Whether you’re a student living off of limited fund or a new grad just starting at your first job, it’s important to know how to create – and stick to – a budget.
There are many benefits to having a monthly budget. The most obvious reason is that budgeting helps you to know where your money is going each month, including how much you spend on “necessities” versus “nice-to-haves”. Seeing a breakdown of your spending will make it easier to cut down if you’re trying to save money.
Having a budget also helps you to make sure that any extra money you have goes towards paying down debt or a savings account. Or, it can help you to save for big purchases or be prepared for expenses that come up unexpectedly.
And of course, budgeting adds to your independence, since being in control of your finances is a big part of living on your own. Plus, becoming good at budgeting now is great practice for the future, when you’ll likely be managing a bigger budget (e.g. for your household or family).
How to create a budget
There are several tools out there to help you with creating a budget – some fancier than others – but spreadsheets are good enough for managing an uncomplicated budget. You may want to consider specific budgeting software down the road though for when you’re juggling multiple sources of income, big expenses, investments, a mortgage, etc. To set up your budget for the first time, follow these simple steps:
- Make a list of your expenses – start with the most important items (the “essentials”) and work your way down. You may find it helpful to use overarching categories and then break those down into smaller budget items (e.g. list “housing” as a category and then break it down into your rent, utilities, hydro and any cable or internet services you have).
- Make a list of your sources of revenue – this can be income from a job, financial support from your parents, scholarship or bursary money or a student loan or line or credit. Write down how much you get from each source of revenue on a monthly basis.
- Estimate – how much money do you spend every month on each of your expenses? It’s important that these projections be realistic, so look through your receipts (or online banking or credit card statements) from the last couple of months to get a sense of your spending.
- Make a final calculation – Tally up your total expenses and revenues and determine the difference.
If you’re left with a surplus, that’s great! You have several options for what to do with the leftover money (see below for some suggestions). If the difference is a negative figure, you’ll need to think about reducing your expenses (or increasing your sources of revenue, if possible). Take a look at what you’re spending your money. Is there anywhere you can cut back? If so, adjust the numbers and remember that you’ll have to curb your spending moving forward.
After completing these steps, make sure you keep your budget up-to-date. On a daily, weekly or monthly basis, add up what you’ve been spending to see if you’re staying within your budget. How does your actual spending compare to what you originally estimated? By the end of the first month, you should have a sense of how realistic your budget is and whether your spending is reasonable given the funds you have available.
Sticking to your budget
Now that you’ve created your budget, you may find that it can be hard to live within it. Don’t be discouraged; it’s a skill you learn over time. Once you know what your biggest expenses are, you can look for ways to bring the costs down. Here are just a few things you can do to save money:
- Spend less on food – Eat at home or pack a lunch instead of buying meals when you’re out.
- Downgrade your cell phone plan – do you really need all that extra data? Consider what parts of your plan you aren’t using, and adjust accordingly.
- Change how you get around – consider walking or biking instead of taking the bus or train (at least in the warmer months if you can’t do it year-round) or taking public transport instead of driving.
- Buy things that are on sale – you can save a lot of money every month by checking flyers for deals on groceries, clothing, cleaning supplies, etc.
- Look for free ways to have fun – invite friends over to watch a movie, host a potluck or visit a museum or gallery.
The bottom line: while it’s good to be financially responsible, you want to make sure you’re striking a balance. Budgeting isn’t about eliminating any costs that are not strictly necessary. Instead, organizing your finances should help you to determine how much “fun money” you can afford to spend on things you enjoy without jeopardizing your ability to pay for the things you need.
If your expenses are lower than your revenues…
You should use the surplus to pay down debt (if you have more than one loan or line of credit, start with whichever has the highest interest rates). Next, pay off any outstanding bills, like your credit card.
If you don’t have any debt to worry about, put the money into a savings account. Your best bet is probably a high-interest savings account or a tax-free savings account (TFSA) since both will let you withdraw your money when you need it, which is important when you’re just starting to build your savings. Later, once you’ve saved up a bit, think about putting your money into a Guaranteed Investment Certificate (GIC), a Registered Retirement Savings Plan (RRSP) or investing in mutual funds. These options have higher interest rates although the investments are a little more risky and there are limits to how often you can withdraw your money.
Now that you know the basics, you can see that creating a budget is not as daunting as it seems. It’s actually an incredibly useful tool to help you manage your money responsibly regardless of what your financial situation is.