Budgeting your finances is necessary, since most don’t have an endless supply of cash on hand. While it may seem obvious, it’s surprising how few actually use a budget to monitor and manage their income along with their expenses.
According to the 2019 Canadian Financial Capability Survey (CFCS)  about 29% of Canadians are have balances owing on credit cards, and one of the largest segments of debt other than a mortgage.
The study also found that about half of Canadians have and maintain a budget, and that 1 in 6 Canadians (about 17%) would benefit from utilizing a budget. In a more recent study (Angus Reid) it mentioned that 57% of Canadians say it’s difficult to feed their household, and there is a substantial increase in the number of Canadians that are able to afford groceries.
Having a budget helps with managing day to day expenses and debt while helping to avoid falling behind on their financial commitments.
Putting a plan in place is the first step towards taking charge of your finances, and for those that do, they are more likely to pay off debt sooner.
What is a Budget
This is a plan that accounts for every dollar you make, and each one you spend. By tracking this information, you will better manage your finances, which can help you plan for the future and possibly avoid future issues, like getting into debt too deep.
There are many budgeting apps that make the job easier which are worth considering to take on the task, and once you’ve set yourself up it becomes relatively easy to manage.
Where to Start with a Budget
Getting started with a budget isn’t that difficult once you have educated yourself on what is is, how to do it, and some of the methods available.
But one of the most important things about a budget is that it takes dedication. In other words, you should stick with it. Having a budget has proven time and again that it’s worth the effort. Depending on the source, between 30 to 50% of people do not have a budget.
The place to start is determining all incoming and outgoing expenses. You can do this on a piece of paper or on your computer, but the latter is recommended. The incoming is easiest for most, and care should be taken with itemizing outgoing expenses.
Essentially, a budget is a case of adding up all your expenses and then subtracting that amount from your take home pay or income. But it isn’t as easy as all that and there’s a little more to it.
Why Create a Budget
Having a budget is not just to monitor your finances, it also allows you to plan for the future.
Creating a budget doesn’t have to be difficult. In fact, it’s relatively easy to do. What it does take is commitment to succeed.
But if you are wondering why it’s important to create a budget, it would probably come down to the fact that people who do tend to better manage their money and probably have less financial issues than those that don’t monitor and manage their finances. For some a budget could be to help them get back on track with their finances, perhaps after a credit card spending spree or trying to keep up with friends and creating debt along the way. For those that have extra challenges or require social assistance having a budget is an important way to stay on top of your finances.
How to Create a Budget
There are many budgeting frameworks to consider, but to keep things simple to start, you might consider the 50/30/20 rule, which focuses on Needs, Wants, along with Savings and Debt Repayment.
» Needs – this includes essentials, which should account for around 50% of your spending. This can include things like rent or mortgage, along with transportation to get to work. Naturally this would include food as well.
» Wants – if you can live without it, it’s probably a want. Being a ‘want’ accounts for around 30% of your overall spending.It isn’t always easy to distinguish every expense as a need or a want, but if you’re honest with yourself it usually works out.
» Savings/Debt – this portion makes up the remaining 20% of your budget. Hopefully as much (or more) goes towards saving as it does for paying off debt.
The 50/30/20 rule is just one of several methods for budgeting. Others include the envelope system, zero-based budget, pay-yourself-first, and the cash-only budgeting to name a few.
Slicing the Pie
Besides the Needs, Wants and Savings, it’s also wise to be aware of what makes the most sense in terms of how you budget things and make use of the money available to you.
The following provides another look at how you might break down common expenses.
- Housing: 25-35%
- Food: 10-15%
- Transportation: 10-15%
- Savings: 10-15%
- Insurance: 10-20%
- Utilities: 5 -10%
- Entertainment: 5 -10%
- Personals: 5 -10%
- Clothing: 5%
With this info, you can start to tell if you are living beyond your means in some areas, such as paying too much each month for clothes, cars or something else.
Building a Buffer
Part of your budget plan should include putting money aside so that you have an emergency fund available, just in case. It might be for car or home repairs, medical bills, unexpected expenses, or one of a dozen other reasons, but only use it for an emergency. A new handbag or golf clubs is not an emergency. An emergency fund is also not your savings. If you are wondering how much is enough to put away, many will advise at least 3-6 months of salary so that you would be able to cover expenses if you found yourself in a predicament, such as losing your job. Note that building your emergency fund should not come at the expense of putting away in your savings/retirement or paying off debt.
RELATED: How to Manage Your Money With Debt
Looking to the Future
As previously mentioned, having a budget is more than tracking expenses. It also allows you to monitor progress for things like paying down your debt or paying off loans along with planning ahead. Most people don’t have a real reason for not starting a budget, but those that do tend to stick with it and come out ahead when they do. Another smart move is to keep working on your credit score, so you might qualify for a personal loan, should you ever need one.
If your employer offers to match contributions to tax-advantaged accounts, you should take advantage of the free money. Following close behind, take care of your debt immediately. Both are smart strategies for taking care of your finances and even building wealth. While your income, expenses and priorities will probably change over time, understanding some basic principles for budgeting can go a long way and likely stick with you.
While looking to the future, you should also read about why you need to create an emergency fund, why it’s important, and how to get started. As you take care of your debt and finances, build a budget and emergency fund, you will be in a much better place and begin to see how it all works together and the significance of each part.