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How to budget: a guide to mastering your finances

Posted on 4 March 2024

Written by Chris Galea

At Spergel, we often hear that one of the most common barriers to setting up a monthly household budget is not knowing how to budget. Yet creating a budget is a crucial step to achieving financial freedom, and achieving your goals. It allows you to review your expenses and income, and make a realistic decision on how much you are able to spend each month, and how to manage your money. It can prevent you from running into debt, and instead help you to save for big purchases. A budget makes a huge difference in how you manage your money effectively. Once you have a budget in place, you may only need to review it every now and again, although it does require discipline to stick to.  Whether you are saving for something specific, or simply want to gain control over your finances, our guide explains how to budget as well as the actionable steps you need to take.

Why do I need a budget?

A budget is essentially a key to managing your money. It clearly maps out the income you receive, the expenses you incur, and the savings and disposable income you can afford. It is also the first step of setting yourself financial goals, by showing you how and when you will be able to achieve them. You should prioritize creating a budget if you fit any of the following criteria:

  • You are unsure where your money is going
  • You do not save 
  • You find it difficult to repay your debts
  • You feel overwhelmed financially
  • You do not feel in control of your finances
  • You want to maximize your funds
  • You are planning for a major life event or want to make a purchase

Here is what a budget can help you to achieve:

  • Defining spending limits
  • Figuring out debt repayments
  • Increasing your savings
  • Tackling mental health problems linked to debt
  • Aligning your funds with your values
  • Empowering you over your finances

Considerations for your budget

Before creating your budget, take the following steps:

  • Consider your financial goals. Figure out both your short-term and long-term financial goals, and add these into your budget as things to save for. Short-term goals might include paying off your credit card debt or building an emergency fund, while long-term goals might include saving for a home or an education fund. 
  • Track your spending. This will help you to understand exactly the income you receive, and your expenditure. Each and every single dollar you spend affects your overall financial landscape, so it is important to track your money. This can help you to make better financial decisions and to save more efficiently.
  • Understand needs vs wants. Knowing what is essential is pivotal in creating good financial habits. While ‘needs’ refer to things like groceries, rent, and medication, ‘wants’ might be vacations, takeouts, and so on. Once you have determined your own needs vs wants, you can establish a budget accordingly.

How to budget

Ready to create your budget? Take the following simple steps to understand how to budget, no matter what your financial situation.

Step 1: Record all your income, expenses, and savings

Recording your income and outcome helps you to understand your financial situation, setting the stage for effective budgeting. The easiest way to do this is to work through your bank account statements, payslips, and bills. You should then create a spreadsheet to track every single cent of your income and outcome. When tracking the source of each, it is important to provide helpful, detailed names so that you can easily track where your money is coming or going for future reference. Once you have entered all of your details, you now have a review of your current finances. You should know pretty soon where perhaps you need to save more or spend less money to create a more equal balance. As a general rule, you should spend up to 50% of your net income on essentials, like rent and groceries. 30% should be disposable income, for entertainment, shopping or dining out. And then 20% should go towards debt repayment or savings. Save your budget somewhere safe so that you can easily access it again as a reference point.

Step 2: Review your situation

Now that you have a view of your situation, it may be helpful to research average guidelines on what Canadians typically spend and save for each category of your budget, for instance, groceries, rent, insurance, and so on. You could also categorize your expenses into fixed costs (rent, utilities, etc) and variable costs (groceries, entertainment, etc). You can then use these guidelines as a basis to assess where you may be overspending or underspending. From there, you can determine where to focus your attention to reduce costs.

Step 3: Establish your realistic financial goals

Now you have a good idea of your situation and baseline, it is time to define both short-term and long-term financial goals. What exactly is it that you want to achieve? Are you lacking an emergency fund? Are you stuck in your overdraft? Or just making the minimum payments on your credit cards? Having clear objectives will help to guide your budgeting decisions. List out your short-term and long-term goals, and work out how you plan to get there along with a timeline. It is key to ensure these goals are realistic, so that you can actually achieve them within a reasonable period of time. Setting yourself some incentives along the way will also help to motivate you on your budgeting journey.

Step 4: Create a monthly budget

In order to make your overall budget more realistic and achievable, you should use your income and expense details to create a monthly budget. Allocate a specific amount to each spending category, ensuring that your total expenses do not exceed your income. An important part of budgeting is tracking your spending, and frequently monitoring your actual spending against your budget. This will enable you to review your spending patterns to identify areas for improvement, as well as successes. As part of this monthly budget, if you have outstanding debts, you should formulate a strategy for repayment. Focus on high-interest debts first while making minimum payments on others. This is known as the debt avalanche method, and can save you thousands of dollars across the year.

Step 5: Track your progress

It is all very well having a budget in place, but an important step of the ‘how to budget’ journey is regularly reviewing your progress. Life circumstances and financial goals can change, so make adjustments as needed. Flexibility is key to maintaining a sustainable budget.Each time you review your budget, you should also update it with any applicable changes to your income or expenses.. See how realistic your budget is, and if you are making positive progress. If not, why not? Which category of spending is showing the largest difference? Do you think you can continue to meet your goals? By performing these reviews and asking questions of yourself, you are more likely to stay on track.

Step 6: Speak to a Licensed Insolvency Trustee

Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. If you are concerned that you do not know how to budget, will not be able to stick to one, or do not know where to begin with your debts, they can help. At Spergel, we have been helping Canadians to gain debt relief for over thirty years and we are here to help you too. Book a free no obligation consultation for personalized guidance based on your unique financial situation. We can offer insights into pathways to debt relief, how to budget, and overall financial wellness.

How to stick to your budget

Half of the battle of having a budget is actually sticking to it and improving it as you go over time. If you do not stick to it or come in under your budget and instead rely on credit to spend each month, it will likely lead to more debt. Sticking to your budget is simple, really. Here are a few recommended activities:

  • Keep all of your receipts
  • Keep your spending limited to what is in your budget
  • Frequently review your budget, and adjust as required – for instance, include updated income figures if you receive a pay increase
  • Compare your budget to your actuals and what you really spent at the end of the month. Combat any large differences between your budget and your actual spending. Is this due to a one-off situation, or is this likely to happen each month?
  • Ask yourself ‘can I save enough money to reach my financial goals or pay off my debts?’ If not, what do you need to adjust in order to get there?

After you’ve completed at least one month of tracking, you will gain insight into where you can cut back on your spending in order to pay down debt or save money. Continue with this exercise each month. You can set a reminder or create a personal calendar invite to review your budget regularly. If you make it a habit, you are more likely to stay on track.

How to budget: FAQs

Here are some common questions we receive on how to budget.

What is the 50/30/20 rule?

The 50/30/20 rule is a simple budgeting guideline that suggests dividing your net income into three categories: needs, wants, and savings. Here’s a breakdown of each category:

  • 50% for needs: allocate 50% of your income to cover essential and fixed expenses, including your mortgage or rent, utilities, groceries, transportation, and insurance. These are the essentials required for day-to-day living.
  • 30% for wants: reserve 30% of your income for spending or non-essential items, such as dining out, entertainment, hobbies, and other personal indulgences. This category allows for flexibility and enjoyment in your budget.
  • 20% for savings: dedicate 20% of your income to savings and financial goals. This includes contributions to retirement funds, emergency funds, and debt repayment. Saving a significant portion of your income helps build financial security and plan for the future.

Sticking to the 50-30-20 rule can provide a simple framework for managing your finances and ensuring a balance between meeting essential needs, enjoying personal wants, and securing your financial future through savings. Keep in mind that individual circumstances may vary, and it’s essential to adjust the percentages based on your specific financial goals and priorities.

What is the budget rule in Canada?

In Canada, there isn’t a specific ‘Canadian budget rule’ that universally applies to everyone, as everybody’s financial situations vary. There are, however, some general guidelines and principles that Canadians often follow to manage their finances effectively. Here are some key considerations:

  • 50-30-20 rule: a widely used budgeting guideline that suggests allocating 50% of your income to needs (essential expenses), 30% to wants (non-essential expenses), and 20% to savings and debt repayment. This rule provides a simple framework for balancing spending, saving, and debt reduction.
  • Tax considerations: you should be aware of various tax considerations when budgeting. Take advantage of tax deductions, credits, and benefits offered by the Canadian government, such as the Registered Retirement Savings Plan (RRSP) contributions, the Canadian Child Benefit, and other applicable tax credits.
  • Emergency fund: building and maintaining an emergency fund is an essential aspect of budgeting. Having three to six months’ worth of living expenses set aside can provide a financial cushion in case of unexpected events like job loss or medical emergencies.
  • Government Assistance Programs: be aware of government assistance programs that can impact your budget. Programs such as Employment Insurance (EI), the Canada Workers Benefit (CWB), and others may provide financial support during specific life circumstances.
  • Housing costs: given the significant impact of housing costs on your budget, particularly in major cities, it is crucial to carefully manage expenses related to rent or mortgage, utilities, and property taxes.
  • Consumer debt management: be mindful of managing consumer debt, such as credit cards and loans. High-interest debt can hinder your financial well-being, so it’s important to include debt repayment in your budget.

While these principles provide a solid foundation for budgeting in Canada, individuals should tailor their budgets to their specific needs, goals, and circumstances. 

What is the budget for a single person in Canada?

Creating a budget for a single person in Canada involves considering various expenses to maintain a balanced financial plan. A typical budget should include allocations for the following:

  • Housing – including mortgage payments, maintenance fees or rent
  • Utilities
  • Property taxes if applicable
  • Food expenses – including groceries and occasional dining out
  • Transportation costs – including public transit or car-related expenses
  • Insurance for health and home
  • Debt repayment where applicable
  • Personal care items
  • Entertainment
  • Health and wellness
  • Miscellaneous expenses like clothing and household supplies
  • Savings – including saving account contributions and retirement funds

While the 50-30-20 rule (50% needs, 30% wants, 20% savings) is a good guideline, individual circumstances and regional cost variations should be considered when tailoring a budget to meet your specific needs and priorities. 

Hopefully by now you are feeling much more confident when it comes to how to budget. Budgeting is a dynamic process that empowers you to take control of your finances, helping you to track your spending and set goals. . The advice and support of a reputable Licensed Insolvency Trustee can also be valuable in helping to begin your budgeting journey, and to help you gain debt relief if needed.

If you want to learn more about how to budget and the forms of debt relief available to reduce your debt and permanently stop collection calls, a Licensed Insolvency Trustee can help you. Book a free consultation with one of the debt experts at Spergel to learn more about how to begin a fresh financial future. You owe it to yourself.

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Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

Schedule a Free Consultation with Chris Galea (or your local Spergel LIT) by:

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