How to create a personal budget that works for you

Nothing beats the feeling of getting your paycheck, except maybe plugging in a USB the correct way on the first try. Seeing the numbers in your bank account grow gets your dopamine receptors firing and blood pumping. It’s hard not to think about everything you could do with that money. You could take your partner out for a nice candlelit dinner or maybe buy that vinyl record you have been eyeing for months.

In the moment, these purchases feel great until you realize you’ve blown through most of your paycheck in a couple of weeks. What if we told you that you can enjoy spending your money in moderation while also growing your savings? Meet budgeting. Odds are, you have heard of budgeting before but have never tried it, at least not successfully. Don’t beat yourself up over it.

According to BMO, a majority of Canadians did not have a financial plan and/or household budget in 2023. On an individual basis, the Government of Canada claims about half of Canadians had a budget in 2019. Just because you don’t currently have a budget doesn’t mean it has to stay that way. The great part about budgeting is that anyone can start budgeting and at anytime.      

Creating a monthly budget

If you are reading this, you are probably a young professional who has their hands full dealing with a higher cost of living, including sky-high rent costs. Times are especially tough in Alberta, where the cost of living is one of the highest in the country. Setting a monthly budget is a great way to make your money work for you while still being able to spend some of it. Knowing where to start can be tricky, but we are here to help!

Calculate your net income

The thought of calculating your net income might send a shiver down your spine, but we promise it’s easier than it sounds. Your net income is your total wages or salary after deductions like taxes. You can calculate your net income by subtracting your deductions from your gross income, which is your total income before deductions.

In Canada, employers are required to deduct federal and provincial/territorial income tax, Canada Pension Plan contributions, Employment Insurance premiums, and employee benefits before paying their employees. In other words, most of the busy work should be handled by your employer. When calculating your net income, remember to also account for deductions your employer is not responsible for, like RRSP contributions.

Expense tracking

You might want to get yourself a calculator and a glass of wine because this next part is rough. It’s time to start tracking how much you are spending. The best way to achieve this is to spend a few weeks taking note of all your expenses. There are several ways to do this, including some phone apps, but starting a spreadsheet is the tried and true method. The best part is, it’s free!

Remember when your parents kept messy piles of receipts? Odds are they were tracking their spending. Nowadays, online bank statements make tracking your spending much easier and without all the wasted paper. Once you have a general idea of where your money is going, it’s time to organize your expenses into two categories: fixed expenses and variable expenses. To make things easier, create a list!

Fixed expenses are expenses that remain constant month-to-month like rent, utilities, streaming subscriptions, phone, and car payments. Variable expenses are expenses that can fluctuate month-to-month, like dining out, buying clothes, entertainment, and transportation. Many variable expenses are not mandatory, meaning they can be a treasure trove of potential cash waiting to be budgeted!

For example, you might find you are spending between $80 and $100 on takeout every month. That’s money you could put aside or contribute to a savings account like an RRSP. Cutting back on variable expenses can also help you afford fixed expenses. Less money spent on takeout means more money for rent. However, there are ways to cut back on your fixed expenses, too.

After tracking your spending, you might find that you are paying for a phone plan you don’t need. If you are only using 9 GB of data a month, do you really need an unlimited data plan? Similarly, if you spend most of your time on streaming services, you could scrap your cable bill entirely. Knowing where your money is going and identifying where you can cut back will help protect you from companies trying to sucker you out of your hard-earned cash.

Budgeting helps you unveil tricky expenses like subscriptions that lurk in the darkest depths of your credit card statement. A recent study found that the average Canadian has eight recurring subscriptions.

What’s shocking is that almost 70% of the Canadians surveyed discovered they were paying for a subscription they completely forgot about. Remember that free-trial you signed up for but never used? It’s now costing you $9 a month. That’s money you could put towards your expenses, savings, or perhaps an occasional sweet treat?

Allocate income for expenses and savings

After you have made a list of fixed and variable expenses, it’s time to set a realistic budgeting goal that fits your lifestyle. There are a number of budgeting methods, but one of the most common is the 50/30/20 budget. This method divides your budget into three categories: needs, wants, and savings.

Half of your paycheck should be set aside for fixed expenses, 30% for variable expenses, and 20% for savings or debt repayment. Let’s say you receive a paycheck of $1,200. Using the 50/30/20 method, you would put aside $600 for fixed expenses like rent, $360 for variable expenses like clothes, and $240 for your savings like a TFSA, or debt reduction.

Remember! The 50/30/20 method is not a one-size-fits-all solution. Someone living in a big city with a competitive rental market would need to set aside more for their needs than someone who is living with their parents. In this example, the person living in a big city might increase their budget for needs to 60% and reduce their budget for their wants or savings by 10% to compensate.

The best part about budgeting is how flexible it is. One month’s budget doesn’t need to look the same as next month’s budget. Are your favourite pair of shoes on their last legs? Set aside some budgeting room to buy yourself a new pair! The important part is that you are realistic. Gauge what your priorities are and adjust your budget accordingly. Your money is yours to control.

Moderation and habituation

Budgeting doesn’t mean going cold turkey. You are allowed to enjoy the things you love, be it pizza or a night at the movies. The trick to budgeting is moderation. It’s easy to start budgeting, but much harder to keep budgeting. Similar to restrictive dieting, the stricter you are with your expenses, the more likely you are to spend excessively during a moment of weakness.

One trip to McDonalds isn’t going to ruin your budget (or your diet), but 100 trips will. You also need to work hard to make budgeting a habit by frequently tracking your expenses. Reviewing your credit card bill is scary, but not knowing where your money is going is even scarier. You might be paying for a subscription without even knowing it.

It pays to be vigilant and practice makes perfect. The sooner you make budgeting a habit, the sooner you can enjoy those sweet, sweet savings. Good habits deserve to be rewarded, so why not practice a little positive reinforcement and treat yourself once in awhile to encourage a healthy budgeting lifestyle?

TL;DR

Budgeting is one of those things we know we should do but put off because we think it’s too hard. In reality, budgeting is incredibly simple and comes down to willpower more than it does dollars and cents. Knowing you’re spending too much on something and making the decision to cut back is the hardest part. You won’t be a budgeting pro when you start and that’s okay.

You are allowed to stumble and make mistakes. What’s most important is that you keep trying. Before you know it, you’ll have more money in your account to put toward your expenses, emergencies, investments, savings, or maybe that trip to Japan you’ve been dreaming of for years! So what are you waiting for? Up your personal finance game by budgeting! Future you will thank you!