Create your perfect budget in 5 steps

Step 1: Understand your values

Figure out what values are important to you in your life and how you want to spend your money. The most common values include your health, having a fulfilling career, or buying a home, just to name a few. Take a moment to rank each of the following values below (from 1 to 5) to find your top values.

Take a look at the example we put together below to better understand how to fill it out.

Let’s say you discover that you truly value being physically healthy. It’s important to you because your family members have health issues. You want to be eating healthy and exercising regularly to stay fit. This may affect how you spend your money as you may decide to purchase a gym membership or online fitness classes.

On the flip side, you may say that having material possessions is the least important to you because you find experiences, such as travelling or trying new activities, more memorable and satisfying. Therefore, it would impact how you spend your money by making you book a Caribbean trip instead of buying new clothes.

Once you determine your top values and how it impacts the way you spend your money, this will help you later on to see if your spending habits align with your values.

Step 2: Create your financial goals

Everyone has a unique vision of what their future lifestyle will look like. Take a moment to reflect on that vision. Write down the goals you want to achieve. These could be short-term goals that you want to achieve within less than a year. A medium-term goal could span a few years. Lastly, a long-term goal would take longer than five years to accomplish. There are a variety of categories to consider, including:

• Career
• Education
• Family
• Health
• Material possessions
• Money
• Religion
• Retirement
• Relationships
• Travel

Ask yourself the following questions:

1. What do I want to save up for?
2. How much money do I need to attain this goal?
3. When do I want to achieve this?

For example, if you want to save for a new laptop, your goal could be “I need to save $110 per month for the next 12 months to save $1,320 to “achieve” buying a new laptop.” The more specific you are, the better. If you know the brand, model, colour, size, and other specifications, include that in your goal. To be successful, continuously monitor your progress and adjust your goals if necessary.

Step 3: Track your income and expenses

Tracking your income and expenses is a simple exercise that takes a few minutes every day but will quickly show you what your lifestyle is like and what areas you are spending the most on.

You can keep track of your income and expenses by using a note-taking app like Evernote. However, there are more sophisticated budgeting apps such as Mint or YNAB (You Need A Budget). Whenever you go to purchase an item, whether online or in-store, record the date, the name of the store, and the amount you spent. This way, you will have a full summary of where your money comes in and where it goes out at the end of the month.

Give this a try for a few months. Most likely, this will be an eye-opening experience as you’ll learn something new about your spending patterns. For example, you may discover that you spend the most money on food, clothing, and home décor. Knowing this information allows you to pinpoint those areas where your money goes and see if you need to make any adjustments. For instance, if you used to work in an office, you may have purchased business outfits. However, since many Canadians have been working at home, you may realize that you no longer need to buy such expensive outfits and can buy more affordable clothes. This means this is an opportunity to save money in this category. In turn, this gives you the option to either increase your savings or direct them into another category.

Step 4: Create a monthly budget

Now that you have a complete picture of your income and expenses, you can take this information and put it into a monthly budget. You can easily do this by using one of the many personal budgeting apps that we have reviewed in the past. We will look at PocketSmith and YNAB as tools for tracking your spending and reaching your financial goals.

Note: Due to changes in bank feeds in Canada, users have reported that their automatic connections are unreliable and will frequently disconnect. This isn’t an issue with any particular budgeting app but a security measure Canadian banks have put in place over the past few years.

PocketSmith

Apply for PocketSmith

PocketSmith is a powerful money management system for people who want to get serious about their finances and unique financial goals. You can view all your financial accounts in one place (including credit cards, bank accounts, and so on) to simplify your budgeting and money management. Store your important files in PocketSmith to have all your sensitive financial information in one place. You also don’t have to search for that receipt if you have a warranty.

Create custom budgets for your various financial goals in life (from paying off debt to saving up for a house) with unlimited, customizable dashboards. This feature is perfect for those with multiple sources of income or for couples with shared finances that have different views on money.

PocketSmith offers a budget calendar that allows you to view your spending on any given day to meticulously track your spending habits. It allows you to forecast and plan your financial future. The forecasting feature is unique because you can see the potential consequences of your current financial decisions up to 30 years in the future. Instead of just looking at your past spending, you can see what will happen with every financial decision you make right now.

Pros:

• It allows you to forecast up to 30 years, making it easier to plan for your future.
• Unlimited, customizable dashboards for multiple sources of income.
• You can track your net worth.
• You can store all of your important documents in one place.

Cons:

• The price can add up if you go with the premium plan.
• There are cheaper alternatives out there.
• Investment accounts require manual edits for gains or losses to maintain accuracy.

Check out our PocketSmith Review.

You Need a Budget (YNAB)

This is one of the most popular budgeting apps in the personal finance community. YNAB allows you to connect all of your financial accounts so you can track your spending and see where your money’s going. It allows you to create a budget that you can follow on the easy-to-use app.

Once you connect your financial accounts, YNAB will allow you to visualize your spending to see where you could use some help when it comes to cutting back. It encourages you to plan ahead and think about your spending. That way, you’re not frivolously spending your money.

YNAB believes that every dollar has a job, so they work on educating you about your spending. It also offers many free learning tools to pick up the basics of personal finance as you’re tracking your spending and working towards your financial goals. On top of the education, it also offers a lively community for you to interact with other like-minded people who are working towards similar financial goals.

Pros:

• It offers joint budgeting for couples.
• You get a risk-free trial period to test out the app.
• A mobile-friendly app that’s easy to use.

Cons:

• It comes with a cost after the trial period.
• Higher cost than most budgeting apps.

Read our YNAB review.

Breaking down your budget

You can easily break down your budget using the Money.ca Monthly Budget Tool. You want to take the time to fill this out and be as accurate as possible. The more detailed you are, the clearer picture you will get of your current financial situation. Gather all the information and fill out the budget to see if you have a surplus or shortage of cash at the end of the month.

This exercise shouldn’t take more than 30 minutes to an hour to complete. If you have a significant other, both of you can fill this out together as you will learn plenty from doing this exercise. Once you complete this spreadsheet, it will give you an in-depth perspective of how you are spending your money. This way, you can make adjustments based on the categories you may be spending too much on and find ways to trim down your spending.

Income

First, ask yourself, where does all your money come from? You will want to write all your income sources, including your employer, part-time business money, rental income, bonuses, commissions, government and/or family support. Then calculate your total income.

Expenses

Record your fixed and variable expenses. Fixed costs are things you spend on and are consistent each month. This includes your car payments, mortgage or rent, internet and phone bill, and monthly subscriptions (like gym, tv, magazines). Variable expenses may include groceries, dining out, entertainment, transportation, gifts, and social events. You may also have some debt to repay, such as a student loan, credit card payment, or line of credit.

Savings

How much money goes towards your savings? Put aside money for an emergency fund if you don’t already have one. Typically, personal finance experts suggest saving between three to six months’ worth of expenses. If you are experiencing an uncertain future, it is wise to bump it up to nine months to one year worth of expenses.

What other savings goals do you have? Perhaps you want to save for an annual vacation or a new laptop. A good strategy is to create a dedicated savings account for each of your savings goals.

Investments

Next, how much goes towards your investments? The most common investment vehicles would be the TFSA (Tax-Free Savings Account) and the RRSP (Registered Retirement Savings Plan). If you are a parent, you may have an RESP (Registered Education Savings Plan) set up for your children’s post-secondary education.

Calculate how much money you have left over

Finally, you’ll now be able to calculate whether you have a surplus or a shortage of money. You want to have a surplus and live below your means. If you see that you are spending more than you earn, then you will be in debt. You’ll need to find ways to tweak your spending habits, so you don’t spend more than you earn.

Here is an example of a simplified balanced budget:

Step 5: Monitor and adjust your budget

After you’ve created your budget, be sure to monitor and review it regularly and make adjustments when necessary. You may find that you need to increase your income, reduce your expenses or increase your savings. A way you can do this is by taking advantage of money-saving apps.

Alternatively, you can look at the different categories where you spend your money. Then see if you can find ways to shave some of these costs. For instance, you may want to negotiate a better cell phone plan with your provider or cancel some monthly subscriptions that you don’t use anymore. You may also find that you have a passion for creating artwork, baking, or freelancing, and you may decide to start your own side hustle to bring in additional income every month. Identifying where you can improve and taking small steps to improve your financial situation will help you in the long run.

Now that you understand the importance and benefits of budgeting, this will help you be mindful of how you spend your money. Remember, there is no shortcut to building strong financial habits. It requires patience, practice, and perseverance. It’s about taking one step at a time, and gradually you will see that you can feel in control of your money, be aware of your spending habits and reach your savings goals. Those small decisions you make daily will make a big difference over time. Don’t worry if you make mistakes along the way, so long as you keep trying and you don’t give up on your financial goals. With these tips in mind, you will be well on your way to developing good budgeting habits and achieving your dream lifestyle.

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