It may not be at the top of the list of fun weekend activities, but a budget is a tool that can provide insights into your spending habits. It can help you plan for expenses, and make it easier to achieve your financial goals, such as building an emergency fund, paying down debt, or saving for a down payment on a home.
While figuring out how much money you earn, spend and save each month can seem like a daunting task, it’s not as difficult to build a budget as you might think. We’ll walk you through the five steps to creating a budget that is easy to use, as well as offer tips on how you can stick to it.
Step 1: List your expenses and streams of income
The first step to creating a monthly budget is understanding how you manage your money from day to day. There are many online budgeting tools and financial apps that can help with this, including Credit Canada’s free Budget Planner + Expense Tracker. With this tool, you plug in some basic information, including your expenses, and the planner does the rest. It provides a complete breakdown of what you spend your money on each month. You can also include your budget and see how it compares to your actual spending.
Using the Credit Canada planner or any other budgeting tool you prefer, create a list of your income and expenses. Then, allocate set amounts of your income to cover those expenses, including how much you pay for various bills and items each month. Along with your expenses, make sure to include any debt payments you will make. If you notice that your expenses are higher than your income, you’ll need to make some adjustments, such as focusing on which debt to pay or earn extra money (more on that in step 3).
Step 2: Begin tracking your expenses
If you’re like most Canadians, you might not know where your money goes after you pay for obvious living expenses, like your rent or mortgage, car payments, groceries and utilities. This is why it’s important to track monthly expenses when you start putting together a budget.
Include even the smallest and spontaneous purchases—like takeout meals and movie tickets—in your budget. Study your credit card bills for any expenses you may have forgotten about, like subscriptions and services. You may be surprised to find out how quickly inconsequential expenses can add up. Try using Credit Canada’s free, online Budget Calculator to find out how much money you could save by eliminating some of these expenses.
As a general rule, you should spend up to 50% of your after-tax income on needs and living expenses. The remaining half should be divided as 20% for savings and debt repayment, and 30% for anything else you may want.
After you’ve completed at least one month of tracking, you’ll see whether you have come in over or under budget and gain insight into where you can cut back on your spending in order to pay down debt or save money.
