Making a budget

From Financial Consumer Agency of Canada

Why make a budget

A budget is a plan that helps you manage your money. It helps you figure out how much money you get, spend and save. Making a budget can help you balance your income with your regular expenses and guide your spending to help you reach your financial goals.

A budget is especially important if:

  • you have trouble paying your bills
  • you don't know where your money is going
  • you have problems paying off your debts
  • you don't regularly save
  • you want to find ways to make the most of the money you have
  • you want to plan financially for major purchases such as a home, car or travel
  • you want to prepare financially for important events such as retirement, having children or going to school

Making a budget may help you:

  • set spending limits
  • live within your means
  • find ways to get rid of your debts
  • reduce costs
  • have more money for things that are important to you

Considerations before you start a budget

Take these simple steps before you make a budget.

Think about your financial goals

Identify your short-term and long-term goals. Make saving for those goals part of your budget.

For example, goals may be:

  • paying off your debts
  • saving to buy a home
  • beginning to build your savings for retirement
  • paying for post-secondary education if you want to go back to school or support your kids when they move out

To deal with unexpected situations, create an emergency fund. Your emergency fund should provide you with enough money to cover your living expenses for 3 to 6 months.

Know where your money is going

Tracking your money will help you figure out your income and your expenses. Every dollar you spend has an impact on your overall budget.

Small changes to spending habits can have a big impact on your budget and your ability to save.

For example, if you spend $2.50 a day on coffee, it will cost you more than $900 a year.

To keep track of where your money is going, take note of what you spend. Keep your receipts.

Try this exercise for one or two months:

  1. Keep track of everything you buy, from groceries to a daily cup of coffee
  2. Keep a copy of bills you pay during this time
  3. Divide your expenses into two categories: “needs” (for example, groceries) and “wants” (for example, tickets to a concert)

Use the My Expenses Calculator to see how these small purchases can add up over time.

Evaluate your needs and wants

A need is something that is necessary, required or essential. For example, a roof over your head, clothing, food, or medication.

A want is something that you'd like, but don't necessarily need. For example, meals at a restaurant, a trip, a gym membership, or designer shoes.

Needs and wants aren't the same for everyone. One person's want may be another person's need. For example, if you live near a bus route, a car may be a want rather than a need. However, if you don't have access to public transit and you can't walk or cycle to work, you may need a car.

Your needs and wants may also change over time. For example, a full-sized washer and dryer may be a need while you're raising a family. However, an apartment-sized model may be what you need when your children are grown and you've downsized to a smaller home.

Tips to help you make a budget

Use the Budget Calculator to help you make a budget.

Step 1: List your income and expenses

  • Take your recent pay stubs, bills, and receipts
  • Enter the amount of income and expenses into each category of the Budget Calculator. If you've collected information for more than one month, take the average
  • If you have income or expense categories that you don't see in the Budget Calculator, put them in an “other” category for each section

When you're done, review the figures and ask yourself:

  • Did you miss any income or expenses
  • Are there any other income or expense categories missing to reflect your situation
  • Were you able to save any money
  • Did you have to borrow money to pay for your basic expenses

This will help you understand your spending habits. If you need to reduce your spending, your "wants" may be an area to target. Pay down debts or increase your savings with the money you save from cutting back on “wants”.

Step 2: Create a balanced budget

Consider the following questions:

  • Do the figures reflect your expenses in any given month
  • Could there be a more realistic figure to reflect your expenses
  • Are there any small recurring expenses that you can cut
  • Are there expenses in the “wants” categories that you can cut
  • Do you want to add money to new savings categories that reflect your financial goals. For example, saving for a trip or creating an emergency fund

If you don't have enough money to cover your expenses, you may want to review your budget and adjust your expenses where you can. You may also consider ways to increase your income.

If you have money left over, consider using it towards your financial goals.

Tips to help you stick to your budget

To stick to your budget:

  • limit your spending as much as possible to what is in your budget
  • keep receipts and bills
  • list your income and expenses
  • compare your budget to what you actually spend at the end of each month

Evaluate your budget from time to time. If your actual spending regularly varies from your budget, you may need to readjust the figures to make it more realistic.

When comparing your budget to your actual spending, ask yourself the following questions:

  • Are there big or small differences between your actual spending and budget
  • Which categories have the largest differences
  • Are differences because of an unusual situation or is this likely to happen each month
  • Are you able to save enough money to reach your financial goals or pay off your debts

Continue with this exercise each month. Many people make this a regular habit at the end of each month.

If your actual spending varies only a little from your budget, you're on the right track.

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