How to prepare a budget in 3 steps

Why prepare a budget

Preparing a budget is key to sound financial planning.

Why? Because it allows you to effectively track your money, by knowing exactly how much you earn, spend and save.

Equipped with the clear picture of your finances that your budget provides, you’ll be able to:

• Live within your means
• Reduce your expenses
• Pay off your debts sooner to avoid running up interest
• Plan your savings
• Achieve your goals, big and small

Who should prepare a budget

All financial planners will give you the same answer: everyone! But making a budget becomes a priority if you’re in one of these situations:

• You struggle to pay your bills
• You don’t know where your money is going
• You have trouble paying off your debts
• You never have money to save
• You’re about to buy a house, car or go on a trip.
• Your life is a bit out of sorts due to major events like retirement, the birth of a child, going back to school or taking a sabbatical.

As you can see, preparing a budget is not an exercise reserved only for those with financial problems. It also prevents your debt from skyrocketing.

Recent statistics show that the debt-to-income ratio of Canadian families reached 176.4% in the first quarter of 2024.

This means that for every $100,000 of income, a family carries $176,400 in debt.

Preparing a budget in 3 steps

Step 1: Make a list of your income and expenses

For your sources of income, refer to your pay stubs or bank statements.

This may be a bit more complicated when you're self-employed, especially if some of your invoices to clients remain unpaid.

For your expenses, consider the ones you incur every month, such as your:

• Mortgage
• Car loan
• Insurance
• Cable
• Electricity, if you’re on an equal payment plan
• Bank fees

To make sure you don’t forget anything, especially unplanned expenses, go back up to a year. Then, calculate a monthly average for these expenses.

If you’re putting money away, include that amount in your budget as well.

This step may seem like a lot, we agree, but it's the best way to ensure your budget accurately reflects your situation.

Step 2: Analyzing your budget

Now you need to crunch all the numbers you compiled in the previous step.

Compare the amounts you actually spend on each type of expense to the recommended percentages of monthly income:

• Lodging (rent, mortgage, taxes, insurance): 25% to 35%
• Transportation: 10% to 15%
• Food: 5% to 15%
• Savings: 5% to 10%
• Emergency fund: 5% to 10%
• Electricity, heating, cable: 5% to 10%
• Leisure and education: 5% to 10%
• Health insurance, dentist, glasses, prescription drugs: 5% to 10%
• Paying off debt: 5% to 10%
• Clothing: 2% to 7%

When you exceed these percentages, you decrease the flexibility you have with your budget. It is then recommended to reassess your choices and redistribute money between the different budget categories.

Cut back in areas where you feel you’re overspending to allocate a bit more where it’s needed.

Step 3: Balancing your budget

For a budget to be balanced, your income must be equal to or greater than your expenses.

If you're posting a surplus, congratulations! It means that with you have money to spend on yourself or to invest in your retirement, which is a concern for many.

If your expenses exceed your income, then it’s time to make a few adjustments.

Reduce your expenses

Cutting back on small, recurring expenses is a good way to stay on track.

A great example of this strategy is preparing your lunches instead of eating out, or avoiding buying items just because they’re on sale that you don't actually need.

Increase your income

This task is easier said than done, but you can also increase your income.

One of the simplest ways is to hold a garage sale. The amount of money you can collect by getting rid of items you no longer use might surprise you.

The sharing economy is also a great way to put money in your pocket.

Need or want?

Analyze your shopping habits, especially your behaviour when purchasing things.

Focus on essential needs before all other purchases.

We're not suggesting you give up buying everything you want, but it's easy to give in to temptation and pay for the items with your credit card...

A tip to resist temptation? Before making an impulsive purchase, wait a while. Often, just waiting a few days will make you realize that you didn’t really need the item after all.

How to stay within your budget

Now that the exercise is done, the hardest part is yet to come: sticking to your budget.

Discipline is your key to success. Make sure to keep all your receipts and compile them throughout the month.

To do every month

As a precaution, check each month whether your budget is balanced or "in the red."

If your income exceeds your expenses, take the opportunity to create an emergency fund for unexpected situations if you don't already have one.

If it's the opposite and your expenses are higher than expected, you need to make adjustments as quickly as possible to avoid debt. Was this situation caused by an unforeseen event that is unlikely to happen again? Are your additional expenses recurring month after month?

These are the questions you need to answer objectively in order to balance your budget.

What if your situation changes?

From time to time, check if your budget is still on track, whether due to changes in your salary or new recurring expenses.

A budget should be a realistic snapshot of your financial situation, not an idealized picture.

Need help?

Contact the Association coopérative d’économie familiale (ACEF) in your region. It’s free.

Community organizations like this one are there to help you better understand your budget and improve your financial health.

You can also contact one of our financial advisors. They can help you ensure your financial security.