Learn Budgeting 101 How to Make a Budget in 5 Easy Steps

How to Make a Budget in 5 Easy Steps

If you have a savings target and are determined to reach it, budgeting will help you get there. A budget tracks your income and spending, mostly over the course of a month, and is a promising start to improving your financial stability!

Reasons to Make a Budget

49% of Canadians currently use a budget to manage their money. The budgeting process gives you a better understanding of your spending habits and a space to evaluate whether they are sustainable. These are the main reasons why a budget is useful.

1. Increases Your Knowledge of Your Income

How much are you making every month, once you exclude taxes and other payroll deductions? Creating a budget helps you track your net income and shows you exactly how much you spend. This is especially helpful if you receive work multiple jobs or a freelancer with unstable income flow.

2. Tracks Your Money

A money budget organizes your spending so you can easily tell where your money is going. This allows you to gain more control over your finances.

Canadian debts reached 175% in 2020, showing a greater need across households for a financial budget. A 2019 survey found that 73.2% of Canadians face outstanding debts. If you encounter difficulties with disciplining yourself to save, there’s never a better time to start creating a budget.

3. Improves Finances

Knowing where your money is going will help you understand what you need to cut. Especially if you have a credit card, living beyond your means can happen subconsciously. Budgeting will stop you from doing this, preventing undue stress.

Budgets allow you to save for emergency funds and financial goals, too. This will be ideal for periods of crisis, or if you are looking forward to spending on something big. When you make a budget, you can plan around debts and loans by setting spending limits.

What to Consider Before You Start a Budget

How do you start a budget that works for you?

Many people start budgeting at certain points in their lives, but they don’t end up following through. This is because they didn’t personalize their budgets.

To ensure that your plan is successful, you must evaluate your motivations and your saving abilities. Here are some things you need to consider before you learn how to make a budget.

1. Decide on Your Financial Goals

What are you dreaming about? Is it to settle all your debts by the end of the year? Or maybe to save up for college or to buy a house?

Financial goals help you set targets and provide you with a purpose for budgeting. Before you start the budgeting process, list down your goals. Divide these into short-term and long-term aspirations. Short term goals can include cutting down on expenses or restricting the use of your credit card. Long term goals can be similar to get out of debt, starting a mortgage, or planning a vacation.

Once you have your list, reorder it, and place the most important and pressing goals first.

Budgeting to achieve your financial goals

2. Choose a Budget Rule

Before you budget, plan how you want to allocate your money. You can do this by choosing a budget rule, and a common and simple one is the 50/30/20 budget rule.

This means that you should spend 50% of your net income on necessities, 30% on wants, and 20% on savings. Needs include the expenses you can’t go without, such as electricity, rent, and gas. Wants may include traveling or entertainment.

The other 20% will go to your savings, which may be allocated for emergency funds, debt repayment, RRSP funds, or any other saving plans.

3. Consider Your Previous Expenses

Before you start your budget, predict your expenses, and break them down into categories, such as entertainment, food, and more. You can use your spending from the previous months to come up with these projections.

Monitoring your expenses will show you when you’re spending too much on something. It’s important to note that even the smallest expenses will build up over a year and cost you. For example, if you buy a box of chocolates every week that costs $10, you will lose $520 in a year.

This reflection on previous expenses is an excellent chance to set yourself adjustments before you start a budget.

Plan how you will track your monthly expenses, too. You can use budgeting tools, such as a budgeting template, a spreadsheet, or an app. Using these tools will ease the creation process and make your budgets look more organized.

4. Prioritize Your Spending

Before you start your budget, explore the different things you usually spend on or are planning to spend on. See whether you can cross anything out that you don’t really need.

Do you really need that new skateboard? Is spending money on a luxury weekend worth sacrificing an end-of-year celebration with your family?

How to Create a Budget

The main goal of creating a budget is to reach your financial goals by growing your savings and cutting down on unnecessary expenses. These are the steps you can take to make a budget.

Step # 1. Include Your Net Income

The first thing to consider is how much you make. List your take-home pay, which excludes taxes. This guarantees that you don’t have an overestimated understanding of your income.

A tip is to do this as soon as the money lands in your bank account. Not before, and not after. If you list your income before you possess it, you will have an exaggerated sense of how much you can currently spend. Listing it as soon as the money arrives will also ensure you don’t forget to include it later.

Step #2. Track Your Monthly Expenses

Go through everything you spend during the month and list them regularly. These expenses include everything, both big and small. Gas, school expenses, even a candy bar - they all go into the list. Make sure to do this daily or weekly so that you don’t forget your expenses. This way, you will get to evaluate your spending throughout the budgeting process.

Step #3. Categorize Your Expenses

Fixed expenses remain constant every month. This includes rent, insurances, subscriptions, and more. Variable costs differ based on usage, such as electricity and hot water. Once you’ve listed your expenses, categorize them into these classifications.

Classify them allows you to stop paying attention to fixed expenses because you cannot reduce these costs. You can narrow down on variable expenses to examine how you can adjust your spending pattern to suit your savings goals.

Step #4. Calculate the Difference

Add up your incomes and your expenses separately. Once you have the total, subtract the expenses from your income, and see how much you have left. The remaining amount will represent your monthly savings.

Step #5. Review and Evaluate Your Budget

Once you know how much you save every month, try to evaluate this by comparing it with your financial goals. For example, if you are saving for a holiday at the end of the year, divide the amount you will need to save by then by the number of months.

Did your monthly saving reach this mark? If not, this is when you get to trace your spending and evaluate how you can do better. Are there any expenses that you can constrict?

Jenny Jesup, with Bridgeworth Financial, Shared his 3 step plan for saving for a holiday. “1) Determine how much you plan to spend 2) how much can you start setting aside each paycheck or each month to meet that goal 3) Put it in a separate account (not checking or your savings) so that you will not be tempted to spend it.”

To understand how well you are tracking in general, you can compare your spending with other individuals in Canada. Statistics Canada created an infographic that shows the average expenditure across different households in 2017. This will give you a clue as to how well you’re doing and perhaps provide you with a guideline when setting your savings targets.

Things to Remember When Making Your Monthly Budget

While going through your financial budget, there are some factors to keep in mind so that the process is effective.

Allocate Money for Savings

When creating a budget, make sure to include a savings goal, and keep this in mind throughout the month. How much do you want to save in the end? If you follow the 50/30/20 budget rule, this will mean predicting your net monthly income and taking 20% of that aside. Focus on the goal and then work backward, restricting your spending based on this savings expectation.

Unless it’s an urgency, saving less than that 20% should be a no-go! This will help you grow more disciplined in reaching your goal. If you’re getting very close to reaching your spending limit, start to cut back.

Olivia Tan, Co-Founder of CocoFax, advised “Open up a savings account and put the same amount in every week. You will be surprised at how it all adds up.”

Track Your Spending Constantly

It won’t be helpful if you create a budget but only input your spending at the end of the month. This prevents you from seeing whether you are on track to reach your monthly savings goal. Tracking your spending gives you a space to reflect almost daily on your expenses. Eric Powers, Founder of Big Game Pro Shop, reminded us just how easily small purchases can add up. “What you might think is an insignificant purchase now has the potential to add up fairly quickly.”

Allow for Budget Adjustments

The best plans are the real ones. Fully sticking to your budget can be impossible sometimes, and doing so will demotivate you instead.

If you suddenly have a huge expense that you need to attend to throughout the month, you can adjust your budget. At the same time, don’t get too comfortable doing this. You’ll have to make up for it in the coming months to meet your financial goals!

Save for Seasonal Expenses

The Christmas holidays or the end-of-financial-year retail sales may mean you spend more during those months than others. Take this into account when planning your budget. Since you will be able to expect this, include seasonal expenses into your savings considerations. This ensures that your budget accurately reflects your predicted spending patterns.

Girl opening a gift on Christmas Day

Avoid Common Budgeting Mistakes

Certain mistakes will make the entire budgeting process counterproductive. They may prevent you from reaching your goals and lead you to abandon the task entirely. These are some common mistakes that people make when they budget.

Setting Unrealistic Standards

When first starting a budget, you may be very excited. You aim to save almost 50% of your net income, and you’re certain nothing will stand in your way.

Halfway in, however, you realize that this isn’t realistic, and instead of amending your budget, you abandon it entirely.

Setting unrealistic standards stops your plan from succeeding. To prevent this, it’s important to go through all the previously outlined aspects of what to consider before starting a budget. This includes financial objectives, sure, but it also helps you evaluate your previous expenses and understand what makes a realistic saving standard.

Not Keeping Up with Your Budget

If you start a budget, leave it for two months, and then return to it when you find the time, your budget plan will not be effective. This is because you will start to treat it as a side task instead of an important tool for achieving financial security.

Misclassifying Your Spending

A common mistake people make is to classify their wants as needs. When you include traveling or going to the cinema in your necessary spending category, your budget will not be successful. Categorizing your wants as needs will prevent you from evaluating those expenses and finding methods to cut down.

Key Takeaways: Make it a Habit

A budget promises a lot. You will be able to plan and grow more financially secure. If you have debts or loans currently weighing you down, budgeting goes a long way in helping you conquer them.

With this in mind, budgeting shouldn’t be optional. It shouldn’t be something you only do when you feel like it. The budgeting process has to become a part of your life to make it work. Incorporate it into your habits by approaching it regularly, and you’ll start to see an improvement in your finances.

At times, you may need help to cover monthly expenses even when you budgeted in advance. When you need short term help with your monthly expenses, get an online loan from iCASH, we provide loans for up to $1,500 in Canada.