How to create a monthly budget: A step-by-step guide for Canadians

It may not be at the top of the list of fun weekend activities, but a budget is a tool that can provide insights into your spending habits. It can help you plan for expenses, and make it easier to achieve your financial goals, such as building an emergency fund, paying down debt, or saving for a down payment on a home.

While figuring out how much money you earn, spend and save each month can seem like a daunting task, it’s not as difficult to build a budget as you might think. We’ll walk you through the five steps to creating a budget that is easy to use, as well as offer tips on how you can stick to it.

Step 1: List your expenses and streams of income

The first step to creating a monthly budget is understanding how you manage your money from day to day. There are many online budgeting tools and financial apps that can help with this, including Credit Canada’s free Budget Planner + Expense Tracker. With this tool, you plug in some basic information, including your expenses, and the planner does the rest. It provides a complete breakdown of what you spend your money on each month. You can also include your budget and see how it compares to your actual spending.

Using the Credit Canada planner or any other budgeting tool you prefer, create a list of your income and expenses. Then, allocate set amounts of your income to cover those expenses, including how much you pay for various bills and items each month. Along with your expenses, make sure to include any debt payments you will make. If you notice that your expenses are higher than your income, you’ll need to make some adjustments, such as focusing on which debt to pay or earn extra money (more on that in step 3).

Step 2: Begin tracking your expenses

If you’re like most Canadians, you might not know where your money goes after you pay for obvious living expenses, like your rent or mortgage, car payments, groceries and utilities. This is why it’s important to track monthly expenses when you start putting together a budget.

Include even the smallest and spontaneous purchases—like takeout meals and movie tickets—in your budget. Study your credit card bills for any expenses you may have forgotten about, like subscriptions and services. You may be surprised to find out how quickly inconsequential expenses can add up. Try using Credit Canada’s free, online Budget Calculator to find out how much money you could save by eliminating some of these expenses.

As a general rule, you should spend up to 50% of your after-tax income on needs and living expenses. The remaining half should be divided as 20% for savings and debt repayment, and 30% for anything else you may want.

After you’ve completed at least one month of tracking, you’ll see whether you have come in over or under budget and gain insight into where you can cut back on your spending in order to pay down debt or save money.

Step 3: Set realistic financial goals

Do you find it difficult to stay motivated to stick to a budget? If so, think about why you wanted to create a budget in the first place. Are you saving up for a big purchase? Getting caught up on debt payments? Write down your short-, medium- and long-term financial goals so you can remind yourself what you’re working towards. Be realistic about what you can achieve based on your current income. If you set unachievable goals, you’re setting yourself up to fail.

Short-term goals are things you want to achieve within the next 12 months. That might be:

• Paying off the credit card balance with the highest interest rate
• Catching up on an outstanding utility bill balance

Medium-term goals are financial milestones you want to accomplish in one to five years, such as:

• Saving for a down payment on a home
• Starting and contributing to an emergency fund

Long-term goals are things that you want to achieve in five or more years. For example:

• Saving for retirement
• Paying off your mortgage

Step 4: Set budget priorities

Not every goal can be achieved within the first month or even the first year—this is why everyone’s budget needs a purpose. If you’re in debt, your first priority should be paying it down. If you understand where your money goes, your spending habits, your money-saving target and how quickly you can pay down debt, your goals will feel more achievable. Keep in mind that circumstances can change, and you may need to revise your budget at least once a year.

If you don’t have any debt but are short on savings, your priority should be starting an emergency fund that covers three to six months’ worth of expenses and/or income. Having this security blanket ensures you have money on hand and will not have to turn to high-interest credit in the event of unforeseen circumstances, such as a health issue, job loss or a large expense like a car breakdown.

Step 5: Open a savings account

When creating a budget, it’s important to save some money for the fun things in life, too. You can easily do this by opening a savings account. This type of saving is different from an emergency fund as it would be used to meet other financial life goals, like a big trip, returning to school part-time or anything you’re passionate about. The purpose of the savings account can be tied to one or more of your goals made during Step 3.

Every time you earn income, take a small percentage and put it into a savings account, like a tax-free savings account (TFSA), some other type of investment account or a high-interest savings account, if you need to access the money sooner than later. Your bank or financial institution can help you set up automatic withdrawals to take money out of your chequing account and put it into a savings account every time you get paid. In doing so, you won’t be tempted to spend the money and can let it grow over time.

Sticking to your budget and understanding debt

The key to a successful budget is sticking to it. If you can’t seem to follow or come in under your budget and you rely on credit to expand your spending each month, you’ll likely wind up in (more) debt.

The primary cause of debt is overspending, which can be linked to a variety of factors—some within a person’s control and others outside of it. Underestimating expenses, mismanaging your income and not budgeting for future costs are common causes of overspending that are within your control. External factors, like inflation and high-interest rates on loans or credit cards, can also contribute to overspending, making it difficult to effectively manage your finances. Knowing how to manage the impact of both can help you make decisions about how to manage better, though.

Don’t dismiss it: Overspending can also be a symptom of mental health struggles. For example, people with anxiety or depression may turn to shopping as a coping mechanism while those suffering from addiction may experience a lack of impulse control when it comes to spending. In addition, many people with these experiences may not recognize their negative behaviours around money can add to overspending. Family financial habits and adulthood experiences, such as unemployment, grief or divorce, can also shape spending habits.

Understanding and managing your money is the first step to creating a successful financial future, and being able to recognize and address contributing factors to overspending will help keep you on track.

Having trouble creating or managing your budget? You can always reach out to a non-profit credit counselling agency like Credit Canada for free, confidential advice on how to manage your debt.

More on debt:

• Debt demystified: How to calculate your debt
• How to calculate your debt-to-income ratio—and why you should know this number
• How long do debt collectors try to collect in Canada?
• Can debt collectors discuss your debt with your family members?