How to build a budget that works

Budgets are to adults what homework is to students: not fun to do—yet it still needs to be done.

You only have to take a look at the latest debt-to-disposable income ratio numbers to see why.

According to Statistics Canada, the debt-to-disposable income ratio was 180.5% in the second quarter of 2023, down from 183.2% in the first quarter. This means that the average Canadian household owed roughly $1.81 for every $1.00 of disposable income. The decline in the ratio was mainly due to a faster growth in disposable income (+2.6%) than in credit market debt (+0.4%) in the second quarter.

Now the obvious solution to the debt load problem would be for Canadians to simply spend less than they earn—or so you would think. But in today’s world it’s not quite as simple as that.

Rising costs of living (and interest rates), unexpected emergencies, summer cash flow challenges, and having to dig into your own pockets during the school year for supplies. These are all competing factors in your quest to balance the needs of the day-to-day with the available funds in your bank account. Sometimes those needs exceed the money you make. Hence why the majority of Canadians find themselves owing more money than they earn.

It’s a vicious cycle.

That’s where creating (and sticking to) a budget can put you on track to breaking that cycle.

Here are our top 10 tips for building not just any budget—but a budget that actually works for you:

1. Make the Commitment

If you’ve already tried the whole ‘budget thing’ but found that it didn’t work (or that you couldn’t stick to it), chances are you didn’t really dedicate yourself to making it work.

Like starting a fitness regimen or quitting smoking, budgets take time and a whole lot of discipline to establish as ‘routine’. Committing is half the battle—so if you’re serious about taking control of your finances, you’re already halfway there.

2. Track Your Average Monthly Spending Habits

Once you’ve made the commitment, you can’t very well create a budget (let alone one that works) without being aware of your monthly spending habits.

The easiest way to do this is to:

• Review your online bank statement for the last 3 months
• Then add up all of your spending during this period and divide it by three
• If you tend to use cash more than debit, keep every receipt over the next 30 days

Remember, the only way your budget will work is if you literally capture every dollar you spend. This means every single bill payment, food purchase, and ‘double double’ from your favourite coffee shop. If you have money that is regularly being contributed to investments, be sure to include that too.

3. Compare How Your Spending Compares to Your Earnings

Once you’ve established the average amount of money going out each month, you’ll need to establish how that number compares to the average amount of money coming in.

If your monthly spending is under what you’re earning, great. But just because you’re in the ‘black’ doesn’t mean there isn’t room for improvement.

If you’ve discovered you’re spending more than you’re bringing in, don’t be dismayed. At least you’ve identified the problem area in your finances and are now in a better position to make adjustments to get back on track.

4. Prioritize Spending into ‘Needs’ Versus ‘Wants’

This is one area where you would benefit by switching into ‘teacher mode’. Because while the practical/logical side of your personality knows the difference between ‘needs’ and ‘wants’—the emotional side can take over when the want for something becomes too great to ignore.

As you build your budget, think of the two main foundation layers of Maslow’s ‘Hierarchy of Needs’ as your guiding principle for prioritizing ‘needs’ vs ‘wants’:

• Your physiological needs such as food (groceries—eating in vs. eating out) and shelter (rent/mortgage/utilities) are most important and should always get top priority in your budget
• Followed by safety needs (home/auto insurance/contributing to an emergency fund)
• To the practical needs that you can live without (car payments, phone, TV/Internet)
• All the way down to luxuries/non-essential purchases (eating out, lattés from your favourite coffee shop, going to the movies, etc.)

If you ever feel tempted to spend outside of your ‘needs’, ask yourself whether that purchase will buy you what you really want—financial freedom. The more you refer to your budget as a guide for spending, the easier it will be to stick to the ‘needs’, resist the ‘wants’, and start building up savings.

5. Get Your Debt Under Control

The latest statistics see the average Canadian credit card debt sitting at around $2,000.

While it takes very little time to rack up thousands of dollars in debt, those high-interest charges prevent many from paying that debt off anytime soon. If your debt load stretches across multiple cards and loans, you’re most likely making multiple high-interest payments each month.

To get that debt paid off faster and free up monthly cash flow in your budget, consider consolidating multiple high-interest cards and loans into one monthly payment. Not only will this help to make your debt more manageable, but the money you free up can also then be put towards future goals (such as saving for a down payment on a home, taking a deferred salary leave to travel the world, or to add to your pension income in retirement).

6. Beware of the False Feeling of ‘Joy’ Shopping Gives

You’ve had a long, stressful day at school—nothing like a bit of retail therapy to make you feel better, right?

Well, half right.

It’s not the actual purchase that is making you feel good. It’s the experience of shopping, which releases dopamine (the chemical in the brain associated with feelings of pleasure and satisfaction). If you’ve ever experienced buyer’s remorse after taking a purchase home, that’s the dopamine wearing off.

To avoid falling victim to your own false sense of shopping joy:

• Walk away and think about it (see if you still want it 24 hours from now)
• Ask yourself if you actually need it (or do you already have 4 or 5 just like it?)
• Avoid areas that tempt you most (e.g., the mall, coffee shops, restaurants—and perhaps consider deleting those online shopping bookmarks and apps from your computer, tablet, and smartphone)

Acknowledging the false sense of joy that shopping gives you is your first step towards strengthening your resolve and keeping your spending behaviours in check.

7. Set Up Separate Accounts

One of the hardest parts of sticking to a budget is simply being aware the money is there in your account (just begging to be spent).

However, when something is out of sight, it’s out of mind—or in this case, out of reach for you to spend.

That’s where setting up separate accounts can be a practical way for you to become more disciplined where your money is concerned.

For example, setting up one account specifically for your fixed monthly expenses (rent/mortgage, groceries, utilities, car/loan payments, etc.), another for savings (emergency fund, investments, etc.), and another that can act as your ‘fun’ account—which is basically an allowance you’re giving yourself for non-essential purchases (such as clothing, going to the movies, etc.).

You then deposit money to cover the first two accounts and whatever is left over goes into the third. This ensures bills are always getting paid, money is always being put away for future goals, and you still have a bit of money to play with.

The discipline that comes out of setting up separate accounts will result in a budget you’re more likely to stick to.

8. Be Strict But Not Too Strict

Remember, everything in moderation (yes, you really can have your cake and eat it too). Because if you get overly strict with your budget, you may eventually decide that it’s too much to keep up with. So keep a level head and develop reasonable expectations and goals for what you want your budget to accomplish (e.g., to pay down debt or to put more money towards savings—or both).

Also, don’t stress yourself out if you give in to splurge purchases now and then. Just don’t make a habit out of it—and keep reminding yourself of tip #6.

9. Fine-tune Your Budget as Time Goes On

If you don’t get your budget right the first time, that’s okay—because it’ll always be a work in progress. Continue making adjustments until you feel that it’s working for you. After all, there is no ‘one-size-fits-all’ approach to budget building.

Furthermore, changes in your life often require making changes to your budget. Buying your first home. Getting married/divorced. Moving up the pay grid. Contract negotiations. You’ll need to continually make adjustments to reflect whatever changes come your way in order for your budget to remain an effective tool for keeping your finances in check—and your financial goals on track.

10. Don’t Be Afraid to Ask for Help

We get it, you’re used to being the teacher—but remember, it’s still perfectly acceptable to be the student. Particularly when it comes to your finances. If you’re feeling confused, overwhelmed, or just want to get a second opinion, call on us. Educators Financial Group has been helping education members with their budgets and a wide range of other financial needs and services since 1975.

When it comes to the finances of education members, nobody knows educators better than Educators Financial Group.

Have one of our financial specialists contact you to review your financial needs and goals.

To get started on your budget now, use our Budget Calculator.

Sources:

https://www150.statcan.gc.ca/n1/pub/36-28-0001/2023010/article/00006-eng.htm
https://reviewmoose.ca/blog/credit-card-statistics/