Creating a budget – and sticking to it – is one of the basic building blocks of financial wellbeing.
There are all kinds of approaches to budgeting. One of the most common ways is building a monthly budget.
Some people like budgeting monthly because it can help you budget by paycheque, especially if you get paid once a month.
You may also prefer it because it breaks your financial year down into 12 manageable chunks. This can help you keep a close eye on spending or savings goals and allow you to adjust for any seasonal changes.
For example, your January budget could be tighter to help tackle extra expenses you incurred over the holiday period, but your July budget has more room for “fun” spending because you’re on vacation that month.
It could also be a good fit for someone with income that fluctuates throughout the year, like a freelancer who has a busy season mixed with some months when work is usually quieter. You might plan to save more during the months when you’ve got more coming in or tighten up your spending for the months where your income is lighter.
Want to get started? Here are some tips for creating a monthly budget.
Calculate your income
Before you can divide your money, you need to know how much you’re working with.
Take some time to understand how much money you can plan to earn each month.
This could include:
- Salary
- Regular clients, contracts, planned projects etc. if you’re self-employed or run a side hustle
- Government benefits
- Investment income
- Rental income
- Pension or other retirement benefits
Make sure you’re looking at your after-tax number. If you have an employer, they’ll often take off the taxes, pension contributions and other deductions before it lands in your account. If you’re a freelancer, on the other hand, you need to calculate this yourself and set aside any money you might owe to the government come tax time.
Here’s an example of how this could work:
Let’s say you make $4,000 salary after tax each month. You also have a side-hustle that reliably nets about $500 after tax each month. You also own a rental property that generates $1,000 after tax each month.
This means that your monthly income is $5,500. Time to budget!
Budget for fixed expenses
You will likely have certain expenses that don’t change month-to-month. They’re often essentials like:
- Rent or mortgage
- Life insurance, health and dental insurance, home or renter’s insurance etc
- Childcare
- Commuting expenses, like gas or transit fares
- Phone, internet and utility bills Credit card and/or loan repayments
These expenses are where you should start with your budget. They’re often non-negotiable – like housing or bills – and harder to cut or eliminate if your numbers don’t add up.
These are your “needs.”
For example, think back to that scenario where your monthly income is $5,500. Your mortgage is $2,000 per month. Childcare costs you $1,000 per month. Your life and health insurance are a combined $300 per month. You also spend $200 per month on bills.
Your grand total for fixed expenses? $3,500 out of your $5500 monthly income.
This means you’re currently working with $2,000 per month leftover for other expenses.
Budget for variable expenses
Next, look at expenses that might change from month-to-month.
These could include:
- Groceries
- Gas, rideshares or public transit that’s not related to your commute
- Health expenses not covered by your government coverage, workplace benefits or private health insurance
These are also “needs,” but you might have a bit more flexibility with the cost every month.
For example, you might switch to a discount grocery store to save some money on food, or carpool with a friend rather than getting a taxi to an event.
These might also be expenses that go up or down depending on what’s happening in your life. For example, you might spend more on your out-of-pocket health expenses if you go to the dentist one month or need to see a physiotherapist another.
In the example where you earn $5,500 per month, let’s say that your variable expenses are about $500 each month.
You’ve now accounted for $4,000 out of your $5,500 budget.
Budget for discretionary expenses
These are your “wants.” You might not need any of these things for basic survival, but they can be important parts of building a life you love.
These could include:
- Dining out, like grabbing dinner with a friend or your daily coffee at your favourite cafe
- Health and wellness activities, like a gym membership or massage therapy
- Hobbies, like crafting or cycling Subscriptions, like streaming services or news sources
These are often the easiest expenses to trim or cut if necessary.
In our scenario where you earn $5,500 each month, your discretionary expenses add up to $500 per month.
You’ve now got $1000 left each month.
Align your budget with your goals
Creating a budget like this can also help you make sure that you’re working towards your goals.
You might want to set aside any leftover money for things like:
- Saving for a house or renovations
- Pay off any debt
- Contributing to an RESP for your kids’ future education
- Setting money aside for the future, like contributing to an RRSP or investing
- Building up your emergency fund
- Vacation, new car, a wedding or other bigger discretionary expenses
In our scenario where you have $5,500 income each month, and you spend $4,500 on fixed or variable expenses, you might allocate your leftover $1,000 to investments, paying down student loans and saving up for a dream vacation in a few years.
Review and adjust regularly
It’s important to keep checking in with your budget.
For example, if you’re consistently spending more than you’ve allocated to certain categories, revisit those amounts. It might not have been realistic, or prices have gone up with the rising cost of living. You may need to cut in another area or look at ways of increasing your income.
For example, let’s say you originally budgeted $100 for gas each month. When you made your budget, you were working from home 5 days a week. Now, you’re working 3 days in the office, which means you’re spending $300 on gas.
Because getting to work is a non-negotiable, you could look for ways to reduce this expense, like taking transit or carpooling. You could also cut another discretionary expense, like your monthly manicure or going to the movies. Or you could pick up some more work with your side hustle to increase your overall income.
Use budgeting tools
There are many tools that can help you make a monthly budget. For example, the government of Canada offers an interactive Budget Planner. You could also use our cash flow worksheet to help you clearly break down your monthly expenses.
If you’re unsure about how much you should be saving for retirement, we have a handy retirement savings calculator that can help.
You might also consider working with your advisor. They can help you get a clear picture of your financial situation, and work with you to create a plan that can help achieve your long and short- term goals.