Illustration by Melanie Lambrick
“You cannot get ahead financially until you make a habit of spending less than you earn.” Columnist Rob Carrick calls this the most basic rule of personal finance, and yet it’s one that many of us struggle to follow. One vital tool to help you get on top of things is the simple old-fashioned budget. But what are budgets, how do they work and how do you start making one? Here’s the basics, and some simple rules to follow.
For a company, a budget is a financial plan and a record of credits and debits. For an individual, it’s much the same. It’s a monthly tally of your income and expenses that lets you track where your money is going and be sure your spending and saving match your financial goals.
People also use the word “budget” to refer to an amount of money allocated to something specific. For instance, you might have a budget of $2,000 a year for vacations, or $100 a week for eating out. But in truth that’s just part of a budget.
Since many of us receive paycheques twice monthly, and a lot of expenses occur on a monthly basis, many people set up their budgets month by month. Your monthly budget would include your income as well as your expenses organized by category: everything from rent and mortgage payments, to tax-free savings account contributions and other savings, to music subscriptions, food, clothing and donations to charity. The goal is for the expenses to be lower than or equal to the income.
Budgeting is an essential tool for meeting your financial obligations and goals. If you are trying to get out of debt, or pay off student loans or credit card balances, it’s far easier if you have a budget that includes those things and you stick to it. And if you have a hard time coming up with the money for big purchases, a budget can help you get there by encouraging you to put away a bit at a time.
It forces you to pay attention, in other words, and avoid trouble. Jenna Young in Halifax, for example, used to avoid looking at her bank balance and just hope she had the money to cover automatic bill payments. But she was having difficulty paying off her student loans and was racking up credit card debt as well. She created a budget one year as a New Year’s resolution, and stuck to it religiously, checking her budget spreadsheet every payday and keeping track, on her phone, of money available for spending.
“It was terrifying to see the total amount owed,” Ms. Young says. But she could also see real progress: She started spending within her means, saving up for unusual expenses, and paying off debts. “Emotionally, it made me feel way less anxious about money because I knew I was in control.”
We all have different financial goals, but for the most part, there are three places to put your money: paying for necessities, buying things (and experiences) that are optional, and saving for the future. The latter might mean putting aside cash for a down payment on a house, saving up for big-ticket items like vacations or cars, or investing for your kids’ education or your retirement.
If you have a hard time saving, or if you often find yourself in debt, then a budget can help you get back on track. “If you regularly have nothing left over to save from paycheque to paycheque, then track where your money is going,” Mr. Carrick suggests. “Use the information you get from this and look at your spending to find areas to cut back.”
Smart budgeting can help you be ready for emergencies and changing expenses. If you keep an eye on what you’re spending, for instance, you’ll see how much more expensive groceries have become, and you won’t accidentally slip into the red because you haven’t adjusted your budget to accommodate.
A budget will also help you plan for the future and make informed decisions. Buying a car, for instance, has gotten more expensive, not to mention the price of gas. If this is something you’re considering, experts recommend assessing all the associated costs to figure out how much the new vehicle will really cost you, and how that will affect your overall budget.
The same goes for buying a house. Mortgage payments are only one part of the puzzle. A thorough budget that also looks at insurance, property tax, utilities, repairs and maintenance will help you decide what purchase price you can really afford. How much should you budget for maintenance and repairs? Mortgage broker Sean Cooper suggests 1 per cent of the home’s value per year.
And then there’s children. “Never-ending costs for parents require never-ending saving and planning,” Mr. Carrick writes. “Figure out what your priorities are as parents and prepare as required.” Having a budget will help you understand how to cover costs such as daycare, contributions to a registered education savings plan, and activities.
As worthwhile as a budget is, there is one problem, Mr. Carrick writes: “Unfortunately, people really don’t like using a budget to track their spending.”
With that in mind, the first step is to be honest about what kind of budgeting solution will be right for you. Are you a spreadsheet or an app person? Are you likely to stick to regularly checking in with your budget, or are you better off doing a lot of organizing in the beginning to make everything happen automatically?
Financial planner Julia Chung keeps her budget organized using a system with multiple savings accounts that automatically receive transfers on payday. It’s similar to the method Mr. Carrick himself uses. “I have more than a dozen savings accounts at various banks, each labelled for a specific purpose,” he writes. “I have accounts where I gradually put away money for insurance – term life premiums plus car and home – for vacations and home improvement, our next car down payment and, of course, an emergency fund.”
Another factor to think about is math – specifically, whether you are afraid of it. People who are anxious about math often also have issues around finances, says Vanessa Vakharia, founder of the Math Guru, a tutoring studio, and podcast host of Math Therapy. If this sounds like you, she recommends finding a kind, patient person in your life who appears to be comfortable or good with money, and then asking them whether they’d be open to spending some time answering questions about how they budget, manage their money or any other financial topic.
It’s also a good idea to think about your feelings when it comes to money, and be aware that they’re part of the puzzle. “There’s an emotional side to budgeting that isn’t discussed enough,” Mr. Carrick writes. “It can be a bit shaming to be cutting back while your Instagram feed keeps showing you scenes of your friends and family living the lush life.” He suggests being ready with a stock phrase for when they ask why you can’t participate in a certain activity, or are looking for cheaper options, something like “I’m trying get my finances into shape in 2022 and I’m cutting back here and there to make that happen. Thanks for understanding.”
Spending with cards, smartphones and strings of numbers across the internet is virtual not only technically. There’s something about it that just doesn’t feel real psychologically, too. And that can sometimes make you spend more than you should.
If this sounds like you, one tool that might help is a cash-only budget. Essentially, this means that you take out cash based on your budget – $75 a week for lunches, say – and that’s all you’re allowed to spend, no cards allowed. Some people use an envelope system for this: Each budget category gets its own envelope, and cash goes into each envelope based on how much you’ve allocated for that category.
Of course, this means being disciplined enough not to pull out the credit cards again when you run out of twenties. But with the right organization (maybe recruit someone to help), this method can be effective.
Budgeting apps can help automate the tracking of your spending and offer a big picture view of how you are doing when it comes to your financial goals. Look for an app that will sync with your bank account and credit cards and has features to help you easily input purchases. Popular options include Mint, Dollarbird and You Need a Budget.
Aashti Vijh of Toronto, for instance, uses the pro version of Dollarbird to help her control her spending. “The actual act of inputting my expenses every day has made me so much more mindful about what I’m spending,” she says. “Compared to other budgeting apps, which link to your bank accounts and categorize your expenses for you, Dollarbird allows you to be pro-active with your finances instead of reactive.”
Your bank or other financial institution might offer a budgeting app, as well. RBC Mobile, for instance, includes Nomi, a tool that analyzes your spending, recommends a budget and then sends you notifications to help you stay on track. And TD has an app called MySpend, which gives you insight on your spending and helps you create and manage financial goals.
The best personal monthly budget template is the one you actually use. If you search online, you’ll find plenty of free options to try. You can also look at spreadsheet software such as Excel, Google Sheets or Apple’s Numbers, which come with ready-to-use budgeting and savings templates.
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Look for a template that’s intuitive to use and lets you customize to match your personal spending and saving categories. Download a few options and play around with them to see which you like best.
You can start with the app from your credit card provider. “Credit card apps are a handy way to keep track of your spending on the fly, including transactions that are both posted to your account and pending,” Mr. Carrick writes. “Card apps also help you keep track of spending room on your card, and your total reward points.” Beyond that, general budgeting apps should incorporate your credit cards into your overall budget picture.
Achieving a high credit score is straightforward, Mr. Carrick says: Pay what you owe on time, and never borrow even close to the maximum amount lenders will give you. “Do only that and you will not have a problem borrowing at a competitive interest rate,” he says.
Your credit score is your history as a borrower distilled into a number on a scale that generally ranges from 300 to 900. 760 and up is considered excellent, while 660 to 759 is good or very good. Below 660, you may have trouble getting the best rate on a loan or mortgage.
Late payments and running up a big balance on a bunch of credit cards or a credit line can hurt your credit score. Creating and sticking to a budget is one of the simplest ways you can avoid a decline in your score. (There are also little things that can reduce your score, like adding a new credit card or cancelling a credit card you’ve had for years and replacing it with a new one – though your score should rebound quickly from such activity.)
Outstanding credit card balances can hurt your score when they’re more than 30 per cent of a card’s borrowing limit, according to a big U.S. credit reporting company. Using a budget can help prevent that from happening as well. “Maintaining a zero balance by paying off all purchases in full each month is the best of all.”
The best budget is the one you’ll actually use. Be honest with yourself about what habits you’ll really stick with when it comes to managing your budget and changing your spending and saving routines. Just like with fitness, consistency is key to success.
One trick is to set a date with yourself in your calendar for when you’ll review your budget. Treat yourself and try to make it fun – maybe budgeting review night and pizza night coincide, or you simply blast your favourite motivational tunes while you work.
To stick to your budget, it also helps to flip things around. Instead of focusing on spending reduction and sacrifice (so tragic), start from zero with an “I get to” approach. You didn’t cut your restaurant budget; you get to eat out X times a month. You didn’t reduce your clothing budget; you get to spend X dollars a month on clothes. Think of yourself as the kid in the candy store with a whole dollar (maybe five dollars with inflation) to spend on sweets. You’ll be much more selective, and enjoy your purchase that much more, than the child who has no limits.
And if you can’t track every penny, there is a middle ground. Gregory Karp of personal finance website NerdWallet, for example, confesses that he thinks budgets are overrated. “But if you’re not going to create a household budget, at least regularly examine your past spending and categorize it,” he adds.
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