Money is tight right now for many Canadians. If you’re among the about half of us who don’t budget, that means it may be time to get your personal finances into shape.
Before you do, though, a word of advice: your personal financial situation is shaped by the fact that we live in a very unequal, debt-financed society. “I think it’s really important to remember that everybody is in a different situation,” says Teri Courchene, a retired economist and investing instructor who volunteers to teach investing at the Toronto Public Library. “Some of us have been lucky, and we are not facing the same financial pressures.”
Whether you’ve never budgeted before or you’ve tried a few times and failed, there’s no wrong time to start, says Christy Ali, a Toronto financial coach who works on a volunteer basis with people struggling with their finances. “A lot of people think they are limiting themselves or making things tight when doing a budget, but budgeting actually allows you to spend.”
It’s a slightly more involved process than just setting a few goals for yourself and hoping you stick to them. But it can be freeing, as Ali says, and it doesn’t have to be onerous. This step-by-step guide is based on interviews with several experts and is designed to get you started on every step.
Check in with yourself
Before looking at your credit-card statement or (deep sigh) checking your student-loan account, take some time to reflect on the things motivating you.
“The reason people don’t want to do a budget is because it feels bad,” says Stephanie Wolfe, an accredited financial counsellor and self-described BFF (best financial friend). “There are lots of emotions that tie into our finances.”
To help combat this, she suggests looking inward. When you know your “why,” as she calls it, you can rely on that core principle to help you navigate the process. That “why” may be wanting to feel less stressed about money, saving for a specific thing, or being able to afford a hobby. “Think about what’s most important before you go into the budget rabbit hole,” she says.
It’s also important to think about multiple timelines. “Canadians should include their short-term and long-term goals as part of their budget,” writes Jeremie Ryan, director of consumer services and information at the Financial Consumer Agency of Canada. “For example, short-term goals may be reducing weekly expenses or paying off a credit card, while long-term goals may include becoming debt-free, buying a home or a car, or paying for post-secondary education.”
TVO Today Explainer: What is inflation?
Figure out where your money is going now
Once you’ve got your reasons in mind, it’s time to sort out where all your cash is going right now. Wolfe suggests physically printing out statements from every account for a three-month period and going through them by hand, perhaps with highlighters, to identify what money is going where.
This can also help you identify anything that you know for sure you don’t want to continue paying for — like, for example, an unused subscription you keep forgetting to cancel.
One area you should pay particular attention to is fixed expenses — that is, things you absolutely need to pay on a regular schedule, such as rent or your mortgage, car payments, or the minimum amounts of debt repayments. Those will become important in the next phase.
Figure out what’s coming in
Once you have a sense of where your money is going, sit down and figure out where it’s coming from and how much you can expect to make every month. If you have the kind of job that pays a steady wage, that process should be simple. But, for many people, it’s not as clear: the realities of gig work and shift work mean it may be difficult to figure out exactly how much they earn each month.
Don’t get discouraged, says Ali: “Make a guess, even.” (One strategy that worked for this reporter when she was a freelancer was to average out several months of income to get a rough estimate.)
Once you have your earnings, your fixed expenses, and your months of information about how you spend now, it’s time to get down to business and make the first draft of your budget.
Make a plan that suits the way you live your life
Budgeting isn’t a one-size-fits all process, and your financial plan should reflect what’s important to you, both in terms of where your money is going and how you’re choosing to track your spending.
There are many budgeting methods out there, and it’s important to try out ones that feel like they’ll fit your life — but if it’s your very first time making a budget, it might be worth starting with the Financial Consumer Agency of Canada’s budget planner, an online tool that is based on behavioural research and designed to be easy to use. All you need to get started are the numbers you’ve recorded above.
Learn how to budget
Wolfe likes the 50-30-20 method, which allocates half of your take-home earnings to those fixed expenses and must-haves like food, 30 per cent to your other priorities, and the final 20 per cent to savings or investing. But, she acknowledges, as both inflation and interest rates are high right now, more than half of your take-home might need to go toward essentials.
Ali advocates for a method called zero-dollar or zero-based budgeting, which involves trying to make a plan that allocates every dollar coming in. If you have credit-card debt or other forms of higher-interest debt, such as a line of credit, she says, it provides a good perspective for paying down debt quickly.
Courchene says she doesn’t advocate for tightly budgeting each transaction. After all, that can be a lot of work. Instead, she recommends watching your spending trends. Most banks now have money-management tools integrated into their web-banking platforms — she suggests starting with those.
She also has a bigger piece of advice: “If you really want to get your finances in kind of good track long term, make sure you pay yourself first.” That means being as proactive as possible about saving and paying down debt so that you can improve your net worth every year.
With interest rates high, you may have to focus on the debt first. FCAC has produced an advice sheet on managing your money when interest rates rise; it includes a primer on what all this means for your personal debt. If you are trying to figure out the smartest way to pay down debt, its resources on debt-management planning and on borrowing money may help you.
Whether you’re new to budgeting or have tried to get a handle on your finances before, you shouldn’t be afraid to ask for help, says Ali. You can get help from a financial coach like her, but even a friend who can help you be accountable is an asset, she says. If you are looking for professional help, whatever your level of income, Ali suggests going to advisorsavvy.com and searching for a coach or filling out the form for its matching service. Some coaches offer their services for free.
Agenda segment, October 5, 2022: Managing personal finances amid inflation
Adjust as necessary
A budget is just a tool, and nothing about it should be set in stone, especially early on. Check in with your spending and saving regularly to get a sense of which budget targets are achievable and which need to be adjusted.
Erin Lowry, author of the Broke Millennial newsletter, wrote in a recent issue that she holds a 15-minute meeting with herself once a week: “I sit down in front of my computer, with pen and paper in hand, and start by checking in on (and paying off) all my credit cards and then taking a peek at my bank account balances as well.” This ritual ensures that she never gets hit by an overdraft charge, always pays her credit cards on time, and doesn’t overspend, because she has a sense of where the money is.
Regardless of where your finances are, regular check-ins can help you get a sense of control and incrementally improve them. As with starting a new fitness program, Courchene says, the key to success is slow but steady work. “Start small,” she says, “and say, ‘Okay, what’s one thing a month I can work on right now?”
Throughout the process, she says, be patient with yourself: “I’m not saying any of this is easy, and that’s even more reason to chip away at it slowly.”
Courchene has a final piece of advice: Don’t beat yourself up if the past few years have been really financially tough or even if your whole life has. And, if you are financially comfortable, “pay it forward a little bit. Make sure that you help others.”
Ontario Hubs are made possible by the Barry and Laurie Green Family Charitable Trust and Goldie Feldman in Memoriam.
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