Budgeting 101: Creating a Budget (And How to Stick to It!)

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In This Article

It’s easy to overspend – maybe it was one too many Uber Eats deliveries or a stash of autumn-scented candles that were calling your name. But this is exactly why knowing how to stick to a budget is so important!

Whatever the slip up, a budget can guide you back on track, and keep you meeting goals. 

In this article, we’ll help break down why budgets are important, introduce some popular budgeting methods, and give tips on how to stick to a budget.

Why Do You Want to Know How to Stick to a Budget?

You know the saying “if you fail to plan, you plan to fail”? Well, that applies pretty strongly to your financial wellbeing.

If you want to reach your financial goals, you need a solid plan. It doesn’t just happen. 

A budget is your road map to help you get from Point A to Point B, explains Tom Drake, financial analyst and founder of Canadian personal finance blog MapleMoney.

Budgets are a great way to assess your current financial situation, advised Sandy Yong, Canadian personal finance expert and author of The Money Master. It’s a visual of your lifestyle and spending habits, and those insights can help motivate change in your spending habits. For example, if you’re forced to look at your statements every month, you’ll probably have a lot smarter credit card use. It’s a great way to work on financial responsibility!

And since our recent study found that one third of Canadians have one month or less of a financial cushion, budgeting is important to make sure you're setting aside money if you need it.

But while this is all great, how do you start moving forward on your budget? By looking at exactly where you are right now.

Step One: Pre-Budget 

Before you start creating a budget, Yong says to track your income and expenses. She recommends using a note-taking app on your phone and writing down any time you make a purchase – online, in a store, or paying for a service. Keep track of the date, the store, and how much you spent. Do this for one to three months. The longer you track your spending, the more accurate your financial picture will be!

While you can find a record of past purchases on your credit card or bank statements, Yong prefers tracking it manually. She says it’s a good habit to get into, and makes you more aware of money going out.

Remember, writing isn’t for everybody! If you don’t want to write it down by hand, budgeting apps are a dime a dozen! Mint and YNAB are some of the more popular options.

While you are tracking your spending, you'll also want to consider what your financial goals are. Having a clear idea of what you’re saving for is an important part of putting together a budget. Budgeting without goals is just shifting your spending habits, and at the end of the day you won’t have anything more to show for it.

Once you’ve gathered information about your spending, you’re ready to sit down and take a look at your financial snapshot. 

Step Two: Making Your Budget

Now that you know what you’re spending, it’s time to build your budget. Here’s what you need to do.

Identify Your Income

Identifying your income is the best starting point, as this tells you exactly how much you have to spend each month. 

When keeping track of how much you make, be sure to include any other income streams beyond your regular paycheck. Do you do any freelance work or have a side hustle? Are you receiving money from rental properties or government support? 

Write down how much you’re making after taxes, and add back in any paycheck deductions for investments or automatic savings. This will give you a broader picture of your finances.

Categorize Your Spending

Next, you’ll want to organise your spending. You can break your expenses into three major categories: needs, wants, and savings. 

Needs are the essentials you use to live and work, things like rent, utilities, and transportation. Wants typically include purchases that support your lifestyle, but you could make do without, such as dining out and entertainment. The distinction between needs and wants isn’t always clear, and deciding where some items belong will differ for each person.

If needs and wants isn’t the best way for you to divide it, you can try fixed and variable costs. Fixed expenses are costs that don’t fluctuate, things like a mortgage, car payment, or regular monthly subscriptions. Variable expenses are purchases with a price tag that changes over time, like gifts, social outings, or grocery bills. 

Choose Your Budgeting Approach

A good way to break down your expenses is with the 50/30/20 budgeting method. 

Divide your spending so that 50 percent of your income goes towards needs, 30 percent for wants, and 20 percent to savings and debt repayment. If your needs occasionally run over their set amount, or you’re unable to meet savings goals, make up the difference by temporarily trimming back on your wants category.

Drake likes the idea of giving every dollar a job, so he uses the zero-sum budgeting method. Every dollar that comes in is assigned a task, whether it’s going to the mortgage, a credit card balance, or an investment account. The goal is to ‘spend’ every penny, but to do it wisely.

The pay-yourself-first budgeting method is a reverse budgeting strategy that Yong prefers. In this approach a spending plan is built around savings goals, and money is first paid into savings before used for your other costs. By putting savings as first priority, you can make sure you’re still hitting your savings targets even in tight months.

Tips to Consider When Building Your Budget

There’s lots of different approaches to budgeting, so try a few ways of categorizing your spending until you find the best fit. 

When making your budget be sure to look at a calendar and see what events are coming up – maybe it’s a birthday, a wedding, or the approaching holiday season – and plan for those expenses. You’ll want to add a buffer to your budget as well, giving yourself some wiggle room will make it easier to follow.

You’ll also want to make some special considerations if you share finances with a partner. It’s crucial to make sure that you’re both on the same page about spending. While it can be tough to open up about money matters, Yong recommends setting a monthly money date with your partner. Carve out time to sit down and go through your budget and have open, candid conversations about money. Some couples might prefer to have both a joint account as well as individual accounts, so that they can have the flexibility and freedom of making their own purchases.

See if you can make this fun by turning it into a date night! Order takeout or have a nice bottle of wine and cheese (budgeted for, of course) while you talk through these tougher conversations.

photo of a woman buying a coffee at a café with her visa card for PolicyMe

Step Three: Consider Your Savings

As you’re looking for a place for every dollar to go, make sure to think of the future you. You’ll want to have savings as part of your budget.

So, how much of your paycheck should you save? The short answer is that you should save as much as you can. For some, that might be 10 or 20 percent of your paycheck, Drake says. No matter where your starting point is, your goal should be to increase your savings rate over time. 

The amount that you contribute towards savings each month should reflect your desired goals for financial independence, Yong advises. If you’re hoping for an earlier retirement, your savings should be more aggressive.

Savings categories often include: 

  • Emergency funds
  • Short or mid-term goals 
  • Debt repayment 
  • Retirement funds 
  • Investments (Make sure to include your RRSP and your TFSA)

The general rule is to have at least three to six months worth of expenses in an emergency savings fund for things like a job loss, car breaking down, or unexpected home repairs. These savings are especially important right now due to the uncertainty of the pandemic. Yong recommends increasing your emergency fund to nine months to a year’s worth of expenses, if possible.

Not sure what you want to save for outside a home? 

Yong said she loves encouraging people to make a dream board or a vision board to help identify what they want their future to look like, and then set appropriate savings goals – whether it’s for your kid’s future schooling, a vacation, or your dream home. Put a dollar amount next to each dream goal, and break those numbers down to figure out exactly how much you need to save every week or month to make it attainable. 

Step Four: Know How to Stick to a Budget

Now that you’ve worked this hard at building your budget and savings goals, use it. You need to know how to stick to your budget to be successful!

However, knowing how to stick to a budget is the hardest part. The more transactions you can automate, the better, Drake recommends. Have as many payments as possible auto-debited from your bank account. This goes for savings and investments as well. If the money is automatically going where it belongs, it makes it harder for you to spend it on.

You also want to be realistic! Being too strict with a budget will make it tougher to follow. “You need to allow yourself some wiggle room to enjoy the things that are important to you, or you won't stick it out,” Drake advised. “It's the same reason that crash diets don't work. As long as you keep moving forward, you'll be okay.”

Revisit your budget every three to six months to see what’s working and change what isn’t. If you find that you're consistently overspending, take a look at where you’re wasting money or brainstorm ways to generate more income.

You can even look at ways to set up a reward system! Identify in advance various budgeting milestones, things like sticking to a budget for three months, or hitting certain savings targets, and celebrate when you reach them. 

Final Notes on Sticking to Your Budget

Budgeting can be an effective tool to identify where your money is going, so that you can make sure your spending aligns with your goals. There’s lots of various budgeting methods, so try a few different options until you find the best fit. Once you decide on a budget, remember to revisit it every three to six months to make sure that it reflects your current lifestyle. 

Sticking to a budget can be challenging, but it's essential for achieving financial goals and avoiding debt. One way to stay on track with your budget is by investing in life insurance.

By selecting the right policy from the best life insurance company in Canada, you can provide financial protection for your loved ones and also ensure that you're not overspending on unnecessary expenses.

Term life insurance in Canada is relatively affordable meaning you can protect the ones you love without breaking the bank. Visit PolicyMe to get insurance quotes in Canada.

If you want to protect your partner, we recommend getting spousal life insurance.

To be able to stick to your budget, you need to find some of the most affordable life insurance companies in Canada.

Visit the PolicyMe website to find out what is critical illness insurance in Canada.

Just remember that budgeting isn’t an overnight accomplishment, and knowing how to stick to a budget takes practice. If you keep actively working at it, it can be an effective roadmap for reaching your financial goals – once that includes Uber Eats and fall candles. 

If you're an older individual and want to leave behind money for your loved ones but are finding it hard to fit it in your budget, we recommend getting seniors insurance.

Use PolicyMe for an insurance price calculator.

Laura McKay

COO & Co-Founder
About the Author

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