I'm about to share with you a step-by-step guide on how to make a practical budget that ensures you reach your big financial goals. "Practical" is the operative word here. If you have high hopes, like when I started budgeting, and make your budget too restrictive, you’re going to blow through it every single time. What’s worse is that you may start to develop a mentality that you’re just not good with money. This couldn’t be further from the truth. Everyone is capable of being smart with their money. I firmly believe that money management is all about the perfect blend of knowledge & mindset. You need the knowledge to create a plan that makes your money work for you, and then you need the mindset to successfully follow-through with that plan.
I don’t know a single person who has met their financial goals without some form of a budget. A budget is the first, and most important, step towards financial independence. There are many different ways to budget. Some people budget bi-monthly, others budget monthly, and some even budget annually. You need to find what works for you. This will most likely be dependent on three factors: when you get paid, your regular expenses and your spending triggers. If your weakness is buying clothes when you're having a bad day, a monthly budget rather than an annual budget will keep you more honest. For me, I get paid every two weeks, have few major expenses, and eating out is my weakness. I find that it makes the most sense for me to make a monthly budget.
When I started out, I made bi-monthly budgets. I found it so difficult and, to the surprise of no one, failed at staying within my budget almost every single time. Why? Because say, for example, I gave myself $50.00 for eating out. Well, technically I gave myself $100.00/month for eating out, but because I broke up my month in two budgets, I had zero flexibility with that expense. I might have had two birthday dinners to attend the first two weeks of the month, blowing my budget, but had no birthday dinners the last two weeks of the month. If I just gave myself $100.00 for the entire month I wouldn’t have blown that expense. Instead, I would get down on myself, when really it was completely preventable. See how important having a practical budget is to your motivation, as well as your relationship with money?
Here's the steps I took to make my current budget, which works extremely well for me. Please feel free to reach out with any comments or questions, and if you have any strategies that work for you. I'd love to hear them.
Step 1: Track Your Spending Every Day for a Month
There are lots of advice online that suggests you should track your spending for 3 months before you create a budget, but if you’re reading this you probably don’t want to wait another 3 months to make a budget. If you’re serious about creating a realistic budget, start tracking your spending today. It’s okay if you’re reading this in the middle of the month, just record your spending for the next 30 days and then start your budget the beginning of the following month.
I use the simple “Notes” App on my iPhone to track everything. Since I almost always have my cell phone on me, I just quickly fill this in when I’m making a purchase. If I don’t have time, I’ll just ask for a receipt or look at my online bank account and fill it in later.
Here's a sample picture of what I do. As you see, I have already put things into categories. I suggest that when you're tracking your spending before you make your first budget, start putting your expenses in categories. It's easier to figure out what your categories will look like when everything is already compartmentalized. For example, don't write, "pizza - $20.00." Instead write, "eating out - $20.00." It will make things much easier when you calculate your spending.
If you're going to be making a monthly budget, I suggest adding up all your spending approximately two weeks into your tracking exercise. If you think you're spending too much on something, try to reduce that spending the following two weeks. This will give you a better sense of what costs you can realistically lower when you're creating your first budget.
Because I make monthly budgets, I calculate my spending in each category in the middle of the month. I can determine exactly what spending money I have left in each category. I usually then write something extremely informal:
“As of August 15:
Groceries - $100
Presto - $100
Entertainment - $75
You get the idea. I save this information in my phone, again usually within the same note, so I can quickly glance at it before I decide to make a purchase.
I don’t find that tracking my spending is particularly burdensome. Once it becomes a habit, it takes 5 seconds to pull out your phone and record this information. It also takes less than 10 minutes to tally up the categories.
Just like the importance of the long and short-form census to Canadian domestic policy, recording this information about your spending habits are important to finding what you absolutely need to spend money on per month and what you can probably reduce a little. This also identifies your spending triggers. Basically, this shows you your strengths and weaknesses. Once you get a better understanding of yourself and your money habits, you’ll be ready to make your budget. Information is power!
Step 2: Figure Out Your Fixed Expenses
Your fixed expenses are expenses that don’t change much and you know are due every month. This is a list of mine:
Student Loan (Minimum Payment Amount)
While the minimum payment on your student loans will change as you’re paying down your balance, you should eventually have a rough estimate as to what it is. For example, if your minimum payment last month was $350.00, you can make your “student loan minimum payment amount” $450.00. That way you know it’s covered. However, you can also just as easily check your student loan balance at the end of the month, which is what I do, and identify the minimum payment before you finalize next month's budget.
Your cell-phone bill may also occasionally fluctuate. One month you could accidentally go over your data limit and owe more the next month. It’s not a big deal, just keep that in mind when you're making next month's budget. While these are “fixed” expenses, you are still making a new budget every single month. While you can usually just copy + paste these expenses when figuring out next month's budget, you should still double-check some of these expenses haven't changed.
Also things to include under fixed expenses:
Minimum payment amount for your credit card
Minimum payment amount for your car lease/loan payment
Parking Spot Fee (if you live in a condo or apartment)
Step 3: Figure Out Your Variable Expenses
These are costs that you, generally, have more discretion over.
This is a list of mine:
Presto Card (or TTC pass – if you take public transit)
Enterprise Car Share
Sh** Happens Fund
My grocery category has been the same every month this year, but this can vary if you know you’re hosting a big dinner party or going on vacation for 2 weeks. I also used to have a separate coffee category, but recently I increased my “Eating Out” category and folded my coffee category into there to simplify things.
“Personal Spending” means I can use this money for whatever. Unfortunately, most of the time it goes towards my medications (my health benefits cover 90% of the costs) and expensive contact lenses. But, I also use this category for clothes, books, and whatever I feel like treating myself with. Also, if I’ve maxed out my “Eating Out” budget but I have a lot leftover in this category, sometimes I use this to fund food-related treats too.
I also sold my car for scraps two months ago and purchased an Enterprise Car Share membership. I mostly use it get to my softball games, but it’s been pretty handy since there are two readily available Enterprise Cars on my street. They even reimburse me for gas!
Lastly, I strongly recommend having a “Sh** Happens Fund." If I accidentally go over my budget for the month due to some small or medium-sized unexpected cost, I can use these funds instead of having to dip into my separate emergency fund. I’ll be honest, I mostly use this to pay back my girlfriend for groceries. We split groceries down the middle and she tends to buy groceries more than me, so I usually owe her money at the end of the month.
Also things to include under variable costs:
Car Maintenance Fund
Step 4: Decide What to Do With The Remainder
Okay, time for some kindergarten math. Subtract the total of your fixed expenses and variable costs from your net income per month, and voila that's what you have leftover. This money should NOT be used to spend on restaurants, concert tickets, the new iPhone and other things you want now but don't need.
This money should be strictly applied to your bigger financial goals. For me, this is aggressively paying down my student loans. Although I already covered the minimum payment, I throw this money on top of it.
If you have multiple goals as well, such as 1) saving 3 - 6 months of expenses in your emergency fund, 2) saving for a down payment on property, 3) a new car, 4) your future wedding etc. then you can use your discretion on how to divide up this money. But again, I strongly believe it's a mistake to use this money towards anything else.
Step 5: Track Your Spending Again
You’re not off the hook just yet! Why am I telling you to track your spending again now that you just made a beautiful, well-thought out budget? To see if this budget actually works. Tracking your spending should be familiar to you now, and shouldn’t feel too onerous. The first month with a new budget is critical. At the end of the month, figure out what worked and what didn’t work, and use that to create a new budget for the following month. I’m going to be honest, it’ll probably take you 3 months or so to perfect your budgeting. Don’t give up. Solid money management takes practice, with a lot of setbacks.
While Gail Vaz Oxlade insists on tracking all your spending forever and ever, I don’t think this will always be the case. For me, I recorded all my spending for months. Once I knew my budget and spending habits really well, I stopped tracking my spending daily. Now, I just login to my online bank account at the end of every week or every two weeks, and tally up my categories. I have developed a better sense of where I think I’m at in terms of my spending, and when I’m getting close to maxing out.
Breakdown of My Budget by Percentage
I find that looking at your budget by percentage, rather than numbers, is more helpful. We all have different incomes, so to look at what someone else spends will not be very helpful for you.
Here's the breakdown of my current budget:
Fixed Expenses: 24.44%
Variable Expenses: 31.57%
It's also worth noting I have a group RRSP plan through work. It's a bit unconventional since my employer automatically contributes 5.5% of my gross income per paycheque to a group RRSP plan, without me having to match anything. That being said, I can voluntarily contribute more. I currently do not contribute to my work plan as I am currently invest in index funds, which started before I took my current job. Once my student loans are lower, I will revisit this.
Ultimately, if you calculate everything, I would estimate that I am roughly living on 54% of my income and the rest is going to student loans and savings. I also believe now that softball season is coming to an end, I'll be able to lower that percentage since my Enterprise Car Share budget is large enough so I can rent a car at least 4 times a month, for roughly 4 hours at a time.
Last Piece of Advice
There is no quick and easy way to make a budget that you can stick to. A budget is, after all, a breathable framework for your money habits. A budget should not only reflect your current lifestyle, but also be the primary tool that will help you reach your bigger goals, such as those I mentioned. Again, these goals may not necessarily reflect your own goals, but you get the idea. If you have everything you already need, then throw that money towards your retirement or mortgage!
Once you have a budget in place, you will not only significantly reduce your present stress, but also feel more confident about your future. Good luck!