How to Create a Budget in 5 Easy Steps

I was listening to the news recently and they were talking about a banking survey. The survey revealed a change in the reasons why people were seeking banking advice. According to this newscast, in the past people were asking for assistance with saving and retirement planning, but now people are seeking help with budgeting and debt repayment.

Since budgets are one of my favourite things, I thought I’d put some quick steps together for how to create a budget.

Please keep in mind that I am not a financial planner and just enjoy talking about finances. It is important to seek professional advice for your financial plans and needs. In this post I am sharing what has worked for me and this may or may not work for you. I do hope that it is helpful, though!

Why Create a Budget

I’ve come across a lot of people that just don’t see value in creating a budget. To each their own, but I will stay passionate about having one. I find having a budget empowering because it lets me see how I am spending my money. I also feel I can make decisions on my spending more quickly and more accurately if something unexpected comes up because I have a detailed knowledge of my finances.

I’ve written a little further about this in these posts if you’re curious to learn more:

What do Finances have to do with Living Life Sustainably

How to Effectively Live off of your Emergency Fund

How to create a budget

Creating a budget doesn’t have to be difficult. Here are some easy steps to walk you through the basics of how to create a budget.

Step 1: Check your income

Knowing how much money is coming into your account every month is essential for helping you make informed decisions. To make a budget, you will need to know how much money you have to work with. Incoming money is fairly straightforward in that, for a lot of people, it will be a regular paycheck and you can look at your deposits or pay stubs to calculate your income.

If you have irregular pay or extended periods off of work during the year, you will have to decide how to calculate your monthly pay. It is also important to think of any regular side-hustle income you make and to add that into your budget as well.

Step 2: Track your spending

Whether you take some time to keep receipts or just rely on your bank and credit card statements to gather the information, knowing how much you actually spend is an important step in making your budget.

Make sure you capture all expenses–even annual ones (just divide those annual expenses by 12 to get that monthly average).

Some things to include in your expenses tracking are:

• Utility bills
• Streaming services and subscriptions
• Property tax
• Strata fees
• Insurances
• Gas and parking
• Groceries and household expenses
• Eating out
• Bank fees
• Debt payments

Knowing where you already spend your money will help you to make realistic choices for your budget.

Step 3: Add up your expenses

Now that you’ve tracked down all of your spending, it’s time to add everything up. Add up each category of expense for the month as well as the entire total of your expenses.

The categories you choose are up to you. For example, I combine groceries and eating out into one category because it’s all food to me. Others will want to create two separate categories for those things. Your budget is yours alone, so you can tailor it to what makes the most sense to you.

Then add up each category as well as your total expenses. Knowing how much you already spend will help you to make realistic choices for your budget.

Step 4: Calculate your net

If you tally up all of your income and all of your expenses, you will be able to see if you are living within your means with a simple calculation:

Income – Expenses = +/- net

A balanced budget will have your income minus expenses equaling zero. If you are living beyond your means (ie. spending more than you make each month) this equations will be a negative number.

For example:
Income = $1,000
Expenses = $1,200
Income – Expenses is $1,000 – $1,200 = (-$200)

If that’s the case, don’t panic yet! You can take a look at your budget and see what areas you can spend less. Sometimes we spend money we don’t even realize we’re spending!

Step 5: Choose where you want your money to go

This is my favourite part of the budget because I find it very empowering. You get to choose where you spend your money.

Some categories are a must: housing, food, taxes, etc. But other categories you can play around with. You can choose how much you want to save versus how much you want to spend on clothing or vacations. This is a chance for you to really dig into your values and what you want to do with your life.

Let your actual expenses and spending guide your budget. Your categories will fall into place for the most part from those expenses. After this you can add in a few more categories that don’t show up every month, such as vacations or gifts.

At the end of all this choosing, however, you just need to make sure that your budget is balanced.

Money Master Class

If you’re curious to learn more about budgeting and personal finances, I took an informal online course with Gail Vaz-Oxlade a few years ago and documented that journey and her advice. The entire year of posts is summarized on our blog in Money Master Class posts and there is some amazing wisdom from Gail in each post.

Check it out here: Money Master Class: A Year of Financial Guidance

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