Article written by Barry Choi for exclusive use by reebee.
Every person needs a budget. It doesn’t matter if you’re a recent grad or if you have a six-figure income, having a budget will help you manage your money. While creating your first budget may be a bit intimidating, once you’ve got one set up, it’s incredibly easy to manage and update.
So how do you budget your monthly expenses effectively? It’s pretty simple. Follow this Budgeting 101 Guide and you’ll have your money working for you in no time.
Start with your income
At the top of your budget (above your expenses), list out your monthly income. For most people, this will be the salary they take home from their employer, so it should be easy to calculate. If you’re paid monthly, you’ll already know your number.
For those who are paid bi-weekly, you’ll need to make a quick calculation. Take your bi-weekly pay and multiply it by 26. Then divide that by 12 and you’ll have your monthly income. For example, if you’re being paid $2,000 (after taxes) bi-weekly, your monthly income would be $4,333.33.
It’s not an exact science since there will be months where you get an extra paycheque, but it’ll help you manage your expenses better with a monthly number in mind.
If you have a side hustle or you’re getting any other income such as the Canada Child Benefit, be sure to include that too.
List all of your expenses
Now we’re getting to the “fun” part. Listing out all of your expenses is vital because you need to see where your money is going. Start with all of your hard expenses and try to group categories together so you can see how much you’re spending. Your expenses might look something like this:
- Outstanding debt (student loans, credit cards, line of credit, etc.)
- Condo fees
- Property tax
- Home insurance
- Car payments
- Auto insurance
- Public transportation
- Home internet and cell phone
- Streaming services
- Personal care
- Children’s activities
- Fitness memberships
Yes, that’s a lot of expenses and I likely haven’t even covered everything. This should be obvious, but your expenses must be lower than your income.
There will always be miscellaneous costs that come up which is why you want to ensure you have a buffer in your budget. Any cash surplus can be put towards reducing your debt or increasing your savings.
Don’t forget about your savings
Having a balanced budget is something to be proud of, but don’t forget to include any savings goals you have in mind. I recommend separating these lines from your expenses so you get a clear vision of what you’re working towards. Some goals you’ll likely want to list include:
- Emergency fund
- Home down payment
- Registered Retirement Savings Plan (RRSP)
- Registered Education Savings Plan (RESP)
- Major expenses
You won’t necessarily be saving for all of the above goals, but the idea here is to list out what your plans are. Many people only think about their savings after all of their monthly expenses have been. Quite often that means, there’s zero money left for savings.
By listing out your savings goals in your budget, you’re making them a priority. You can take things a step forward by setting up automatic transfers from your chequing account to an account for each of your goals. By doing this, you’re paying yourself first.
Make sure your savings goals are set up with one of the best high interest savings accounts in Canada. Unlike traditional banks, digital banks pay a decent interest rate. For example, EQ Bank has been consistently paying around 2% interest for years whereas I’ve earned zero interest from my regular bank. Having the right accounts can help you meet your goals quicker.
Track your expenses
You would think that your budget would be done after listing your income, expenses and savings, but that’s just the start. Now it’s time to start tracking your expenses. For the next 1-3 months, log everything you spend money on. From that birthday card for mom to after-work drinks, you need to keep a record of all of your spending.
Pro-tip: If you’re tracking your expenses at the beginning of the year, don’t forget about things that will come up much later such as holiday shopping or weddings.
Now that you know where all of your money is going, you can start to make adjustments. Are you spending too much on eating out? Maybe it’s time to start meal planning, so you can cut back on your spending. Yes, your grocery bills may go up as a result, but you’ll likely still come out ahead.
Have you looked at your other expenses? Is there any way to cut or reduce what you’re spending on entertainment, your cell phone bill or even your clothes budget? Every dollar you cut from your spendingcan be applied to your debt or savings.
It’s important to note that budgets can change frequently, so you shouldn’t get upset if you go over one month. Make adjustments as needed, but try to find some consistency to the point where you no longer stress about your spending because you know you’re reaching all of your saving goals.
Consider the 50/30/20 budget
Although every budget is different, the 50/30/20 budget method has proven to be effective over the years. This is how those numbers break down in your budget:
- 50% – Needs
- 30% – Wants
- 20% – Savings and debt
The numbers speak for themselves. You want to try to keep your hard expenses under 50% of your budget. For wants such as entertainment, clothes and vacations, you shouldn’t exceed 30%. The remaining 20% can be put towards debt repayment and savings.
Using this strategy can go a long way as it should make managing your income and expenses relatively easy. That said, if you live in a high cost of living area or you’re just starting out your career, housing expenses alone could exceed 50% of your budget.
Think of the 50/30/20 budget as another goal. Once you’re able to get there, you can relax a little, but that doesn’t mean you should stop checking your budget regularly.
Even after following the above steps, managing your budget can still be a struggle for some people. One strategy to get around this is to switch to a cash only budget. By doing this, you’ll physically see your money leaving your wallet which will encourage you to be smarter about your spending. Alternatively, you could try one of the best budget apps in Canada as they’ll help you track your money.
Budgeting is something you’ll have to do your entire life, but once you have the hang of things, managing your money will be easy.