Whether you have good or bad spending habits, money has a powerful influence over everyone. Therefore, taking control of your spending is essential before it takes control of your financial security. One of the best ways to do this is to make a budget and maintain it. So, whether you're an expert or have never had total control of your finances, we are here to help you!
After reading this article, you will know the following:
- What is a budget, and why do you need one
- Making and maintaining a budget
- Recommend budgeting guidelines
- The best budgeting apps in Canada
What is a Budget?
A budget is a customized financial plan where you can estimate and sets goals for income and expenditures for a specific period. Most individuals and families opt for a monthly budget, created at the beginning of every month and monitored throughout. Regardless of how much money you earn, you need a budget. A monthly budget can help you create better spending habits resulting in financial security.
Why do I Need a Budget?
Following a monthly budget diligently is one of the most sure-fire ways to create financial stability and security. Without a budget, saving money and spending responsibly, no matter how much you make, can be challenging. Even people with high-paying salaries can end up with an empty bank account at the end of each month or, even worse, in bad debt if they don't monitor their spending. Budgeting allows people to manipulate their current spending, saving, and investing habits by measuring and tracking their current obligations and tendencies.
Combatting Lifestyle Inflation
Many young professionals save less money when they get their first competitively paying job than when they barely have any money. This instance is called lifestyle inflation. Unfortunately, it is too common for people to increase their spending as income increases. Creating a budget attuned to your needs rather than your income level is a great way to combat the temptations of lifestyle inflation. But don't worry, we won't fault you for getting another $5 latte. With a proper budget, you can still enjoy life's simple pleasures with peace of mind (and confidence in your bank account) by setting appropriate spending amounts for your needs and wants.
Paying Off Debts
Over seventy percent of Canadians have outstanding debts or have used payday loans in the last year. One in six Canadians is falling behind in their monthly cash flow, and one in four say they must borrow money to pay for their daily expenses. A lot of Canadians could benefit from a budget customized to debt reduction.
It certainly would be nice to receive a lump sum from the lottery and have your debts magically disappear. But what would keep you from getting back into the same obligation? Creating and following a budget is the best way to develop healthy spending habits so that you can borrow less money, pay off your debts, and develop lasting financial security.
Protection Against Economic Downturns
Another reason you need a budget is to protect against economic downturns. Since 1970, Canada has gone through five recessions. Even though these recessions usually only last a few months, they can devastate individuals and families without financial security.
If you're currently living paycheck to paycheck or don't have a comfortable amount of savings, it might be time to consider how a recession would affect you. For example, would you still be able to pay your rent or mortgage? Would you still be able to afford gas and groceries?
How to Make a Personal Budget
Whether you're trying to learn how to make a personal budget or how to make a household budget, these step-by-step instructions can help you develop healthy spending, saving, and investing habits.
Step 1: Identify and Review All Sources of Income, Expenditures, and Investments
Defining your current financial status is the first step to creating and maintaining a budget. How much money do you make? Do you invest any money? Where does all your money go? You might know the answers to the first two questions, but it's okay if the last one causes you to stumble. That's common.
Think about your short-term and long-term financial goals. For example, do you want to pay off debt? Are you saving for a down payment on a home? Do you need a better strategy to live within your means? These are all things you must consider before building your budget.
Example: Tom makes $5,000 from his job every month. He spends $1,400 on rent and utilities, $400 on groceries, $300 on gas, $200 on his car payment, $150 on insurance, $400 on miscellaneous purchases and dining out, $100 on credit card bills, and an unpredictable amount of money every month travelling for pleasure on the weekends.
Step 2: Consider Your Habits and Set Realistic Goals
The best budget is not the most aggressive one. You need to be pragmatic and create a plan customized to fit your goals with reasonable deadlines. Setting unfeasible goals often put people into a discouraging cycle of unmet expectations. The easiest way to burn out is by stripping yourself of life's simple pleasures. However, don't rid yourself of ALL unnecessary spending!
You must consider your finances and set attainable goals for yourself. Remember, you can constantly adjust these goals. It is perfectly okay to start small and change as you become more responsible with your money and increase your income.
Example: Tom knows he will likely overspend dining out with friends and travelling on the weekends. Even though he wants to control his spending and create financial stability, he doesn't want to lose all the fun in his life. So he knows that he will need to make room in his budget for spending on things that bring joy so that he doesn't burn out.
Step 3: Set Boundaries for Spending
We've said this a few times already, so hopefully, by now, you know: no matter how much money you make, you need to set boundaries for spending. Some of the wealthiest people have declared bankruptcy because they did not secure their finances. So whether you're competing with Elon Musk for the wealthiest human on planet earth or scraping pennies for your gas, you need guardrails to keep your spending in line.
Stick around as we'll go over the popular budgeting percentage guidelines, so you know what percentages of your income you should allocate to needs, wants, and savings.
Example: Tom decides to follow the 50/30/20 Rule. He allocates fifty percent of his income ($2,500) to his needs, thirty percent ($1,500) to his wants, and twenty percent ($1,000) to savings, investing and repaying his debts.
See recommended budgeting percentage guidelines following Step 5 for more information.
Step 4: Set Goals for Investing
Once you've determined your spending limits, you need to consider your future. The first step in preparing for your future is creating an emergency savings fund. Experts recommend allocating at least three to six months' worth of your income to savings to fully prepare for unexpected financial turns.
Once you've stashed a comfortable amount of cash for an emergency fund, consider alternative places to invest your money. If all your savings sit in your bank account for years, you're missing opportunities to grow your wealth exponentially. Not to mention, inflation rates are almost always higher than the average bank savings account returns. So, consider setting up a retirement account or investing in the stock market.
Example: After deciding how much money to spend on needs and wants, Tom has $1,000 left over each month to devote to saving, investing, and repaying debt. He decides to allocate $500 per month to an emergency fund in a high-yield savings account and $500 per month to pay credit card debt quickly. Any money leftover from spending at the end of the month will go to his emergency savings fund. After he pays off all his credit card debt, he will put $700 per month into his emergency fund and $300 per month into his retirement account. Once he has a comfortable emergency fund, he will invest more money into his retirement account and other investment options.
Step 5: Track Your Progress and Make Adjustments as Needed
Always remember your budget is a work in progress. Not everyone makes the same amount every month, and that's okay. No two months will look the same on your budget, so don't get discouraged by occasional fluctuations. The important thing is that you are taking steps in the right direction toward financial stability, security, and freedom!
Recommended Budgeting Percentage Guidelines
While everyone has their personal preferences and needs, there are a few commonly followed budgeting guidelines you can reference when creating your budget.
The 50/30/20 Rule
This Rule advises people to allocate fifty percent of their income to their needs, thirty percent to their wants, and twenty percent to savings, investing and repaying debts.
The 70/20/10 Rule
For those who need to spend a more significant amount of their earnings on necessities, this Rule advises people to allocate seventy percent of their income to their needs, twenty percent to their wants, and ten percent to savings, investing and repaying debts.
The 80/20 Rule
This Rule advises you to allocate eighty percent of your income to spending and twenty percent to savings. While this is a good rule of thumb, some people may have trouble separating expenditures for their needs from their wants.
Dave Ramsey's Budgeting Rules
Personal finance personality, Dave Ramsey, has a strict set of budgeting rules he recommends. Setting tight budgeting rules makes saving money seem too complicated and far-fetched for some people. For others, strict rules help them stay aligned with their plans and prepare for the future. Here are Dave Ramsey's 2022 budgeting guidelines:
Best Budgeting Apps for Canadians
Suppose you're not interested in writing down every one of your expenses in a notebook or typing your expenditures into a spreadsheet every week. In that case, you might benefit from downloading a budgeting app! With one of these apps, you can create a budget, track your spending and saving, and get visual representations of where your money is going.
Listed below are just a few of the most popular budgeting apps for Canadians – but if you don't like these, there are plenty of other options on the market! These apps help you monitor your finances from the convenience of your phone, typically offering direct connections with your bank. In addition, using a budgeting app can save you time by automating the process of tracking your money.
- Mint – “Managing money, made simple.”
- Pocket Smith – “Forge your own financial path, we'll provide the tools.”
- YNAB – You Need A Budget – “Gain total control of your money.”
- Good Budget – “Budget with a why.”
- Pocket Guard – “Personal finance simplified.”
Get Started Today!
The most important part of a budget is following through with your plan. Maybe you need to set weekly notifications to monitor your spending or recruit the help of an accountability partner. At Creditpicks, we're here to provide you with all the financial encouragement you need every month. So sign up for our newsletter today and hold yourself accountable for your finances.
Your future self will thank you!