According to the Canadian Financial Capability survey, around 50% of Canadians have a monthly budget plan. That is up from around 46% of Canadians in 2014.
If you have never created a budget before, you are in a growing minority. Budgeting can help stretch your monthly income. This financial strategy can also help you save money or meet other major financial goals.
In this guide, we will teach you our top budgeting tips to help you get started. Keep reading this guide for a step-by-step breakdown of how to create your very first personal budget plan.
Step 1: How Much Do You Have to Spend?
The first step to creating a monthly budget is figuring out how much money you have to spend. You’ll do this by calculating your gross income. Gross income refers to how much money you make after taxes.
For many budgeters, gross income is equal to their monthly paycheck. Make sure to add any savings contributions (e.g., to a 401k, HSA account, etc.) back into this amount. That way, you can see how much you save per month, too.
Those who are self-employed have a more difficult task at hand. These budgeters need to calculate annual taxes. Subtract taxes and expenses from your total business income to find your gross personal income.
Step 2: What Do You Spend Your Money On?
After calculating income, you need to identify where your money goes each month. The average Canadian consumer spends money on the following:
- Housing (rent payments, monthly mortgages, hotels)
- Transportation (car payments, gas, public transportation fees)
- Food (groceries and takeout)
- Health (insurance and medical services)
- Insurance (auto, homeowner’s, renter’s, social security)
- Entertainment (streaming services, out-of-home entertainment, pet expenses, gym fees)
- Retail goods (personal care items, clothing)
- Education (books, schooling)
- Financial payments (credit cards, installment loans)
Sort expenses into categories. For example, you could use categories like “savings” and “expenses.” You could then break up the “expenses” category into “necessities” and a “wish list.”
Most Americans spend about a third of their budget on housing. A quarter of their monthly income goes to transportation and food. Insurance, healthcare, entertainment, and other expenditures make up the remainder.
If you aren’t certain how much you pay toward expenses each month, track your spending. There are many free apps available (e.g., Mint) to help you understand where your money goes.
Step 3: Do You Have Any Financial Goals?
It’s almost time to create your monthly budget. But first, you should consider your goals. For example, are you saving up for a big expense, or do you want to increase the amount you put away for retirement each month?
Savings are not the only type of financial goal. Your goal may be to cut back on certain expenses. Check out the Motley Fool’s list of the top unnecessary expenses to get an idea of where you can cut back.
For example, it may be time to unsubscribe from unused streaming services if you want to cut down your entertainment spending. Or, if you pay high interest on your credit cards, you may want to pay them down ASAP.
Step 4: Creating Your Monthly Budget
Now, it’s time to start budgeting. We recommend using Excel or Google Sheets to create your budget plan. But you can also use budgeting programs like PocketGuard, Honeydew, or EveryDollar.
For clarity, we will talk about budgeting with free tools like Excel. Start by creating a table listing all your expense categories. Make sure you include a line for your monthly savings, too.
Under each expense category, break out the individual items that sit within it. For example, under the transportation category, include a line for your car payment and monthly gas costs.
Now, if you are satisfied with the way you spend already, you can simply fill in the amount you spend each month in each category. If you want to change the way you spend and save, you need to do a little healthy speculation.
For example, say your goal is to reduce your expenses and increase your savings. Identify categories and subcategories where you can reduce your spending.
Another way to go about this is to use a budgeting strategy like the 50/30/20 rule. This rule states that 50% of your budget should go to necessities, 30% should go towards “wish list” items, and 20% should go to savings.
You can adjust the percentage split based on your financial goals. The only hard and fast rule of budgeting is to spend less than you bring in each month.
Step 5: Rinse and Repeat
One of the biggest mistakes newbie budgeters make is believing that once you create a budget, it is set in stone. In reality, budgets should always change and flex depending on your monthly financial needs and goals.
It may be difficult to make time each month to create a new budget. Try to shoot for a goal of adjusting your budget plan twice annually or once per year at the very least.
Another good time to readjust your budget is after a major expense. Say you purchase a home a few months from now. You will definitely want to update your budget to include your new mortgage payment.
Want More Personal Finance Tips?
A monthly budget is the best way to hit your financial goals once and for all this year. We hope this guide has helped you realize how easy it is to get started with budgeting!
Are you looking for more tips and tricks for reducing your expenses and growing your savings? Subscribe to our blog for more posts like this one. Or get in touch with us to learn about getting a loan.