Many Canadians need help managing their monthly income and spending. Instead of having a formal budget plan based on solid information about their income and critical expenses, countless working adults play things by ear—spending money until they run out. They may not know how to make a budget or simply feel that it’s unnecessary to plan out every dollar they spend since they make a decent income.
However, we would encourage everyone to learn how to make a budget and to stick with it so they can better manage their finances. Read on to learn more about budgets, including why it’s important to budget and how to follow a budget.
What Is a Budget? (+Why Is Budgeting Important?)
A budget is a way to estimate your income and expenses within a set time frame (typically a month). Budgeting is when you create a budget or allow yourself a certain amount of spending on specific expense categories.
Our Sr. Education Facilitator Richard Haggins breaks down budgets into three main sections:
- Income. The money you bring home from work and other revenue sources.
- Fixed Expenses. Items that have a fixed monthly cost—like your rent or mortgage.
- Nonfixed or Flexible Expenses. Expenses that may fluctuate from month-to-month—like food costs, fuel, vehicle maintenance, entertainment, etc.
By breaking your budget into these distinct parts, you can make it easier to tell where your money’s coming from and where it’s going. This, in turn, helps you improve your budget by letting you “cut the fat” so you aren’t spending more on “wants” than you can afford.
Monthly expenses (both flexible and fixed) can be broken down into nine distinct categories:
- Housing/Shelter. This is what you spend on your current residence in mortgage or rent payments. For most, this will be the largest expense on a monthly budget.
- Food. This covers all your monthly nutrition costs and includes grocery shopping, eating out, in addition to personal care items purchased at the grocery store.
- Transportation Costs. Whether you own your vehicle, use public transit, or use a ride sharing app to get around, that’s going to cost money. For those who own a vehicle, this can be a relatively large monthly expense.
- Utilities Payments. Hydro, gas, internet, cable, and other monthly bills for basic services fall under the utilities umbrella.
- Debt Payments. This monthly spending category covers forms of debt like credit card payments, loans, and other personal debts that need to be paid.
- Discretionary Spending. This is the spending category for personal items like entertainment, personal grooming, or hobbies not related to work.
- Savings Contributions. This is the budget category for contributions to your savings account or investments like a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA).
- Clothing. A spending category for purchasing clothes—both for personal use and for work. An argument could be made for including clothing purchases under “discretionary spending,” but it’s worth keeping separate.
- Medical Expenses. This is the spending category for medical-related costs like dental work, glasses/contacts, and over-the-counter medications that don’t require a prescription.
The Purpose of Budgeting
So, what’s the purpose of budgeting? Well, that depends on you. When you start budgeting, it’s important to have a goal in mind, but it should be something you decide based on your priorities.
Some examples of budgeting goals are:
- Setting Aside Money for Retirement. One reason that some have actively started budgeting is that they want to set aside some money for themselves for later in life when they’re retired from work. With this in mind, they look at their income and expenses with an eye towards putting more money away in long-term savings accounts and investments.
- Getting Out of Debt. This is a reason we hear a lot at Credit Canada. Many of our clients started budgeting because they realized they were spending more than they could afford and were falling behind on debt payments. So, to get out of debt, they look at where their money is going and identify opportunities to cut back on spending and put more towards debt payments.
- To Prepare for a New Arrival. Parenthood can be both incredibly rewarding and extremely expensive. Estimates vary, but a CTV News estimate puts the total cost of raising a child to age 18 in Canada at about $281,880 and the average cost per year at about $15,560. So, savvy parental planners prepare by producing a budget and looking at what specific costs they’ll face.
- To Save for a Vacation. Some budgeters want to ensure they can set aside enough money to comfortably take a vacation to someplace new within the next year or two. These folks learn how to budget to find ways to set aside more money for that cruise or theme park vacation they want to go on.
These are just a few of the potential purposes behind a budget. Whatever it is that you want to do with your money—that’s the purpose of your budget. Everyone could use a budget—but it’s up to you to determine the reason for yours!
Quick Budgeting Tips
So, what are the simple budgeting tips that you should follow when creating your budget? Here are a few easy ones to follow:
- Start with Why. Why do you want or need to track your monthly income and expenses? What’s your goal? Identifying your reason for making a budget can help you stay motivated throughout the process and stick with it.
- Track Your Income and Expenses for at Least a Couple of Months. When making your budget, try to track several months’ worth of income and expenses to get a clearer idea of how much you’re making and what you’re spending it on. The more months you have to compare, the better. Try it out using our Budget Planner + Expense Tracker resource.
- Prioritize Housing/Shelter. The most important part of your budget is your housing costs. These costs should be prioritized in your budget so that you don’t miss rent/mortgage payments.
- Leverage Budgeting Apps. Technology has come a long way. Now, there are numerous budgeting apps available for your smartphone that you can use to help you create a budget and stick to it. From banking apps with budgeting features to personal finance apps like Goodbudget and Mvelopes, your options are nearly endless.
- Get Help. If you’re struggling with making a budget, you don’t have to do it alone. Reach out for help and advice from friends, family members, a financial planner, or another person with extensive experience in making budgets. Our credit counsellors have helped thousands create budgets and stick to them so they could get (and stay) out of debt.
- Decide on a Type of Budget. There are actually a few different ways to set your budget. Knowing the different budget types and how to use them can be useful for meeting your budgeting goals. Two examples of budgeting systems you can use include:
- The Money-Bucket System. In this system, you set up a few different “bank accounts” for things like your fixed monthly expenses, variable monthly expenses, and savings accounts. Each bank account is specific to that type of monthly expense, so you cannot spend more than you set aside in the bank account.
- Zero-Based Budgeting. In this system, you plan to use every dollar of income in some way. There is no “idle” money in a zero-based budget—it’s all put towards something useful like paying off debts or investing for the future, if there’s anything left after covering all necessary expenses.
These are just a few tips for making a budget to get you started.
We’ve heard a lot of questions about budgets and budgeting from our clients. Here are a few examples of some of the frequently asked questions our team can help answer:
When Do I Need to Start Budgeting My Income and Expenses?
This is a frequent question from younger budget inquirers who aren’t entirely convinced that they need to carefully track their money. Our answer is this: it’s better to start tracking your money earned and spent sooner rather than later.
By starting a budget now, you can develop better money habits that will help you curtail excessive spending. You'll be conscious of how much money you’re making and what you need to save that money for.
How Much Should I Set Aside for Each Type of Expense?
One of the first things most people want to know is how much money they should set aside for different expense categories within their monthly budget. The answer depends on your income and personal situation, but a good rule of thumb is to set aside a percentage of your income for each monthly expense category. Here are some examples of how much you might spend for each expense category:
- Housing: 35%
- Food: 15%
- Transportation: 15%
- Utilities: 10%
- Debt Repayment: 10%
- Personal/Discretionary: 5%
- Savings: 5%
- Clothing: 2.5%
- Medical: 2.5%
Of course, there’s room for customization here. For example, if you live in a city with excellent access to public transit, you can save a lot of money on transportation costs by purchasing a bus pass instead of owning your own vehicle. This gives you a chance to put more money towards debt repayment.
Also, you might move to a smaller or more affordable home to reduce your housing expenses—allowing you to save up more money for the future. Or, if you do some thrifty grocery shopping, you might be able to reduce the percentage spent on food costs.
Is It Too Late to Start Budgeting if I’m Already in Debt?
For many, being in debt can seem overwhelming and they might feel like filing for bankruptcy is their only way out—so they feel like starting a budget is pointless. However, this isn’t necessarily the case. Many of our clients have been able to get out of debt simply by starting to track their monthly expenses and income. They can then revise how they spend their money to minimize waste, putting more towards paying off debts.
The more you can put towards paying off debt, the better. By paying more, you can save money on interest in the long run and leave yourself in a better position. Often, what feels like insurmountable debt is quite manageable. Once you have a clearer picture of your income and your actual minimum necessary expenses, you may find it easier to handle your debt.
So no, it’s almost never too late to start budgeting—even if you’re in debt! Also, even if you do end up needing to file for bankruptcy, being able to make a budget will still be important. A bankruptcy judgment may result in wage garnishments or other measures that restrict your income—meaning that you’ll need to stretch every dollar you make further than before.
Can’t I Just Earn More?
It’s a common assumption that the primary reason for being in debt is that you simply aren’t earning enough to keep up with your expenses. Based on this logic, all you need to do to manage your expenses is to earn more.
However, in practice, this doesn’t always pan out. We’ve had clients with incredibly high earnings still struggle to pay their bills. Those who earn more may feel more comfortable making larger purchases—which can keep them living almost paycheque-to-paycheque despite making more money in a week than some do in a month!
For many, it isn’t that they aren’t earning enough to keep up with their necessary expenses—it’s that they’re not tracking their spending. By starting to track your income and expenses, you can better control how much you spend and maintain the discipline needed to get, and stay, out of debt.
So, even if you make a lot of money, it doesn’t hurt to start budgeting!
Step-by-Step Budgeting Using the Credit Canada Template
So, how can you create a budget using Credit Canada’s budgeting template? The process is simple.
Step 1: Download the Budget Planning Spreadsheet
The first step is to download the spreadsheet and review what’s on it! You can do this by visiting our Budget Planner + Expense Tracker page and completing the form.
Step 2: Fill Out the Budget Planner Section
The first tab of our budget planner and expense tracker is where you can find spaces to enter basic information about your personal finances such as your income, expenses, and debts.
This gives you an overview of your finances so you can see how much money you have coming in and going out.
Step 3: Fill Out the Expense Tracker Tabs
The next five tabs of the spreadsheet are all dedicated to tracking your weekly spending. There, you’ll find lines for different expense types sorted into different days of the week, with a column for the week’s total expenses at the end.
Whenever you make a purchase, pay a bill, or otherwise spend some money, jot it down and record the expense in the tracker. As you fill out the expenses for each line item and day of each week, you’ll see the totals updated in the tracker.
Step 4: Review Your Expenses and Income
Once you track your expenses and income for a full month, review them to see where you’re spending the most. This will help you to set priorities and goals.
Step 5: Set Your Financial Goals
What do you want to accomplish with your budget? Your “why” is important to keep you motivated and help you achieve what you want or need to achieve. It helps to set a series of smaller short-term goals to help you reach your bigger long-term ones.
For example, if your goal is to “pay off all of my debt in the next year,” then you’ll want to set smaller monthly goals to pay a set amount of debt in any given month—and even plan out which debts to prioritize based on their size and interest rates.
It’s also important to set yourself a realistic goal. For example, if your current debt is equal to more than half your annual income, odds are that you won’t have the leeway to pay it off in a single year. Instead, consider adjusting your plans to put that as a longer-term goal and focus more on restricting spending to prevent the accumulation of more debt.
Step 6: Set Budgeting Priorities Based on Your Goals
Once you know what you want to accomplish, adjust your monthly spending plans to accommodate those goals. This goes almost hand-in-hand with your financial goals, but it’s worth mentioning as its own distinct step.
Step 7: Adjust Your Spending as Needed
Once you have a firm grip on your spending priorities and goals, adjust your spending as necessary.
Step 8: Repeat Steps 2-7
Repeat each step of the process until you achieve your financial goals!
Even after achieving your goals, keep track of your spending using the expense tracker tabs so you can always see when your spending in any category is starting to climb higher than necessary, and make more adjustments.
That’s the simple, eight-step process for making and using a budget to meet your financial goals!
Need help getting out of debt? Reach out to a certified credit counsellor for assistance. We’ve helped thousands get and stay out of debt with budget planning, debt consolidation programs, and advice—and we want to help you, too.
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