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Welcome to Canadianbudget.ca‘s 8 steps to making a budget and financial plan Canadians can actually stick to! You will learn all the steps required to improve your financial situation, and create a budget that is flexible and will help you meet your goals.
This is going to be one of the longest posts on this site, but I will cover in-depth all the steps you need to take to succeed in getting your financial life in order!
If you have every struggled to make a budget, this is for you. You can use the Canadian Budget Planner to follow these steps and create an amazing budget plan for yourself.
Prefer to read a shorter post on the basics of creating your first budget? I got you! But, if you are ready to make a change in your money habits, this article will give you all the steps you need to get started! Let’s get into it!
Step 1: Understand How to Make a Zero Based Budget
Zero Based Budgeting is the preferred method of CanadianBudget.ca. It helps you know exactly where your money is going each month therefore helping you to stay on top of your finances.
TLDR: Income earned – money allocated in budget = $0.00
The main concept behind this method of budgeting is that every dollar of income you earn gets a job. That means you are giving each dollar a duty and making sure it accomplishes its role each month. In the end, your budget balance will be zero.
Does that mean you are spending everything you earn? No, It means that all money will be allocated to a role. Whether that’s bill payment, savings, investing, debt repayment, or spending. You will tell your money where to go instead of wondering where it all went at the end of the month.
Do I Need Physical Cash In My Wallet To Use This Method?
You do not need to find an ATM and withdraw any cash to use this style of budget. Using cash envelopes for spending categories can be helpful for some, as they visually see the cash on hand.
However, in this digital day and age, less people are using cash and more are relying on digital money (debit or credit). The great news is a zero based budget can be used whichever style you prefer.
The Cash Envelopes Concept
The cash envelopes concept can be applied when using this method without cash. The concept basically helps you keep an eye on how much you are spending as you spend and be aware of how much is left in that spending category for the month. So as long as you are following the steps to budget, you don’t actually need to have cash. You will track your spending and update your categories as you go.
I do not take out cash from an ATM unless I absolutely have to. With the ease of digital finance, and a global pandemic raging on, why bother taking out money to physically hold? I find it harder to put the money to work for another purpose if it is taken out in cash.
Have cash left over from a category for the month and want to pay a bill with it? Then you have to go find an ATM, put the cash back into your account, and then pay the bill from your digital money. I’d rather just leave it all in digital format.
That’s just my preference, but the great thing is you can use whatever method works best for you! Regardless of other people’s preferences or opinions. You do you!
So now you know a bit about the style of budgeting I am going to be speaking about in this article. Lets move on to Step 2.
Step 2: Gather Data and Review Your Financial Position
You can’t just make a budget without doing some groundwork first, otherwise, it will not work. To back up your zero based budget we need actionable intelligence. The good news is, you only have to do the first part of this step once when you start budgeting.
The Canadian Budget Planner can help guide you through these steps.
What You Owe
Gather information on any debts you may currently have. That includes mortgage, credit cards, family loans, car loans, student loans, and any other debts you may have.
The next step is to write a list of all accounts owing recording the lender, amount owing, minimum monthly payments, and what the interest rates are.
What You Own
You will then take inventory of all savings and investment account balances. Write down a list of your various checking and savings accounts, your retirement funds, pension accounts, tax free savings accounts. Next, think about high-value items you own as well. Do you own a car – how much is it worth on resale? Do you own a home? – include the equity portion of your home value (eg. Overall value minus mortgage balance).
Do you have jewelry, gold, silver, collectibles that are worth something? Estimate their value as best as you can and write that down too.
Calculate Your Net Worth
With this data collected, you are going to create a Net Worth statement. After you have this as a starting point you can create a tracking chart for yourself to track your financial progress over time.
I recommend updating a tracking sheet and update at the end of every month with your new balances. It will take you 5 minutes a month to update.
This helps you to visualize your progress toward your goals, whether it’s paying off debt, or getting to your first $100K invested! You cannot improve what you don’t track – this is why we are budgeting in the first place!
The Net Worth calculation is simply a record of a moment in time. Don’t stress out too much if it is a negative number. The whole reason you are likely here is to learn more about how to improve your financial situation – and you are off to a great start! With a bit of good budgeting and consistent progress, you will move that number to a positive and keep building it up over time!
Step 3: Review Your Spending History & Categorize Spending
The normal recommended length of time to review is three months of bank and credit card statements. This can account for any out-of-the-ordinary months that include holidays or special occasions to give you a good picture of your spending habits. You can print out your statements if you like having things on paper to do by hand. You can also download the statements and organize them in an excel spreadsheet. Once you have this data it’s time to categorize.
Make Spending Categories and Subcategories
Going over your statements will help you understand what you are spending money on. Categorizing your spending will help in your budget creation. Below is a sample of some categories and subcategories. Choose the ones that work for you, add or remove as needed to create your own set of categories that reflect your spending.
- HOA Fees/ Maintenance Fees
- Property Tax
- Home Owners Insurance/Renters Insurance
ok, I know what you are thinking… All this and we aren’t even to the budget part yet?
But trust me, laying this groundwork will really put you in a good place to improve your financial position!
Estimate Your Average Spending by Category
Now you have your categories set, You are going to go through each of the last 3 months and add up each of the transactions based on the categories you just set and create your own mini chart to determine your average monthly spending.
Let’s imagine the months you are reviewing are January, February, and March. Create a table with your categories running down one column vertically and each month across the top row. add up the categories one month at a time so you end up with 3 columns of spending category amounts, one for each month. Completing this chart will give you a good picture of your average spending, and you will use this data when you create your budget.
Step 4: Set Your Financial Goals
So what’s the point of all this anyway?
Why do we even want to go through all this work? It is so that eventually you can reach the financial goals you have for yourself.
Want to buy a house?
Want to retire early?
Want to get out of debt?
Want to be financially ready to start a family?
Want to be able to support aging parents?
Want to have money to travel?
All of these goals can be accomplished when we get organized with our money, have a good budget, and drill down on what our goals are and how much they will cost us!
You are going to like this part! I’ve made this really easy. Enter your details below and download a Financial Goal Planner for FREE to help you through this step. It’s a PDF document you can print out and work on to help set your goals.
Come back after downloading the planner to continue the process below.
Are you still with me?
Amazing! So glad you made it this far! Are you ready to continue on the steps to create your budget and help you reach those financial goals you just set for yourself?
Here it is, the part you’ve been waiting for:
Step 5: Making Your Budget
Creating your budget, or your spending plan is going to be really simple now that you have done all the leg work categorizing your spending.
Basic Budget Formula
Basic calculations make up a budget, take your income and subtract expenses, spending & savings. With the zero based budget method we learned earlier, the result of that equation should be zero.
By Hand vs Digital Budgeting
Here is where I can make the process much easier for you. Check out the Canadian Budget Planner which includes the Budget Template, and Spending Categories & Tracker and more!
If you prefer to work digitally, check out the Master your Finances Digital Bundle which includes a Zero Based Budget template, Net Worth Tracker, and bonus Debt Payoff Spreadsheets.
Budgeting Monthly vs By Paycheck
Another personal choice is to decide between budgeting monthly or by paycheck. How often you get paid may be a deciding factor. In Canada, I would say the majority of people get paid bi-weekly, but you may have an inconsistent income, or you maybe get paid monthly like me.
You can try both ways and decide what you like – or even do both. Create one overall monthly budget, and then plan out each pay cycle with its own budget. You do you!
Create your spending plan
YES! Let’s get to it.
This is a first draft attempt – so don’t be too critical, just start writing, we will revise after this.
If you have one of my above budgeting bundles, the budget skeleton is already there for you. If you want to make your own here is the general format you want to follow.
At the top of the page, record your expected income.
Under the income section then comes your expenses.
We are going to practice paying ourselves first. That means before you go spending anything, you have already set aside money for your savings and investments.
Write down your contributions to your savings goals (which you determined the monthly costs for in the Free Financial Goal Planner you filled out). Then list out all your expected bills for the month, next to the amount, add the date the bill is due. Include here any minimum debt payments required each month.
For any bills that are variable costs (a different amount each month) use your estimates from your 3-month spending review (you know, the one we completed earlier), to put down an average cost.
Below that go the spending categories you already determined up above as well as their estimated average spend.
Now to calculate, subtract every item from your total income.
Congrats, you completed your first draft of your budget.
Are you spending less than you make?
If the above calculation of all of your expenses and planned spending subtracted from your expected income resulted in a negative number – you need to do some adjusting.
Spending less than you make is the key habit to help you get out of debt, and have enough money not only to spend on the things that are important to you but to have enough to save for the future and invest as well!
Are you a little over? or way over?
If you are just a little over the budget (spending more than you make). Small tweaks can help you to refocus your spending habits on what brings you joy, and cut back on the mindless spending that adds no value to you.
If you are way over budget, evaluate what has caused this. Go section by section to review each of the following:
- Financial goals and monthly contributions toward them
- Monthly bills and services in use
- Debt repayment amounts (Learn how to get debt free faster)
- Spending categories
Where do you see room for change? Can you negotiate a monthly bill or lower an interest rate? Can you cut out or cut back on a service that is not essential. Can you reduce your spending each month in one or two categories, or eliminate a category altogether? This article can help you drill down on some ways to save.
Or alternatively – what are the ways you could make a bit more money each month? This could be as small as selling something on facebook marketplace, or as big as changing jobs to a higher-paying one.
Whatever it is – now that you have all this data, and knowledge about your spending and financial position – it will be easier for you to make this change.
Get your numbers right
You want to tweak the numbers in the categories that you have control over in the budget until your balance equals zero – you have given every dollar a job.
As I mentioned before – this doesn’t mean you have to spend spend spend until there is nothing left.
A great tool in the budget is the Buffer or miscellaneous category. Budgets are built by working on estimations, so there is always a chance we over or under-estimate our budget. When you overestimate, a buffer is there to protect you. This could mean adding a $100 Buffer line to your budget, for example.
If you are well under your budget – this means you can divert more of your income to your financial goals, through sinking funds or investments.
Rejig the budget category amounts until it the balance is zero, and you are ready to go!
Step 6: Track Your Spending
Now that you have your budget, and your best estimates of how much you think you are going to spend, surprise surprise, you actually need to track what you spend.
Yes, every dollar.
Yes on your debit, credit, and cash use.
And yes – at least for a few months.
It doesn’t have to be a forever thing – but it is a fantastic exercise to really understand your money habits and make sure you are on track toward the goals you set for yourself.
The Canadian Budget Planner makes it super simple to track your spending and stick to your budget, so check it out!
Why it makes sense to start on paper
There are all sorts of apps for budgeting, and I’ve tried them all. It makes sense to begin your budget on paper as when we write something out by hand – there is something in our brain that makes it stickier. We pay more attention and are able to remember more when we have taken the time to write it out by hand.
So yes, you can download your digital transaction records from your bank or credit card. But I strongly urge you to take just a few minutes a day at the end of the day – and write down anything you spent that day, as well as assign it to one of your categories.
The Canadian Budget Planner includes spending tracker sheets – you can also use plan paper or your favourite notebook.
7. Close Out Your Budget and Calculate Category Spend
OK! You have diligently tracked all your spending and you have reached the end of your first budgeting month.
To close out your budget you are going to compare what you budgeted with what you spent. Add up all the spending by category for the month.
The Budget sheet in the Canadian Budget Planner has a column included for you to add up what was spent and compare it to what was budgeted.
If you are budgeting by month rather than by pay period (and you get paid bi-weekly), I actually recommend you do this at the end of pay period 1 and pay period 2 as well so you can see how you are doing. it will show you how much of your monthly budget is still left to use – and you can adjust the next 2 weeks accordingly.
8. Review and Revise Budget For Next Month.
Each month you should be looking back on what happened in the previous month and how you did compared with how you planned out your spending.
A budget should never be static. It should be adjustable and change based on your experiences, and as you improve your relationship to your money.
After you reviewed your performance, you are ready to set your budget for the next period and start again.
If you went over budget, its not a failure, its a learning opportunity. So don’t let any small hiccups along the way derail your process.
You are practicing in order to improve, not to be perfect. You want to be better this month than last, but holding yourself to perfection standards will not help in the journey you are on. Give yourself some grace, and know that each time you try, you are getting a little bit better!
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Find more content like this in the Budgeting section of the website!