/ Finance 101

How to build a budget

It’s the perfect time of year to launch your new household budget.

Learning how to budget your money is important, and it’s a skill you can continually improve. If you haven’t already mapped out your New Year’s Resolutions for the upcoming year, consider adding budgeting to your list.

How do you create a budget? We broke it down in 7 simple steps:

Step 1: Understand where you spend your money

Tracking your spending may take a bit of time, but it’s an important step to creating your budget. Fortunately, there are lots of online tools, apps and tricks to make this step easy. To get a good idea of your spending, take a look at the last three months’ worth of purchases.

Here are a few suggestions to help you get started: 

  • Online banking: if you’re a regular debit or credit card spender, your online banking platform likely offers software that can identify your spending patterns.
  • Budgeting apps: tools like Mint, Dollarbird and others can sync your accounts and track spending on your behalf.
  • The old fashion way: print the last three months of your debit and credit card statements and grab some highlighters. Pick a colour to help identify different expense categories like household expenses (including food), utilities, bill or debt payments, clothing, entertainment (including eating out at restaurants), child costs and savings. Highlight your expenses based on the categories you define.

Whichever method you choose, total each expense category and divide by three. This is your average cost per category per month.

Step 2: Determine your income – this will be a basis for your monthly budget plan

Now that you know your spending patterns, it’s time to figure out how much money you’re bringing in versus how much money is going out. Calculate your income each month for the last three months; include all income sources in your calculation, including paycheques, Government benefits, pension amounts, etc. Add up your income for the last three months, and then divide by three. This is your average income per month.

Now compare that amount with your average monthly expenses. Is there a gap between expenses and income? Are you saving money, or are you losing money each month? A budget will help bridge the gap between these discrepancies.

Step 3:  Now it’s time to balance your budget

If your ins and outs don’t match at first, don’t panic. It’s easy to have irregular spending patterns when you don’t have a budget – that’s what brought you here.

To help you balance your budget:

  • Keep an open mind as you review your balances and look for opportunities to reduce expenses. Any way to save money should be investigated.
  • See if there are “quick wins” that could save you money in the short-term, like cutting back on eating out at restaurants or skipping a second daily cup of coffee. These quick wins can help get you on track in the short-term, but may not be long-term solutions.
  • Set longer-term goals for your money. Are you able to establish new spending and saving patterns, like adding couponing to your regular grocery shopping regime? What about prioritizing higher-interest debt repayment so your more expensive debts are paid off first (while still staying on top of lower-interest debt, of course)? You can also learn more about setting short-, medium- and long-term goals for your money on the Financial Consumer Agency of Canada’s (FCAC’s) website.

Looking for creative ways to cut down on expenses? Check out the lifestyle section on our blog – we have everything from meal planning ideas to tips on cutting down on luxury purchases.

Step 4: Rely on Resources: Find a budgeting template or spreadsheet

Online budgeting tools can support you as your balance your budget. A quick internet search can connect you to lots of free budgeting templates and budgeting spreadsheets. We recommend starting with  the Government of Canada’s budget calculator, or other resources from the FCAC’s budgeting and money management website.

Is debt repayment part of your budget? You can use our free debt consolidation calculator to see if a consolidation loan will save you money, and help create more room in your budget.

Step 5: Check your budget for leaks: make sure you’re not forgetting about sneaky expenses

What’s the main reason most budgets don’t work? People forget about sneaky expenses. These expenses can be anything from haircuts to vet bills or even gifts. Just because something isn’t a monthly occurrence doesn’t mean you shouldn’t include it in your monthly budget. While looking at your last three months of spending, tally up everything that’s an ad hoc purchase. This will give you a good ballpark amount for your miscellaneous category, and should give you enough of a buffer to cover infrequent spends.

And, don’t forget about setting aside some money for emergencies each month. An emergency fund will prevent your budget from ending up in the red when you experience something like a car or home repair.

Step 6: Refine your budget over time

Approach your budget as a work in progress. Once you have a good idea of your monthly income and expenses, it’s easier find out what money-saving tactics work for you. Don’t worry about making mistakes along the way; you won’t get your budget perfect on the first shot, and you may have to experiment with moving money around to different spending categories until you find the right balance.

Remember that your priorities might change over time, meaning you’ll have to adjust your budget. For example, someone with young children is going to have a very different budget from an empty nester. A good rule of thumb is to review your budget once a year; mid-year check-ins can also be helpful to ensure you’re on the right track.

Step 7: Budgeting shouldn’t be scary – make changes at your own pace

If you feel overwhelmed at first, keep in mind that creating a budget can be easy, educational and even inspiring when approached the right way. Although it takes time and effort to track your spending and income, you’ll find building a household budget has huge benefits. A budget can help you make smart financial decisions, identify how you can change your spending patterns and prepare yourself for unexpected expenses throughout the year.

Remember: the first step to budgeting is getting started. If budgeting is one of your New Year’s Resolutions, you’re already on your way to achieving your financial goals.

More budgeting resources:

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This article is for informational purposes only. For personalized financial advice, you should contact a qualified financial advisor.

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