Budgeting is important for everyone’s finances! A lot of us shy away because we’re nervous to look that closely at our spending and saving habits. But when you know how to make a budget the right way it should actually give you MORE money for the things you want, and help you stop wasting money on things you don’t.
Budgeting can help you stop overspending, get out of debt faster, track your savings, and reach your financial goals earlier!
How to Create a Budget for Beginners
Okay budget beginners, ready to learn how to create a budget? It’s actually quite simple to start and it only takes 5 steps:
1. Determine your income
It’s important to know how much money you are earning each month. For the sake of your budget, you’ll want to calculate your net income A.K.A your after-tax income! This will determine how much money you can allocate in different parts of your budget.
2. Calculate your monthly expenses
You can create a monthly, weekly, or even quarterly budget. But for beginners we recommend working on a monthly basis to start. Calculate how much you spend on necessities and non necessities per month. This will guide you in making your budget and maybe even shed light on any unnecessary spending you’ve been up to.
KOHO is just one awesome way to track your spending (and get cash back you can use toward other financial goals!) and a great accompaniment to your new budget that’s super easy to use.
3. Set goals
What do you want your budget to do for you? Maybe it’s save an emergency fund, keep your debt repayment on track, or reduce unnecessary spending. Whatever goals you set will help you design your budget with ease and make it personal to you.
4. Automate savings
Saving is such an important part of budgeting. Having a monthly budget usually helps make saving easier and more consistent! Automating your savings is a great step in keeping your monthly budget on track and helping you reach your financial goals faster. Not sure if you should be saving in an RRSP or TFSA? The answer is probably TFSA first, RRSP second. Read our comparison of these two accounts here.
5. Customize your budget
There are some great budget templates that already exist. But even with the help of those as your guide, you should take some time to really customize your budget based on your goals, expenses, and debts. Sit down with a pen and paper and divvy up your monthly income between your fixed and variable expenses. You can always re-asses your budget as needed!
Understanding Fixed vs Variable Expenses
The difference between these expenses are essential to keep in mind while you budget.
What are fixed expenses?
Fixed expenses are mandatory expenses which you pay the same amount for each month. This will include things like rent, childcare, car payments your internet and phone bill, and so on.
What are variable expenses?
Variable expenses are the ones that vary month to month. This will likely include things like groceries, gas, entertainment, and typically other non-necessities.
Don’t forget annual expenses or one-time purchases!
Many people tend to forget things like property taxes and insurance premiums, that are only paid once per year. One-time purchases are things you might have to buy every so often, like new tires for your car, or appliance replacements! Not only that, but keep in mind those other occasional purchases that pop up during holidays, birthdays, vacations, and more. These things add up and it is good to be prepared for them.
There are many different budget templates to follow, and we’ve suggested 3 below that are a great place to start:
The Money After Graduation Budget
The MAG budget is designed to build wealth and it’s super simple to follow! Below is an outline of this very basic budget, and how it should transform over time as you take control of your savings and debt. Remember, building lifetime wealth is a lifetime journey, so be patient with your progress:
35% Housing- This includes all housing costs, from rent/mortgage to utilities and property insurance.
15% Transportation- This is all vehicle or commuting costs, from bus passes to gasoline for your car. You can elect to put your car payment in this category, or under “debt”. If you have more pressing debt, such as credit cards or student loans, I would keep your car payment under Transportation to create a balanced budget.
15% Debt Repayment- This is all the payments you’re making towards any kind of debt, from credit cards to student loans. If you put in all your debt payments and find you’re below 15% of your net income, increase those payments — you can afford to!
10% Savings And Investments- Things like saving up for a vacation or a new car are NOT savings, they are planned spending! You have to be really honest with yourself about what constitutes savings. If you have any kind of savings plan through your employer, feel free to count it in this category. EQ Bank is an awesome vehicle for savings with their high interest rate and no fees!
Long term investments are important to keep in mind here, too. They ultimately help you save, which is why we’ve put these things together in the MAG budget. Wealthsimple is great option for investing. It’s a robo-advisor that will let you invest in the stock market hands-free! Plus, when you sign up your investments will be determined by their money experts, based on the type of investments YOU want to make.
25% Everything Else- This category is everything else: cellphone bills to beer to clothes, plus groceries, gifts, and vacations. Whatever else you need to buy that doesn’t fit neatly in the above categories goes here.
The 50-30-20 Budget
This budget option is popular in Personal Finance! It involves dividing up your net income by needs, wants, savings, and debt. Here’s how to allocate it:
50% of your net income is for your needs- housing, transportation, groceries, utilities, etc.
30% of your net income is for your wants- dining out, gifts, entertainment, etc.
20% of your net income is for savings and debt repayment- save money for the future and pay off what you owe!
The hardest part of this budget is deciphering your wants from your needs. Just remember your needs are required for you to live and work.
This is a less common form of budgeting but it’s still a good one! Essentially you spend on what’s most important to you, regardless of traditional budgeting “rules”. You focus on using your money on things that add value to your life, no matter what that may mean for you.
Money shouldn’t make you miserable, and this budget template urges you to spend on what makes you happy. Of course, this also means looking ahead and thinking off what will add value to your future, like some solid savings, maybe?
It’s time to start budgeting!
We hope these budget tips help you out in creating your own budget! Prioritize your own financial needs, set goals, and continue to stick to AND re-assess your budget each month. You’ll be on your way to smoothly handling your monthly finances sooner than you’d think.