If you’ve been following our financial guide for new Canadians, you’re already a seasoned pro who knows all about Canadian bank accounts, credit cards, investment accounts, and insurance .
However, you might be wondering how all those pieces fit together. That’s where budgeting comes in – which might either excite you or terrify you. If the second one sounds like you, have no fear. We’ve put together a guide with everything you need to know about budgeting in Canada as a newcomer and even included a few different budgeting methods for you to try out. Let’s get started.
What is a budget?
If this section is too simplistic for you, feel free to skip ahead. If it isn’t, don’t worry; you’re not alone.
A budget is like a plan for your money. It helps you figure out how much you have coming in (your income) and how much you need to spend (your expenses). Think of it as a roadmap that helps you make smart choices about where your money goes.
A very simple way to manage your budget is to first list all the money you expect to receive, like your paycheque, government assistance, and money made from odd jobs. This is your income. Then, you write down everything you need to spend money on, like bills, groceries, transportation, and any other expenses. These are your expenses.
Once you have both your income and expenses listed, you compare them. If your income is more than your expenses, that’s great! You have some extra money you can save or spend on other things you want. But if your expenses are more than your income, you might need to make some changes. That could mean cutting back on non-essential spending, finding ways to increase your income, or both. Ideally, you’ll end up with extra money left over – after expenses – for savings.
The goal of a budget is to help you get the most out of your money, so you can not only achieve your financial goals and avoid running out of money before your next paycheque, but to also help you build a financial nest egg for the future. It’s all about planning, tracking, and making adjustments as needed to keep your finances in balance.
How do you do that? We’re glad you asked. We’ve put together three of the most popular budgeting methods, with step-by-step instructions, to help you get started. Read through them to see which might work best for you and give it a try. But don’t worry, you can always switch up your budgeting method and try something new if the one you’ve been using doesn’t feel right.
Method #1: The 50/30/20 budget
The 50/30/20 method is probably the most popular way to budget. And for good reason. It’s a simple and flexible way to manage your finances, splitting your income into three main categories: needs, wants, and savings. Here’s how it works:
Calculate your after-tax income: Start by figuring out how much income you make each month after taxes and deductions. This is the amount you’ll base your budget on. You don’t want to spend any more than this because that will mean going into debt.
Spend 50% on needs: Aim to spend 50% of your income to cover essential expenses or needs. These include things like rent or mortgage payments, utilities, groceries, transportation, insurance, and other essential bills. These are the things you must spend money on to survive. It’s important to prioritize these expenses first to make sure you meet your basic needs and live a stable and healthy lifestyle.
Spend 30% on wants: Aim to spend 30% of your income on things you want. This category includes non-essential expenses that enhance your lifestyle or provide enjoyment, such as dining out, entertainment, hobbies, shopping, vacations, and other personal indulgences. While these expenses aren’t strictly necessary for survival, they contribute to your quality of life and happiness. Spending on these categories can also be treated like, well, treats that make budgeting worth it. Think of this category as your reward for managing your money so well.
Spend 20% savings and debt repayment: Aim to spend 20% of your income on savings and debt repayment. This category includes contributions to savings accounts, retirement accounts, emergency funds, and debt repayment beyond the minimum payments. Building up savings and reducing debt are important for achieving financial stability and reaching your long-term goals.
Adjust and monitor your budget: Regularly review your budget to make sure it reflects your current financial situation and priorities. Make adjustments as needed to accommodate changes in income, expenses, or financial goals. This can be after changing jobs, getting a raise, or coming into some additional funds. Tracking your spending can help you identify areas where you may need to cut back or reallocate funds to stay within your budget.
Using the 50/30/20 budgeting method involves dividing your income into these three broad categories and then managing your expenses accordingly. By following this method, you can achieve a balanced and easy to follow approach to budgeting that takes care of both your immediate needs and your long-term financial goals.
Method #2: The zero-based budget
The zero-based budgeting method might be for you if you’re super detail-oriented. It’s an approach that requires assigning every dollar of your income a specific purpose, making sure your income minus your expenses equals zero. So, it takes a little more work than the 50/30/20 budgeting method. Here’s how to set it up:
Calculate your income: Figure out your total monthly income from all sources after taxes and deductions. This is the amount you have to work with each month.
Track your expenses: Make a list of all your expenses, including fixed expenses (like rent or mortgage payments, utilities, insurance, and loan payments), variable expenses (like groceries, transportation, and entertainment), and discretionary expenses (like dining out, shopping, and hobbies).
Assign every dollar a task: Allocate your income to cover each expense category until all of your income is spoken for. Start by covering your fixed expenses, then allocate funds for variable expenses based on your typical spending patterns, and finally, allocate funds for discretionary expenses.
Adjust as needed: If your expenses exceed your income, you’ll need to make adjustments to your budget. Look for areas where you can reduce spending or reallocate funds to align with your priorities. This might involve cutting back on discretionary expenses, finding ways to lower fixed expenses, or increasing your income through additional work or side hustles.
Track your spending: Keep track of your spending throughout the month so that you stay within your budget. Use a budgeting app, spreadsheet, or pen and paper to record your transactions and compare them against your budget categories.
Review your budget: At the end of the month, review your budget to see how well you stuck to your plan. Identify any areas where you overspent or underspent and consider adjusting your budget for the following month accordingly. Reflect on your spending habits and goals to continuously improve your budgeting skills.
By giving every dollar a specific purpose in a zero-based budget, you’re able to take control of your finances, prioritize your spending, and live within your means. This method encourages intentional decision-making and encourages you to align your spending with your values and goals.
Method #3: The envelope method
If the other two methods seem too complicated, this one just might do the trick. For this method, you’ll be working with cold, hard cash. Here’s how it works:
Start with a high-level budget: Calculate how much you take home each month through your salary and other sources of income. Then, calculate all of your monthly expenses: this includes your necessities like rent and groceries and your discretionary, such as entertainment and dining out. Get a dollar figure for each. It might look like this:
Money you make each month: $4,000
Money needed for needs: $2,500
Money needed for wants: $1,000
Money for savings: $500
Create your envelope categories: You’ll need physical envelopes for this method. Yep, the ones you use to send letters. You can use as little as four different envelopes – you might call them “money in”, “wants”, “needs”, and savings. However, you might want to get more specific and use more than three envelopes. Maybe have one for groceries, another for clothing, another for rent, another for utilities, another for entertainment – you get the drill. However many you choose doesn’t matter; what matters is the next few steps.
Fill your envelopes: Now, withdraw all the cash you’ll need for the month. Fill each of the envelopes with the required cash for the month. So, if you have a “rent envelope” and your rent costs $1,500 a month, place $1,500 in that envelope. Do the same for all your other envelopes.
If this step makes you feel anxious (misplacing cash is a much pricier lesson than losing a debit card), you know this method isn’t for you. However, if that doesn’t worry you, read on.
Spend in cash from your envelopes: Now that your money is neatly divided, you can go about your monthly financial business, “withdrawing” from the necessary envelope every time you pay for something. Once that envelope is empty, you can no longer spend money on that envelope’s category. Simple, right?
For this method to work, though, you’ll need to be disciplined. If your “entertainment” envelope is empty halfway through the month, you’ll need to stick to your plan and not borrow from other envelopes.
Pick a budget and stick with it
There are dozens of different ways to budget and the one that works for others might not work for you. Give one of these a shot and see how things go. If you find it helpful, great! If not, give another one a try.
The important thing is to be conscious of the money you make each month as well as the money you spend. Budgeting will help you live within your means, manage your expenses, and help you save for the future you’re building in your new country.
If you need help, you can always speak with an advisor at your bank. They can help you figure out the best financial products in Canada to use as well as give you tips on managing your finances.
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