How to make a budget (and stick to it)

If you’re new to budgeting, congratulations on getting started! Learning the basics of budgeting can help you manage your finances, save for the future and ease your financial stress.

Let’s invest some time to learn the basics of budgeting. Your finances will likely thank you later.

What is a budget

A budget tracks how much you earn, spend and save over a period of time to help you reach your short- and long-term financial goals. Think of it as a guide that tracks your spending and saving. Following one can give you an understanding of where your money is coming and going so that you can live within your means.

Why make a budget

A budget gives you a clearer snapshot of your financial situation. Making one is an important first step in taking control of your finances.

A budget can help you:

  • Manage your spending
  • Pay down your debts
  • Identify ways to cut costs and save more
  • Save up for big ticket items like major appliances or a vehicle
  • Pay for unexpected expenses like car repairs, or occasional expenses like gifts for family and friends
  • Estimate how much you can afford to spend on things like car payments, loan payments or a mortgage

3 things to consider before making a budget

Before you sit down to crunch some numbers, ask yourself these important questions:

1. What are my short- and long-term financial goals?

Think about your financial goals and make saving for those objectives a part of your budget. Examples of short-term goals include paying off your credit card, saving up for minor home improvements and reducing your weekly expenses. Examples of long-term goals include saving up for college or university, paying off all your debts and saving up for a down payment on a home.

Source: Some things to consider when reviewing your financial goals, TD Canada TrustOpens in new window.

2. Can I pay for an unexpected expense without going into debt?

No one wants to be caught in a financial pinch when they need money ASAP. You can deal with out-of-nowhere expenses like car repairs or urgent visits to the vet by having an emergency fund.

The Financial Consumer Agency of Canada (FCAC) recommends having enough money in your emergency fund to cover your living expenses for 3 to 6 months. This may seem like a lot of money and depending on your debts and expenses, it may take a while to accumulate that kind of wealth. But if you make saving for an emergency fund a part of your budget, you’ll get there eventually. Just be patient and consistent. Building a nest egg is a marathon, not a sprint.

Source: Setting up an emergency fund, Financial Consumer Agency of CanadaOpens in new window.

3. Where does my money go?

Every dollar and cent you spend affects your overall budget, so keep track of where your money is going. The FCAC suggests taking note of what you spend for 1 or 2 months by:

  • Monitoring everything you buy, from groceries and gas to a meal at a restaurant and the occasional coffee or treat
  • Keeping a copy of all your bills during this period
  • Dividing your expenses into 2 buckets: needs and wants
    • A need is something that’s essential. Think medication, groceries, electricity in your home and a roof over your head. These are things you must budget for to survive. Then there are wants. These are often fun things like tickets to a concert, eating out at a restaurant and going on a vacation.
    • Knowing the difference between your needs and wants is important, as even small changes to your spending habits can have a major impact on your overall budget.

Once you understand your needs and wants, you’re ready to start budgeting.

Source: Making a budget, Financial Consumer Agency of CanadaOpens in new window.

How to make a budget in 4 easy steps

Building a budget doesn’t have to be complicated. To make it easier, choose a budgeting tool that works best for you. Here are a few suggestions:

Once you’ve settled on a budgeting tool, you’re ready to make your first budget. Here’s a step-by-step guide to help you out.

Step 1: Calculate your monthly household income

Tally up all of the money coming in after taxes and deductions. This can include money from:

  • Full- or part-time work
  • Employment Insurance (EI) or other government benefits
  • Spousal or child support
  • Interest from a savings account or investment earnings

Step 2: Estimate your total expenses

List all your expenses and add up the total. Your spending categories might include:

  • Fixed expenses, or expenses that must be paid regularly such as a mortgage, rent or car payments
  • Variable expenses, or expenses that fluctuate each month such as groceries and gas
  • Discretionary expenses like dining out or buying clothing
  • Occasional expenses, or expenses that come up periodically like car insurance
    • To get a monthly average, take the typical annual amount you spend and divide that number by 12
  • Credit card and other debt repayments
  • Savings, or money you put aside for future use
  • Charitable contributions

Step 3: Figure out the difference

Subtract your total expenses from your income total to get the difference. This number will reveal a lot about your spending habits. A positive number means you’re spending less than you earn and you can save even more for future needs. If the number is negative, you should consider trimming down your discretionary expenses or finding ways to increase your income.

Step 4: Review your budget regularly

Things change over time – you may get a raise, move to a new rental unit or have children. Take the time to revisit your budget every few months, make appropriate adjustments if necessary and make sure that you’re still on track to reach your goals.

Source: How to create a budget, TD Canada TrustOpens in new window.

The bottom line

Having a budget gives you a roadmap to financial health. Think of it as a north star that keeps you accountable as you work towards specific financial goals. Remember, creating a budget doesn’t have to be complicated – there are different budgeting tools that can work for you.

This material has been prepared for informational purposes only and is not intended to be a substitute for obtaining advice from a financial professional.

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