You’re never too young or too old to start budgeting your expenses. It doesn’t matter if you’re rich or poor; having a monthly budget that outlines your expected costs is important. By understanding your income, tracking your spending, and setting financial goals, a budget can provide clarity and help you plan effectively.
Budgeting in Canada has unique challenges. Tax rates between provinces and cities like Toronto, Vancouver, and Montreal come with a high cost of living. Federal and provincial tax obligations, housing costs, and healthcare coverage are all factors that influence your budget. It's important to understand these aspects of the Canadian financial landscape as you proceed.
Who Needs a Budget?
-
Students: Managing student loans and part-time jobs while planning for your future.
-
Young Professionals: Balancing rent, bills, and savings as you begin your career.
-
Families: Managing household expenses, childcare, and education costs.
-
Retirees: Shifting from earning an income to relying on retirement savings and benefits.
Step One: Assess Your Monthly Income
To create a good budget, you first need to understand your income: your sources, how much those sources produce, and when they produce that income. This step is crucial, as it lays the groundwork for your budget. Only then can you organize it to align with your expenses and financial objectives.
Start by identifying all sources of income. This includes both primary and secondary income streams and any government benefits you may receive.
-
Salary after tax: For full-time and part-time employees, calculate your take-home pay after taxes and deductions like Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and workplace benefits. If you're self-employed, calculate your income after setting aside the necessary taxes.
-
Government benefits: Consider any government benefits you may receive, like GST/HST credits, the Canada Child Benefit (CCB), or provincial assistance programs.
-
Investment income: If applicable, include any dividends, interest, or rental income from your investments. Add these amounts monthly and be sure to update them if they change or stop.
What Happens If My Income Is Inconsistent?
For many Canadians, income can be inconsistent. Freelancers, seasonal workers, and those with commission-based jobs often face fluctuations in their earnings. Managing these ups and downs takes a bit more planning, but it’s achievable with the right strategy.
Average Your Income for an Estimate
If your income fluctuates only slightly month to month, take an average of your earnings over the past 6–12 months to estimate your monthly income. Even if your income varies each month, this can still help with long-term planning and savings goals.
Buffer Your Income with Savings
Since you can't predict your income, it’s important to build an emergency fund to cover any shortfalls during lean months. Consider setting aside a portion of your income during higher-earning periods to help manage cashflow during slower months.
Emergency funds also can be crucial during unpredictable events. Consider how much you'll need if you have to take a week off work or if your car breaks down. Factor in the cost of new tires and your monthly rent. It can be helpful to estimate the funds needed to cover these types of expenses, especially with variable income.
Plan For Worst-Case Scenarios
In industries with uncertain income, it's helpful to budget based on your lowest expected earnings. This way, your projections stay reliable, and you avoid spending money now that you might make up for later. Extra income could be allocated to personal priorities or set aside for future needs.
Step Two: Understand Your Expenses
Expenses come in various forms. They include essential costs like utility bills and housing, as well as important lifestyle expenses such as clothing, food, and entertainment. Additionally, you might view your savings as an expense if you're aiming to set aside money for emergencies and future goals.
To calculate your expenses, start with the essential costs you incur each month. In addition to keeping track of these fixed or near-fixed expenses such as housing and utility costs, you should try to reflect on your other financial habits. This allows you to make more informed decisions about how to manage your money.
Tracking Your Expenses
Keeping track of your expenses is essential for managing your finances and keeping your budget accurate. Tracking small purchases can reveal spending patterns. A detailed record can assist in creating a realistic budget aligned with your financial goals. You can track your expenses in several ways:
-
Apps: There are many apps that simplify expense tracking. Popular choices like Mint, YNAB (You Need a Budget), or your bank’s budgeting tool help you categorize and monitor your spending in real time.
-
Spreadsheets: If you like a hands-on approach, a customizable spreadsheet can help you track specific spending categories and trends over time.
-
Pen-and-paper: For those who prefer writing things down, keeping a journal or notebook to log each expense is a reliable method. This approach works well for many—just find what suits you best!
Categorizing Expenses
Once you start tracking your spending, it's crucial to categorize your expenses. This helps you see patterns and distinguish between what you need and what you can live without.
Essential Expenses
These are the must-have items you pay for each month.
-
Rent/Mortgage: Housing costs are usually your biggest expense. Consider whether your housing costs align with your overall income.
-
Groceries: When thinking about food costs, you can often save by planning meals and taking advantage of sales.
-
Transportation: This includes public transport, fuel, and vehicle maintenance—essential costs that need to be included.
-
Utilities: These are your electricity, water, heating, and other services necessary for running your home.
-
Childcare: The cost of childcare adds up over time and is important to account for in your monthly expenses.
Non-Essential Expenses
These are areas where you can be more flexible and adjust your spending.
-
Dining Out: Eating at restaurants or getting takeout can add up quickly. Taking a closer look at dining-out expenses can reveal opportunities to adjust spending in line with your priorities.
-
Entertainment: Enjoying activities like movies and concerts is important, but they should fit within your budget.
-
Subscriptions: Regular expenses like streaming services and gym memberships should be reviewed often to see if you still use them and if they make sense for your budget.
Monthly vs. Annual Expenses
It's also important to consider expenses that aren't monthly but still need to be included in your budget. Some bills come quarterly or annually, and if you don't plan for them, they can disrupt your budget when they arrive.
Quarterly or Annual Payments
These expenses are important but often easy to forget about. They can seriously impact your budget if they come as a surprise.
-
Insurance: Car, home, and life insurance premiums are usually billed once or twice a year. Planning ahead by setting aside funds each month can make managing larger payments easier when they come due.
-
Property tax: In Canada, property taxes are generally paid annually or semi-annually, depending on your province or municipality.
-
Healthcare: Canada has government-funded healthcare, but some provinces may not cover certain dental and vision costs. Remember to budget for new glasses or contact lenses if you purchase them annually.
Remember: Remain Consistent, Flexible, and Realistic
A budget isn’t a fix-all solution—you can’t solve all your financial issues just by tracking your income and expenses. However, it can help you identify potential challenges early and assist in planning for emergencies or other goals.
The key to a successful monthly budget is consistency, flexibility, and honesty. Make it a habit to review your expenses at least once a week. Understand that your needs will change over time and be honest with yourself about what you need and when.
The information in this article is general and for informational purposes only. It should not be considered financial or investment advice. Please consult a qualified financial advisor or tax professional to determine how the FHSA might fit into your financial plans.