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. Learning to set (and stick to) a budget can promote long-term financial health and help you avoid getting trapped in the debt cycle. 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 to spend a certain amount 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:
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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.
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Food. This covers all your monthly nutrition costs and includes grocery shopping, take-out and restaurants, and personal care items purchased at the grocery store.
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Transportation Costs can be a relatively large monthly expense, especially if you own a vehicle. This category also includes costs for public transit or ride-sharing apps.
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Utilities Payments. Hydro, gas, internet, cable, and other monthly bills for basic services fall under the utilities umbrella.
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Debt Payments. This covers credit card payments, loans, and other personal debts.
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Discretionary Spending. This is the spending category for personal items like entertainment, personal grooming, or hobbies not related to work.
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Savings Contributions. This is for contributions to your savings account or investments like a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA).
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Clothing. Clothes for everyday and work. An argument could be made for including clothing purchases under “discretionary spending,” but they’re worth keeping separate to better track how much you spend on essential clothing for work vs. leisure or seasonal updates to your wardrobe.
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Medical Expenses. Medical-related costs like dental work, glasses/contacts, over-the-counter medications, and out-of-pocket payments for prescriptions pending insurance reimbursements.
The Purpose of Budgeting
When you start budgeting, it's important to have a clear goal in mind—something that reflects your priorities and values. This is a great opportunity to think about your 'why'—your purpose for money. What are you ultimately working toward? Whether it's financial freedom, saving for a home, or achieving long-term security, understanding your 'why' will guide your financial decisions.
Some examples of budgeting goals are:
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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. In this case, your purpose might be security and flexibility for your future.
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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. In this case your purpose might be freedom from the weight of your debt.
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To prepare for a new arrival. Parenthood can be both incredibly rewarding and extremely expensive. Estimates vary, but Statistics Canada puts the total cost of raising a child to age 17 in Canada at about $293,000. So, savvy parental planners prepare by producing a budget and looking at what specific costs they’ll face. In this case your purpose might be the ability to spend time with your growing family without additional financial stress.
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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. In this case your purpose might be adventure.
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
Here are a few simple budgeting tips to follow when creating your budget:
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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 Free Budget Planner.
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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.
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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 YNAB, your options are nearly endless.
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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.
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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:
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The money-bucket system. In the money-bucket 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.
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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.
- Try sustainable spending. This is a long-term method that analyzes your income and expenses and brainstorming ways to improve cash flow and make positive changes to your spending habits. It also allows you to look at your finances holistically and prioritize spending where it’ll make the biggest impact to your financial health.
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Budgeting Ahead for Your Life Plans
In addition to the general budgeting tips above, you may want to budget for specific life circumstances. Here are some more detailed tips to budget for various goals and opportunities that life might bring you:
Budgeting for Summer Plans
Summer is the perfect time for vacations and outdoor adventures. If you’ve got big plans, estimate the total cost of each activity on your list. Make sure to include everything from travel expenses to food and activity costs.
Learn more about budgeting for summer plans, including special events and weddings.
Budget Advice for Staycations
Budgeting for staycations can be a lot easier than saving for a big trip, especially if you’re trying to pay off debts and rebuild your savings accounts. However, you still need to budget. Identify affordable local activities and set aside money for any expenses you might incur, including meals and small indulgences.
Budgeting for College or University
College and university life comes with a unique set of financial challenges, including tuition and living expenses. Calculate your expected costs and create separate categories for everything. Stick to your budget and be careful to avoid overspending.
Learn more about budgeting for university expenses.
Budgeting for Time with Friends
Spending a weekend with the guys or girls can be a great chance to catch up with friends and make memories that will last a lifetime. However, it’s not an excuse to overspend and bust your budget. Plan ahead and set aside a specific amount for each big activity. Don’t forget to track smaller expenses, as they can add up quickly.
Learn more about budgeting for get-togethers with the guys.
How to Budget for Wedding Season
Budgeting for wedding season can feel overwhelming when you factor in gifts, outfits, travel, and accommodation costs. Prioritize your spending based on how important each event is to you and your relationships. A clear budget will allow you to celebrate loved ones while avoiding financial stress.
How to Budget for Maternity Leave
Budgeting for maternity leave will enable you to focus on bonding with your new child and caring for your family. Begin by calculating how much time you’ll take off and any paid or unpaid leave options you have. Build a budget by cutting discretionary expenses and saving as much as possible beforehand.
How to Budget to Pay Off Debt
Paying off debt requires discipline. Start by listing all of your debts and prioritize them based on interest rates and minimum payments. Allocate a portion of your monthly income toward tackling a specific debt (e.g., highest interest or lowest balance).
Learn more about how to budget to pay off debt.
Budgeting for the Holidays
Holiday expenses can pile up and lead to serious overspending. Determine how much you can afford to spend, and don’t buy too many gifts in response to social pressures. Stick to your plan and look for sales to make your money go further. These tips will help you learn how to budget for the holiday season.
Budgeting Based on Your Situation
Here are a few situational budgeting strategies:
How to Budget as a College or University Student
Budgeting as a student is all about balance. Track your spending and prioritize essentials like rent and groceries.
Learn more about how to juggle your finances while studying.
Budgeting on an Irregular Income
Irregular incomes fluctuate and are not received consistently or predictably—like freelance work, commissions, or seasonal jobs. Because of this, learning how to budget with an irregular income requires a little creativity. Focus on building an emergency fund so you can make minimum payments and avoid taking on unnecessary debt. The goal is to create a flexible budget with room for variable income.
When Do I Need to Start Budgeting My Income and Expenses?
This is a frequent question from younger people 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 sooner rather than later.
By starting a budget now, you can develop better money habits that will help you curtail excessive spending and avoid getting into debt. 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:
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Housing: 35%
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Food: 15%
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Transportation: 15%
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Utilities: 10%
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Debt Repayment: 10%
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Personal/Discretionary: 5%
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Savings: 5%
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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 or savings.
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 towards your debt payments now, you can save money on interest in the long run and leave yourself in a better position. Often, what feels like insurmountable debt is manageable when you have a plan. 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 (and especially) 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 measures that restrict your income—meaning that you’ll need to stretch every dollar you make further than before.
Why Your Budget Isn’t Working
Your budget might not be working due to unrealistic goals or underestimated expenses. Failing to track spending can also lead to gaps between your expected income and what’s left over each pay period. Regularly review and adjust your budget to adapt to changes in your financial situation.
Can’t I Just Earn More?
Of course, earning more income can help you avoid debt; however, it’s all in how you manage that income compared to your expenses. 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 controlling 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.
Learn more about why your budget isn’t working.
Step-by-Step Budgeting Using the Credit Canada Template
We make budgeting easy with a monthly budget planning template. Here’s how to use it:
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 downloading our free Budget Planner.
Step 2: Fill Out Your Net Monthly Income
At the top of the page, enter your monthly income after taxes and any other monthly income you can put toward your bills. ur finances so you can see how much money you have coming in and going out.
Step 3: Fill Out the Expenses Sections
The rest of the sections are all dedicated to tracking your spending. You’ll find lines for different expense types, such as housing, living, work, and personal.
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 motivate and help you achieve what you want. 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, SMART 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 building a budget or support with 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.
