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 savings and expenses. It guides your spending to help you reach your financial goals.

A budget is especially important if you:

  • don't know where your money is going
  • don't save regularly
  • have problems paying off your debts
  • feel overwhelmed by your finances
  • feel like you’re not in control of your finances
  • want to make the most of your money
  • are planning for a major purchase or a life event

Making a budget can help you:

  • set spending limits
  • find ways to pay down your debts
  • reduce costs and save more
  • live within your means
  • reduce stress
  • have more money for things that are important to you
  • feel in control of your money

What to consider before you start a budget

Take these simple steps before you make your 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:

Short-term goals:

  • paying off your credit card
  • reducing your weekly expenses
  • starting to build an emergency fund

Long-term goals:

  • paying off all of your debts
  • saving to buy a home, a car or booking a trip
  • saving to have children, to go to school or to retire

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. These amounts can sometimes seem out of reach. That is why you should start by saving a small amount on a regular basis.

Having an emergency fund will help you reduce financial stress and avoid getting trapped in a debt cycle.

Learn how to build an emergency fund.

Know where your money is going

Tracking your money will help you figure out what comes in and what goes out of your pocket. Every dollar you spend affects your overall budget.

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.

Try this exercise for 1 or 2 months:

  • keep track of everything you buy, from groceries to a daily cup of coffee
  • keep a copy of bills you pay during this period
  • try dividing your expenses into 2 categories: “needs” and “wants”

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

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

Evaluate your needs and wants

Knowing the difference between your needs and your wants is key to making a smart budget.

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 can't cycle to work, you may need a car.

Your needs and wants may also change over time. For example, a large house may be a need while you're raising a family. However, a condo or a smaller home may be what you need when your children move out.

Once you’ve figured out your needs and wants, you’re ready to start your budget.

How to make a budget

In order to make a useful budget you need an effective tool that is easy to use.

The Budget Planner is a tool that allows you to create a personalized budget and save it online. It gives you tips and guidelines and helps you figure out your next steps with suggestions. It also creates charts that show you where your money goes. You also have the option to compare your budget with those of other Canadians like you.

Use the Budget Planner to make a budget.

Steps to make a budget

Take the following simple steps to make your budget.

Step 1: List your income, savings and expenses

  • take your recent pay stubs, bills, and account statements
  • enter the amount of income, savings and expenses into each category of the Budget Planner
  • if you can’t find a field for a specific item, you can always add and name your own items

When you're done, review the amounts to make sure you didn’t forget anything. These items should represent your current situation.

As you’re entering data, the tool will give you tips to help you save more and/or spend less. Consider those tips in order to balance your budget.

When you’re done creating your budget, save it online so you can return to it anywhere, at any time.

Step 2: Review your results

The results section provides you with average guidelines. These guidelines tell you what Canadians usually spend or save for each budget category, for example, food, housing, clothing, insurance, etc.

Look at the different alerts you receive for each category:

  • Thumbs up: this amount is within the average range
  • Warning sign: this amount is slightly above the average range
  • Stop sign: this amount is above the average range

These alerts will help you determine where you should focus your attention or try to reduce costs. Everyone’s situation is different and while the guidelines can’t apply to everybody, they provide a good starting point.

Review your results graphics, they give you a clear visual of your overall budget. You’ll see a graphic that shows you how your budget compares to those of other Canadians in similar situations. It’s valuable to compare your financial habits with people with the same age, income, housing and family situation.

Step 3: Review your next steps

In the next steps section, the tool gives you personalized suggestions. These suggestions are based on your situation and what you have entered in your budget. They help you figure out your next steps whether you have money left or are overspending.

Read them carefully and follow the links to useful educational tools and content in order to improve your budget.

Tips to help you stick to your budget

Now that you have a budget, try to stick to it and improve it as you go.

To help you with this task, try the following:

  • keep all your receipts and bills
  • limit your spending as much as possible to what is in your budget
  • update your budget with any changes, for example, a pay raise, a bill increase, etc.
  • 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 often varies from your budget, readjust your figures to make it more realistic.

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

  • are there large differences between your actual spending and your budget
  • which categories have the largest differences
  • are differences due to an unusual situation or is this likely to happen each month
  • can you save enough money to reach your financial goals or pay off your debts

Continue with this exercise each month. You can set a reminder or book time in your calendar to make sure you review your budget regularly. If you make it a habit, you are more likely to stay on track.

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