Budgeting 101 For Canadians

In less than two weeks it’s going to be two years since I started budgeting. Prior to becoming a budgeting geek, I really didn’t care for a budget. They didn’t make sense and sadly I found budgeting a lot of work which I wasn’t willing to invest much time into. Furthermore, I wasn’t sure how to do it and while I knew I was constantly spending more than I had, I didn’t have the discipline to stop.

I tried to create what I thought was a realistic budget, but it always failed.

I finally started taking budgeting seriously when I also decided to get out of nearly $60,000 of debt. Since then, I managed to eliminate $60k worth of debt in under two years, and in the same process became a budgeting pro. I can confidently say that if it wasn’t for budgeting, I’d certainly still be swimming in debt today.

In this guide, I’d like to share with you the key points on creating a budget, and making the most of budgeting.

How to stick to a budget

1. Understand Your Spending Habits

The whole idea behind knowing your spending habits is so you know where you’re starting and more importantly having something to measure it against. There’s no other way to understand your spending habits unless you track your spending.

Generally three months is recommended, but even tracking your spending for a whole month will give you a decent picture of your spending ways.

By successfully tracking your spending habits, you’ll be able to know how much you spent in a certain category, but more importantly you’ll realize how much you need to budget for that category. The basics of budgeting begins with figuring out how much money you will have for the month, dividing it up based on what you want to do with it, and then tracking where your money actually goes.  A budget provides guidelines and when you are accurately recording your spending habits – whether it’s in a simple spreadsheet, or with a budgeting tool like Mint or QuickBooks – the numbers don’t lie.

2. You Quit and You’ll Fail

The only downside to budgeting that I could come up with is that it’s a repetitive process.

The first time I started budgeting, I wanted to quit after the first month because the process was tedious, limiting and in a way it beat me up knowing that I had money sitting in the bank account, but I could only spend $100 for groceries this month.

However, much like anything in life, budgeting takes time. Certainly when you start working out, the results are not instantaneous and neither are the results with budgeting. Part of human nature is that we want instant results, instant gratification and instant everything, but they key is to work smarter and not harder.

Budgeting in a way is a game against thyself, and only the smart, patient and determined succeed – the rest just fail by quitting on a potentially life altering journey.

3. Understanding Why Budgets Exist and What They Do

In order to reap the benefits of any exercise it’s important to understand why were doing something. We work out because the health benefits are good, we feel better, look better and train our bodies to defend against unlikely illnesses.

Budgeting is not meant to act as a system that works against you and way of stopping you from having fun. So, the sooner you understand the purpose of budgeting and more importantly why you’re budgeting, the more successful you’ll be at money management. Budgeting isn’t about deprivation and instead it’s about empowerment.

4. Goal Setting Trough Budgeting

There are many things I love about budgeting, but my favorite aspect is goal setting. Budgets allow us to set financial milestone goals for the future and they also allow us to create smaller specific goals that are easier to obtain. Working towards financial milestones such as saving for a down payment or eliminating debt are very solid goals. But more specific and more importantly motivating goals are being able to cut your lunch spending down or eliminating coffee on the go or saving $50 off of your monthly grocery budget. You get to see instantaneous results with the smaller goals, which fuel you to continue pushing forward towards the bigger milestones.

How To Create A Budget

Now that we know why a budget is important, and how to stick to one, let’s learn how to create a budget properly.

Step 1: Determine your after-tax income

The very first step in making an effective budget is to figure out how much money you’re making, AFTER taxes.

If you’re an employee and receive a paycheck, you can just use that amount. However, if you’ve set up any automatic savings towards your retirement or any insurance programs, you’ll need to add those back in, as they’re those deductions are coming out of your regular income.

If you’re a business owner or freelancer it’s a little trickier as you’re responsible for calculating the net income that you takeaway after taxes. Take the money you earn each money and minus things like taxes and business expenses. If you’re unsure how much to set aside for taxes, ask your accountant what percentage you should be allocating towards tax payments.

Step 2: Choose the right budgeting style for you

This is the part that’s going to be different for everyone. It will really depend on your personal goals and how much you decide to spend/save on what. Depending on what your goals are, allocate percentages of your income to specific areas such as bill payments, retirement savings, groceries, eating out, etc.

If you’re saving up for something specific such as purchasing a home or even just an emergency fund, you want to create a separate savings account for each, ideally one that has zero fees.

Step 3: Automate or do it all yourself each month

You want to automate as much of the allocation as you can so that you don’t have to make the same actions each month. This is something that your bank can do for you, if you talk to them and request it.

For example, you can ask that 30% of your paycheck goes into your emergency fund, 20% into paying off debt, and 30% into your home purchase savings account, and the remaining 20% into your regular savings.

This can all be done automatically, and actually has another advantage. Humans will naturally spend what they have. Unless you’re a savings addict already, it’s difficult to build the habit of allocating most of your income into savings before spending on things you want.

Automating it allows you to save without even having to think about it. The funds left over is what you can use to spend on what you need/want, and you can do so without feeling guilty of not saving!

Step 4: Get used to the lower “usable” funds

The hardest part of all this is that you’ll feel like you have less money now. And in a sense you do, since the money that lands in your account is much lower than it used to be.

The good part is that you’re prioritizing savings. You may need to change your lifestyle in certain areas. You may not be able to eat out or spend wrecklessly on things as much as you used to. And that’s a good thing! However, it can be tough to get used to.

Final Thoughts

Learning to take control of your financial situation is what I call empowerment. At the end of the day, nobody cares more about yourself or your money as you do. So, who better to take control of the financial situation than yourself. Budgeting is just another form of exercising, it’s not different than physical exercises, the benefits the may be different, but the principles remain relatively the same. It’s up to you whether you budget or try it for that matter. I certainty can’t force you, nor would I ever want to do such a thing, but certainly I can tell you that budgeting is a powerful tool that can set you free in ways that you’ve never even imagined.