Written By: Sara Azevedo
Ahhh yes budgeting – everyone’s favourite subject.
Budgeting may be a daunting and intimidating subject for many beginners, but don’t fret, we are here to help clear things up for you.
So, what is budgeting?
Budgeting is the process of creating a plan for managing your money. Creating a budget can help you navigate spending money wisely so you can save your money and reach any financial goal as a result. This is usually easier said than done, so it is important to design a well thought-out monthly budget to ensure you keep your expenses in check.
A monthly budget is a key tool in tracking your income from your job or side hustles and where your money is going (i.e., savings, debts, investments, and expenses). Once budgeting becomes an integral part of your monthly routine, you will naturally begin to assess your spending habits and make the necessary changes to maintain your financial goals.
It is common to feel a bit discouraged highlighting the different areas you may be struggling financially and you may feel that restricting yourself is the only way to keep within budget. However, a great budget is not meant to restrict you from going out or splurging on yourself – in fact it’s meant to have the opposite affect. Once you gain control of your monthly spendings, you will begin to feel less worried about financial insecurity and in return be able to spend money on yourself guilt-free!
To get you started with your financial tracking journey, below are some key steps into creating a fool-proof monthly budget.
Step 1 – Figure Out Your Income
First things first… you must know how much money is coming in every month. This would count as any income from work salaries (post-tax deductions), side hustles, investment returns, and more. Your income will determine how much money you can allocate towards your savings, debts, investments, and expenses.
Once you estimate your monthly income, you can then use this amount to determine if you are spending more than you make once spendings are allocated. Small expenses can quickly add up, especially if you feel pressured to buy the latest tech and fashion, so understanding your financial limits in the foundation to creating an effective budget to avoid going into debt.
Most importantly – don’t feel discouraged about budgeting with a lower income. As a part time student with an estimated annual income of $20k, budgeting has allowed me to fully repay my student loans interest-free while also allocating reasonable amounts for personal expenses.
Step 2 – Determine Your Fixed Expenses
Now that you’ve determined your total income, it is time to review your fixed expenses. Fixed expenses are consistent payments like car payments, loan/credit card minimum payments, insurance, rent/mortgage, bills, subscriptions, and more. These recurring payments are usually consistent month-by-month and are payments you are required to make by designated dates. For any fixed expenses that may vary in cost, use a 3 month average cost to determine the estimated cost for your budget.
After all fixed expenses are listed, sum all the costs to get the total cost you are expected to pay out each month. At this point you can begin to subtract spending costs from your income. This will give you a clear idea with how much you have to work with for your other budgeting categories.
Step 3 – Track Your Variable Spending
Now it’s time for the fun part, confronting your spending habits. Budgeting your fixed expenses is not meant to discourage you from treating yourself to a new pair of shoes or eating out with friends, we still want you to enjoy your life! By tracking your variable expenses (i.e., shopping, entertainment, eating out, etc.), you can ensure you don’t go over budget and cut down on those impulse purchases. You can even categorize each individual expense to see where you are falling over or under budget.
For us Starbucks addicts, spending $2.65 on a Starbucks Blonde Roast everyday does not seem like a big expense in the moment. But, by the end of the month that $2.65 has now become $79.50- and that’s not including tax. Now I don’t know about you, but I would much rather put that money towards that Aritzia sweater that has had my eye for months and would be worn over the course of a few years.
By tracking your variable expenses, you can determine what you are spending most of your money on and cut down on those unnecessary purchases. Any extra cash can be allocated to other areas, such as an emergency fund.
At the end of the month, sum up all these expenses and compare the total to the estimated budget you have allocated for personal spending. By doing this, you can see if you stayed within your means or overspent in specific categories.
Step 4 – Keep Track of Your Debt
When making a budget and allocating amounts to your segments (i.e., savings, expenses, investments, etc), it is important to also track your debt. Your debt can include car loans, credit card minimum payments, student loans, personal loans, etc. To track your debt, identify the total amount you owe, the interest charged on top of that principal amount owed, and minimum payment amounts and due dates.
As mentioned in Step 2, minimum debt payments can be counted towards your monthly fixed expenses. Once fixed and variable expenses are budgeted from your income, you can now allocate additional payments towards your debt with the remaining amounts. This is a great way to begin repaying your loans faster than initially planned.
For more information on paying off your debt, Zoe Pritchard explains how she paid off her $20k debt in just one year.
Step 5 – Consider Your Short and Long Term Goals
To budget effectively, it is important to identify your financial goals– whether that be short or long term. Having financial goals will keep you motivated each month to stay on top of your spending habits.
Short term goals are what you will accomplish in the near future (i.e., within 1-3 years). This may include:
- school tuition
- vacation fund
- emergency fund
- new car
Long term goals are what you will accomplish further in the future. This may include:
- retirement savings
- home downpayment/mortgage
- business investment
- child’s education
Once you decide which short and long term goals you will strive towards, you can allocate any funds left over after budgeting expenses and debts. Your monthly budget will vary depending on the goals you want to achieve and feel free to change your goals to adapt your current lifestyle. Remember to also set yourself realistic goals that won’t overwhelm your monthly budget!
Step 6 – Create a Budgeting Spreadsheet
This step is optional for those who prefer old fashioned pen and paper. However, one of the most efficient ways to organize and track your finances is to create a spreadsheet. Digital spreadsheets are customizable, so they work with everyone’s goals and organizational style. The internet offers a vast amount of free and easy to download spreadsheet templates, or you can even use Excel or Google Sheets to build one form scratch. For those new to digital spreadsheets, Work Smarter Not Harder on YouTube offers an easy tutorial to help you create your own Excel Spreadsheet.
We also offer our own Google Sheets monthly budget spreadsheet on our Etsy page, so you can start your budgeting journey as soon as possible! And of course, every download includes instructions to guide you through the entire process.
