How to Money – Budgeting Basics

One of the easiest ways of getting control of your finances is by making use of a budget. If you don’t already use one, the upside is you have everything to gain. The only downside is you’ll need to commit a little time each week to making it work. 

About half of Canadians don’t use a budget, but research shows those that do are less likely to find themselves having financial difficulties. 

In this article we outline the benefits, getting started, different methods and tools to try, along with how budgeting can help with your credit score. Read on to learn more about what can potentially be one of the most important financial decisions you make, and why you should get started with having a budget for your own personal finances.

Benefits of Having a Budget

Your basic budget will tell you a few things like where your money is going, what you can afford to spend or save, and how your finances are doing overall.  

A budget helps you with tracking your incoming and outgoing money and to maintain a balance. Keeping tabs on your expenses, bills, debt and where your hard earned money can help with managing your funds, and possibly avoid the need for borrowing online loans when unexpected expenses happen. 

As mentioned, you’re less likely to have financial difficulties when you use a budget. But not only that, you are much more in tune or aware of how and where your money is used. By keeping a record, you can identify ways to save, pay debt off quicker, how to reach goals, and where to make adjustments that can benefit you and your family.

Where to Start with Budgeting 

Those first few steps into the world of budget might seem difficult, but let us assure you that anyone can do this. 

To keep things simple, look at budgeting for what it can do for you:

1. Calculate your personal expenses
2. Determine what your post tax income would be
3. Monitor and manage your personal finances
4. Create your goals for payoff & savings 
5. Be sure to track your expenses

Plan to devote time to your budgeting and personal finances each week. Set an appointment with yourself that you will commit to, such as every Sunday evening at 7pm for 20 to 30 minutes. You need to make the time and not just leave it to when convenient. Budgeting is also about developing good habits, and this isn’t just paying bills on time, but also committing to taking the time necessary to track, monitor and update your records for your finances. 

Popular Types of Budgeting

Tracking and monitoring are part of budgeting, but the strategic part of budgeting is when you are determining how much of your income goes towards paying debt on credit cards or similar, or what you might put towards your savings after your bills have been paid. 

50/30/20 rule 

The 50/30/20 rule is a popular method which suggests putting 50% of your money toward needs, 30% toward wants, and 20% of your income toward savings. Needs can include your rent or mortgage, payments towards debt for loans or credit cards, groceries, healthcare and similar. In some cases, having a car can be essential to getting to work, like if you don’t live near public transit. The ‘wants’ are not essential and more like luxuries, or things you can get by without but like to have. Entertainment often falls under this category, such as subscriptions to streaming services. Memberships would be another. Dining out and travel also fit this category.

80/20 rule 

An even simpler option is the 80/20 rule, where 80% of your income is yours to spend how you like (bills, entertainment, etc) and 20% of your paycheck is deposited into your savings account. While this is a simplified version of the 50/30/20 rule, it might not be for everyone since it doesn’t clarify spending into segments like Needs, Wants and Savings. While the principal is similar, the concept doesn’t have the same clarity. 

60/30/10 rule 

This budgeting method involves using 60% of your take-home pay towards building your savings, invest, or pay off debt. The next 30% goes towards needs like food, housing, transportation, healthcare and utilities. The remaining 10% would go towards discretionary or any non essential spending. This method has an emphasis on saving or paying down debt and reaching financial goals.

60/20/20 rule

The 60/20/20 method suggests 60% towards needs (including debts), with 20% to wants, and the other 20% towards savings. When you have substantial debt, you can modify the budgeting rules to accommodate your needs as suited to your own finances.

70/20/10 rule

With the first 70% of your income going to wants and needs, the next 20% towards savings and investments, and the last 10% going to debt repayment. But you have to look at whether only 10% towards debt fits with your plans or whether the 60/20/20 method above is more suitable.

Choosing the Right Budgeting Method

One of the biggest challenges to getting started with a budget is finding that balance and whether the 70/20/10 rule or the 50/30/20 rule or something else entirely makes more sense for your own situation. The above examples are a few of the more popular ones to consider and have worked for many. 

Some look to zero-based budgeting as the answer, which is a method where you allocate all of your money towards needs and wants, along with short/long term savings and debt repayment, and the goal being you have spent your income towards any needs, wants, debt and arrive at zero. In other words, if you have something leftover, your budgeting plans may benefit from a revisit since all funds should be categorized, allocated and accounted for. 

Related: Building a Budget That Works

Budgeting Tools to Try

Some are fine with using excel, but there are many tools now available that are well worth your time to try that you would be doing yourself a disservice if you did not take the time to try them.

Tools like Mint.com and Quicken.ca are a couple examples where you can have all your personal finances in one place that make managing money simple. When you can see the full picture of your finances, from cash in your accounts to credit card balances, bills and track your cash flow, things can become more clear. 

Related: Budgeting Apps for Better Personal Finances 

Tools like these not only allow you to track and manage your finances, you can find opportunities to save, see your balances after your bills are paid, and allow you to make plans. Whether that means saving for a big purchase, travel, putting away for retirement or building your emergency fund for that inevitable time it’s needed is up to you. Many of these budgeting tools have mobile apps that take a lot of the guesswork out of things, and an enormous leap to the envelope budgeting system that people used to use.

Related: Guide to Saving Money

How Budgeting Helps Your Credit Score

It might not be obvious, but the use of budgeting can have a positive impact on your overall credit score in a few ways. 

When using a budgeting app like mentioned above you are more organized, and this can help (along with app alerts) to pay on time. Having late payments is usually easy to avoid, and can easily affect your credit score. If it appears to be a habit, in addition to lowering your score, it can make your odds of approval for an installment or personal loan more challenging. 

Keeping track of your money with a budget also allows you to stay aware of your debt to income ratio and credit utilization which are also factors with your credit score, and affect your ability to borrow in the future. 

Budgeting helps you to create strong habits and monitor your funds, which tends to help you with having the right habits that can assist you with improving your credit score. 

Using a budget can also help you to identify potential financial issues, such as living beyond your means, which usually leads to digging yourself deeper into debt each month until you get so far into debt that require drastic actions. 

Related: 10 Debt Repayment Methods to Know

Getting the Most out of Budgeting

There are many gains with using a budget to help manage your finances. With some more obvious than others, the following can provide some insights to the benefits of budgeting.

It is likely your personal finances will be better managed. If it’s worse, you must be doing it wrong. Everyone benefits from budgeting. 

The use of budgeting keeps your finances on track, can help you plan for upcoming expenses, and be prepared for unexpected ones. 

You should also ensure that you budget for some things you find enjoyable, because an overly restrictive budget will be like an overly restrictive diet – you won’t stick with it. 

You can also find this online budgeting tool from the Canadian Financial Consumer Agency to try, which allows you to download a spreadsheet when you’re done. 

If you live from one paycheque to the next, you should definitely look into budgeting and how it can help you in more than one way. It is more than likely that that those finding themselves running out of money between paydays will benefit from a budget. 

Why People Fail at Budgeting

For some, budgeting can feel overly difficult to keep up with. While you shouldn’t expect to track every penny, you do the best you can. Consistency and commitment are important aspects of succeeding with your budgeting. Making an appointment with yourself each week is a start so you can take a few minutes to maintain things. It’s best that you book 30 minutes with yourself to be on the safe side. Quitting too soon can be one of the most common reasons and that it is worth the time and effort for anyone to master this. Budgeting is also an excellent tool to teach your kids for financial literacy and some money management basics. 

Sometimes the issue can be people setting unrealistic goals for themselves, which makes it tricky for your budget to solve your financial problems. A budget is for managing and monitoring finances. If you carry significant debt that you want to get out from under, a budget isn’t the right tool for the job. You should be thinking about how debt consolidation can help and whether it would be right for you.