Making a Budget in 3 Steps

According to the 2024 Canadian Financial Capability Survey conducted by the Government of Canada, “about 1 in 3 Canadians (32%) say their monthly spending exceeds their monthly income, while 1 in 2 (49%) has had to borrow money for daily expenses in the last 12 months.”

Why do I need a budget?

A budget is an indispensable tool to help you stay on track with your financial goals. It allows you to keep track of how much money you have coming in and going out, identify unnecessary expenses and help you set aside money for your personal goals.

Did you know that, according to the Financial Consumer Agency of Canada, around 51% of Canadians don’t have a budget? The main reasons behind this statistic are said to be a lack of interest or time and a feeling of being overwhelmed by managing one’s finances.

However, according to the survey cited in the introduction, people who have a budget are less likely to default on their financial obligations, more effective in managing their finances, and less inclined to live beyond their means.

Having a monthly budget is useful for:

• Knowing where your money goes and setting spending limits
• Deciding how much money to put into savings
• Allocating part of your income to pay your debts
• Feeling in control of your finances
• Planning for projects that are important to you, such as a trip or renovations
• Living within your real financial means
• Reducing your stress related to managing your money

How do I start making a budget?

Creating your own monthly budget is much easier than you might think. Generally, there are three steps to follow.

Step 1- Set your goals

In this first step, think about specific goals you would like to achieve with your money. Then, set a date for when you would like to achieve them.

Here are some examples of goals you could include in your budget:

• Go on a trip
• Pay off your credit cards
• Save for a house
• Invest in your child’s registered education savings plan (RESP)
• Be able to put a specific amount in your registered retirement savings plan (RRSP) or tax-free savings account (TFSA) every month
• Pay off a debt
• Build up an emergency fund (to cover your expenses in case of a disability or for unexpected renovations)

The important thing is to choose goals that you will be able to achieve and that are important to you in order to stay motivated.

Step 2 - Calculate your income and your expenses

The second step is no doubt the longest. It involves making a list of all your income and all your fixed expenses. To make it easier, hold on to your bills for an entire month and check your statement of transactions available in your online bank  and credit card account.

Once this list is completed, it will serve you for years to come. Think of this step as an investment of time towards your financial wellbeing!

To help you with this, you can use the Budget planner tool created by the Government of Canada.

Step 3- Adjust your budget every month

Lastly, at the end of every month, do this math:
Your monthly income - your monthly expenses = how much $?

The result is the amount you are able to put aside each month for your personal goals. If this amount is too small, check whether you could lower the expenses somewhere next month (e.g. eating out or buying coffee from a coffee shop). In any case, you really should make all the efforts to stick to your budget!

What income sources should be listed in my budget?

You should include the items below to the Monthly income section:

What expenses should I include in my budget?

The items below should be included in the Monthly expenses section:

Should I include my savings in my budget?

Yes, absolutely. Here are the items that should be included in the Monthly savings section:

Knowing the difference between needs and wants in a budget

We can be very good at tricking ourselves into thinking that we are “meeting a basic need” when in fact, we are wasting our money on luxury stuff or things that we don’t need at all. To make sure that you are spending your money wisely, ask yourself these two questions before budgeting for an item:
1) “Is this really necessary to my life?”
2) “Is there an economical option that could meet this need?”

Let’s say that you are contemplating getting a new car. Yes, it’s a necessary expense because you need it to commute to work and drive the kids around. But is the 7-passenger luxury SUV you’ve been dreaming the wisest choice? No. An affordable 5-passenger sedan from a reliable car manufacturer will do the trick (and leave you money for other things). 

Our tips

In closing, here are some tips to keep in mind to ensure that your budget is optimal and that it keeps up with your situation over the years.

• Give yourself leeway: It is often safer to round up your expenses to ensure that you are able to cover any unforeseen events that may arise, such as an appliance that stops working or the car breaks down..
• Identify repetitive and unnecessary expenses: When tracking your budget from month to month, identify recurring expenses that could be reduced. The classic example is that yummy little latte from your favourite barista! Think about it, three five-dollar coffees a week adds up to $780 over the course of the year.
• Plan for expenses that come back at the same time each year: Car registration, snow removal and municipal taxes are all expenses that you can budget and save up for in advance.
• Adjust your budget when something changes: Whenever your income changes or a new life event occurs (such as having a baby or purchasing a property), take the time to adjust your budget to avoid any unpleasant surprises or new financial stress.

Last but not least, don’t hesitate to call on the expertise of a financial advisor when making your budget. This expert will guide you in making the right choices to help you maximize the money you work so hard to earn.