A budget is a financial plan that outlines a person's expected income and expenses over a specific period. Budgeting can help you manage your money by allocating funds to various categories thereby making your personal finances more stable.
Luckily, you don't have to create a budget plan from scratch. There are several valuable types of budgeting software available for Canadians, or you can do things on your own with a spreadsheet or just some pen and paper. Some banks even offer budgeting tools via their online banking portals.
However you proceed, being dedicated to your budget plan will ensure that you always have enough money to cover necessities. This guide explores the fundamental concept of personal budgeting, offering insight into how individuals can take control of their money, achieve financial goals, and build a secure future.
Key Takeaways
- A budget is a financial plan that outlines your expected monthly income and expenses.
- Budgets work by showing you where your money goes, what you can afford, where you can cut costs, and how to reach your goals.
- You can get started with a budget plan by calculating your income and expenses, making a list of goals, tracking your spending, and regularly reviewing your plan.
- A few pros of budgets include preventing stress, encouraging and building savings, and building long-term discipline.
- Cons include becoming frustrated with finding the right budget method for your needs and it feeling rigid and inflexible.
How to start making a budget in 6 steps
Creating a budget can be accomplished in just 6 steps – you'll start by calculating your net income, but there isn't an official "finish." Instead, you'll continually review and reevaluate your budget plan to ensure it's still working properly.
Here are the 6 basic steps to take when starting your budgeting journey:
- Calculate your net income: Add your salary, side hustles, and any other regular income sources together so you have a firm number to work with.
- Add up your expenses: This should include fixed expenses (mortgage/rent, car payments, utility bills, etc.) and variable expenses (groceries, gas, entertainment, etc.)
- Compare these expenses with your net income: Having an income amount that's higher than your expenditures is ideal. But if your expenses are higher than your income, you'll need to adjust your spending habits, which is exactly what a budget is for.
- Make a list of goals: Be sure to differentiate between your needs and wants, but do include both.
- Track your spending: Creating categories is one way to get started on this as it can show you exactly how much you spend in specific areas.
- Review your budget: Set aside time every 3 months, 6 months, or some kind of regular basis to review your spending. Note what's working and what's not, then adjust your plan accordingly.
You can learn more about creating and maintaining budgets here: Making a budget.
How do budgets work?
Budgets work by helping you effectively manage your finances by planning your spending and saving. You compare your income with the total cost of your expenses so that you can figure out certain details, such as:
- Where your money goes
- What you can afford to spend
- Where you can cut costs
- How you can reach your goals
Essentially, a budget provides a system of doing things that allows you to maintain a sense of control and enjoy peace of mind. The more you understand your spending habits and social influences, the more effective your budget will be.
7 reasons to have a budget
Perhaps the biggest reason for having and sticking to a budget is to ensure your savings are on track for the future. This means you're prepared for emergencies, retirement, and any personal goals you may have.
These aren't the only reasons for having a budget, though. Here are a few more to consider:
- Helps you reach your goals and plan for major expenses
- Fixes poor spending habits so you avoid overspending and/or accumulating debt
- Prepares you for emergencies, whatever they may be
- Reveals your spending habits and helps you fix them
- Reduces financial stress and provides peace of mind
- Makes saving for retirement easier, which provides its own peace of mind
- Improves quality of life for you and your whole family
Pros and cons of budgeting
This table lists the main benefits and pitfalls of having a budget.
| Pros | Cons |
|---|---|
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Discussion regarding the downsides of creating and maintaining a budget isn't common, but the effort required and rigidity of a budget can be just as impactful as the ability to achieve goals. Many people also underestimate how tricky it can be to remain on the same page as your spouse or partner regarding household spending. Creating and sticking to a budget should be something you undertake together, but it isn't always easy.
Types of budgeting
This table explains several of the most commonly used budget plans and approaches used in personal finance:
| Budget plan | Details |
|---|---|
| Zero-based budgeting | * Goal is to "zero out" the budget – in other words: income - expenses = $0 * Every dollar of income is assigned a specific purpose |
| Envelope/cash-only budgeting | * Cash is divided into physical envelopes * Each envelope represents a specific bill or spending purpose * An empty envelope means you can't spend any more in that category until the next budget period |
| 50/30/20 budgeting | * 50% of your income is set aside for needs (housing, groceries, utilities) * 30% is set aside for wants (dining out, entertainment) * 20% is set aside for savings and debt repayment |
| Savings-first approach | * Prioritizes saving by automatically setting aside a portion of your income for savings or investments * Bill payments and expenses are met with what's leftover |
| Spending-first/Pay yourself first approach | * Spend what you need throughout the month * Leftover funds are put into savings at the end of the month |
| Biweekly budgeting | * Budget is based on a biweekly pay schedule * Plans and scheduled expenses to be met every 2 weeks * Requires adjustments for irregularly occurring expenses |
| Sinking fund budgeting | * Set aside money each month for irregular expenses (car repairs, vacations, etc.) * Assures preparedness for irregular and emergency expenses |
| Emergency fund budgeting | * Requires building a fund to cover 3 - 6 months of living expenses * Builds emergency fund to cover unexpected expenses or financial setbacks |
| Percentage-based budgeting | * Allocates percentages of your income for spending categories based on your personal priorities * Similar to 50/30/20 budgeting but with varying percentages |
| Incremental budgeting | * Prioritizes a focus on changing income, expenses, and/or financial goals * Requires making incremental adjustments to your budget over time |
Whatever your budgeting priorities may be,consider using this monthly budget template to help you stay on track . It's an easy-to-use PDF that encourages goal-setting and even does all math calculations for you.
FAQ
What is a budget?
A budget is a financial plan that outlines a person's expected income and expenses over a specific period. It helps you manage your money by allocating funds to various categories, resulting in your personal finances being more stable.
Why should I have a budget?
There are many reasons to learn how to make a budget and stick with it. They can help you to evaluate and rethink your spending habits, enable you to reach your financial goals, prepare you for emergencies, and more.
How do I start making a budget?
The first step is to calculate your net income. You'll then add up your expenses and compare this with your income. Next, you make a list of goals, track spending, and review your budget plan regularly to ensure it's working.
Will a budget help me save money?
Saving money is one of the benefits that sticking to a budget provides. It can also prevent stress, enhance household communication and coordination, and build long-term financial discipline. Still, it can be tricky to find and stick to a budget.
What are the 3 types of budgets?
There are actually many types of budget plans to choose from, each requiring a unique approach to personal finance. The 3 most popular are the 50/30/20 plan, the Zero-based plan, and the Envelope budgeting plan.
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