develop and implement a monthly budget for the best results.

Remember, a monthly budget is always recommended because billing cycles usually bill monthly. If we went by paychecks, payments would be irregular.

 

Follow the 50/30/20 Guideline

Ideally, the perfect budget is broken up into 3 categories; 50% goes to needs, 30% goes to wants, and 20% is either invested or saved. If you can manage to fit your budget into this, then you’ll be far ahead of the average Canadian!

The Essential 50

Because this is the biggest category, accounting for 50% of your budget, you should be looking here first for opportunities to save. However, let’s first define what it is.

Your essentials include the expenses you can’t live without. Your utility bill, rent, insurance, and business expenses are perfect examples of essential expenses.

While groceries don’t come in the form of a monthly bill, they still belong in the essentials category.

Although, it’s important to remember that just because something is a monthly expenditure does not mean it’s an essential bill. A subscription to Netflix or your favorite magazine is not the same as your heating bill, which brings us to our next category.

The Wanted 30

These are the expenses that you want. Do you like to go out to your favorite brewery on Saturdays with your friends, attend a yoga class, or subscribe to your favorite news outlets? Well, consider this your “fun money”.

Your wants tend to be where we can save the most, as commodities tend to be the most expensive.

Of course, we would never suggest that you don’t spend your hard-earned money on things that you want. You know what they say about “all work and no play”.

However, it’s important to have a set limit for these expenses, and that should be under 30%. If you want to make this easier, have your bills automated and take your fun money out in cash.

When you do this, it will be easier to visualize how much you have to spend when you go out, as these costs add up. There are many expenses we forget about, like tipping your waitress or valet driver, concessions at the movie theater, and more.

The Invested 20

The last 20% should go toward investments or savings accounts. If you’re saving for a house, retirement, college fund, or even a rainy day, 20% is a good figure to aim for. Investments may include:

  • Stocks
  • Bonds
  • ETFs
  • Real estate
  • Precious metals
  • Starting/buying a business
  • Interest-accumulating savings account

The list goes on to include whatever type of investment you prefer. Another great investment that is often overlooked is paying down your debt. If you are interested in investing, paying down your debt should be your top priority first, especially for high-interest debt.

Why? Because a 20% APR on your credit card will add up more quickly than a 6% annual return in the stock market. Paying off debt is the best investment you can make.

All in all, if you continue to invest 20% of your income throughout adulthood, you will likely be looking at a secure retirement, unlike 70% of Canadians.

 

Address Conflicts in Your Budget

Did you write out a budget and find that you’re still in the red? Are you unable to put away any money for saving or investments? Don’t panic.

If your budget isn’t working out for whatever reason, you just need to figure out how to end up with more money at the end of the month. Here’s how.

Increase Income

We know what you’re thinking: “Easier said than done.”

However, we are fortunate to live in a time when there are plenty of opportunities to earn extra money, no matter who you are.

First, you can always start by asking for a raise or some overtime pay at work. This is a great place to start as it won’t require any lifestyle changes.

Second, you can pick up a side hustle. Driving for Uber or Lyft and delivering for Doordash only have a small barrier of entry. If you’re over 21 and own a car (or even a bike for Doordash in some cities), then you can start.

Also, do you have any skills that would work in the freelance economy? Are you a good writer, bookkeeper, marketer, or anything else? These skills are in high demand and can earn you a pretty penny in your free time.

Get creative. There are many ways to increase your income and gain some extra leeway on your budget. A year from now, you’ll be glad you did!

Reduce Expenses

Sometimes, we live beyond our means. Crunch the numbers and see if downsizing your apartment or home is in your long-term financial interest.

There are plenty of ways to save money on utilities, groceries, clothing, and more. Always look for deals and be more mindful of your dollar when it comes to your essentials.

Ask yourself two important questions: How many subscriptions do you have, and how many do you use? This can help you prioritize and save some money every month.

If you find that you spend a lot of “fun money” at a certain place or with a certain person, try to curb that habit by trying more free activities. Take a walk in the park, go for a hike, go swimming at the beach, or do whatever you want. There are plenty of free or cheap activities to choose from!

Remember, if you’re going to go over your budget on one of the three categories, it should be your savings/investments. Try to save money on the other two when you can!

Pay Down Debt

Lastly, it’s important to get rid of high-interest debt as soon as possible. If you have a 30-year mortgage with a 3% interest rate, keep making your regular payments.

However, if you have debt from credit cards or payday loans, you want to alleviate that right away. If you’re only making the minimum payment on $10,000 of credit card debt with 25% APR, you’ll owe an extra $2,500 at the end of the year, assuming your debt doesn’t increase.

In some cases, taking out a personal loan with a lower interest rate is a good short-term solution that can save you some money. Just keep making the payments and focus on taking your debt down one month at a time.

 

Don’t Gloat, Stay Afloat!

Now that you know how to create a budget to reduce debts, this knowledge will only go to use if you make it!

Put these tools into practice, and you’ll start seeing benefits in no time. Stay up to date with our latest financial news, and feel free to contact us with any questions!