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A Step-by-Step Guide to Building a Budget

April 26, 2021
5 mins
A young couple review their finances with paperwork and a laptop

For the average Canadian, the first step on their personal finance journey is building a budget. Budgeting is a critical first step to financial prosperity because it lets you make informed decisions about how you spend your money. But budgeting isn’t intuitive for everyone, and it takes some practice and know-how to budget successfully.

Here is a step-by-step guide to building a budget.

What is a budget?

Before we dive into building a budget, let’s get clear on what we’re talking about here: A budget is a financial plan that enables you to track your after-tax income and expenses for a specific period, like a month or a pay period. The goal of having a budget is to have more income than expenses and use that excess cash to reach your financial goals. Your budget will give you a high-level view of your money, much like the floorplan of a house, and allow you to make adjustments as necessary, helping you reach your financial goals sooner.

How to build a budget

While there are plenty of options for automated budgeting online (and we’ll cover those below), you should build your initial budget yourself to have a clear understanding of the numbers.

First, calculate your net income each month. Your net income is your paycheque (many people receive two each month) or other income after taxes and deductions. This number goes at the top of your budget.

Second, start totalling your expenses. It can be helpful to organize them into the following categories:

  • Housing – rent, mortgage payments, utilities, insurance, property tax, and internet
  • Transportation – car payments, gasoline, transit passes, rideshare services, insurance, and maintenance costs
  • Other living expenses – groceries, entertainment, cell phone bills, streaming services, hair cuts, and gym memberships
  • Debt – student loans, credit card debt payments, and personal loan payments

The expenses above are not an exhaustive list, so think hard to make sure you don’t forget anything. Annually renewing subscriptions can be easy to miss!

Third, set goals for your retirement savings or other financial plans and the amounts you would like to contribute:

  • Savings – Registered retirement savings plan (RRSP), tax-free savings account (TFSA), rainy-day fund, and other savings accounts

Next, you’ll subtract all of these expenses and contributions from your net income and see the results. You might find that your budget balances perfectly, that you are spending more than you are making each month, or that there is an excess of cash left over.

If you are spending more than you are earning, you’ll need to adjust your budget to bring it into balance. Cutting unnecessary spending from your budget, like streaming services or takeout, is a great place to start.

Related read: Are Your Subscription and Streaming Services Blowing the Budget?

If you have excess cash left over, consider what you’d like to do with that money. The options are endless.

What is a balanced budget?

Beyond making sure that you aren’t spending more than you are earning, you should also make sure that your different budget categories are balanced. While the numbers can vary based on where you live and your stage of life (i.e. older people tend to have less debt), here is what a balanced budget should look like:

  • Housing: 35%
  • Transportation: 15%
  • Other living expenses: 25%
  • Debt: 15%
  • Savings: 10%

If any of the categories are significantly higher than these guidelines, that could signal potential vulnerability in your budget. For example, if a large portion of your income is going towards debt, this could signal that you are over-leveraged and having trouble living on your income. There are, of course, caveats to these guidelines. For example, if you have no debt but live in a high cost of living area, you may find it worthwhile to spend more than the recommended 35% on housing without jeopardizing your budget.

Keeping your budget on track

After you’ve built your budget and made any necessary adjustments, it’s time to make sure you stay on track. If you’ve created your budget on paper or in an excel spreadsheet, you’ll need to track your spending to ensure you don’t overspend in any of your budgeted categories.

If that sounds like too much work, there are plenty of apps online that will help you create a budget and then import your bank’s transactions so that you can track your spending and stay on target.

Here are some popular options:

  • HomeBudget
  • You Need a Budget
  • PocketSmith
  • KOHO
  • Wallet

Take this step before you budget

Finally, the biggest mistake Canadians can make when budgeting is setting unrealistically low amounts for variable spending. Variable spending accounts for bills that aren’t the same month-over-month, like groceries or utilities. This mistake is the equivalent of crash dieting and can set you up for failure.

For example, if you estimate that you spend $200 per month on groceries, but for the past five years, you’ve actually been spending $600 per month on groceries — you are going to struggle to meet that goal. You may even fail and give up on budgeting altogether.

The best way to avoid this mistake is to track your variable spending for one to three months before building your first budget. This exercise will help you create a budget that realistically reflects your actual spending. If you don’t like the way the numbers look, you can make small changes over time (for example, reducing your grocery spending budget by $20 per month) so that your actual spending comes in line with your goals. Planning your grocery purchases can also help you avoid a bloated bill at the supermarket.

Recognizing how you spend money can also help you save money. In the end, budgeting can prepare you for financial emergencies or unexpected expenses and assist you in reaching your financial goals faster.

Jordann Brown

Jordann Brown is a millennial money expert at She has been featured by major media outlets in Canada including The Globe and Mail, Financial Post, The Toronto Star, CBC, CTV, and Global TV.

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