“The budget is not just a collection of numbers, but an expression of our values and aspirations.”
— Jack Lew
At what point does money become wealth? Numerically, the answer is different for everyone. Conceptually, it's the same from one person to the next. Wealth is the capability to live life how you want—something a budget can help with.
Having a sound budget is the foundation of being in control of your finances, allowing you to allocate every dollar you spend (or save) efficiently. The opposite is having a passive relationship with money—following trends, seeking instant gratification, or letting others determine what we value.
A responsible budget doesn't mean you have to starve yourself of memorable experiences or products you simply want. It's a tool to help you be intentional with your money. It's a way to make informed financial decisions daily. It's a strategy to increase your financial security and feel confident, not worried, when checking your bank account.
Before you start a spreadsheet, catalogue your savings, and outline your expenses, ask yourself what you value most and what a meaningful life means to you. From there, you can plan around what's most important and make sticking to your budget easier than ever.
For example, if you're happiest by the lakeside cottage, think about what the associated costs are of owning a second property. With that in your mind, you'll know that every dollar you put into your savings account is actively working towards your dream cabin.
Without a values-based budgeting system to remind you of your long-term financial goals, you may be more prone to overspending, struggle with saving, or let impulses control your finances.
Here's where a spreadsheet becomes helpful, if not necessary.
Fixed costs: these are consistent bills, such as rent, prescriptions, memberships, internet, and subscriptions. Given that they don't fluctuate all that often, they're easier to plan for.
Variable costs: as the name suggests, these may rise and fall in any given month, so being mindful of them can help you keep them in check. Examples include dining out, laundry, travel, or entertainment.
We'd recommend tracking your expenses for a three-month period to see where your money is being put to use. This can help identify savings opportunities, understand which variable costs tend to spike in any given month, and determine an average monthly cost of each category by dividing the totals by three.
It's worth noting that they can be further broken down into discretionary and non-discretionary costs. The former category references something you may want, such as a trip overseas, whereas the latter is something you need, such as housing or food. If you're falling short in your savings goal or struggling to pay off debt month to month, knowing where to cut back on discretionary spending can get you back on track.
The same principle applies here, but the average young adult who is just beginning their career, post-secondary education, or investment portfolio will have fewer technical categories to consider compared to expenses. The important part is to consider every dollar of income, whether that's through family, wages, scholarships, government benefits, tax refunds, and the like, over the course of three months.
If your income isn't stable from one month to the next, you'll be able to find the root cause. Are your employment hours in flux? Are OSAP distributions frontloading your budget? Did you recently receive birthday gifts from family members? While some of these are out of your control, you can at least have an idea of when they might happen, and you can focus on variables that you can influence, such as taking more shifts at work.
Does your net income exceed your expenses? If so, you're doing well and can move on to thinking about how to optimize your budget. If not, you're still doing better than 51% of Canadians who don't have one to begin with, according to a 2019 study by the federal government.
Remember, increasing your income isn't as easy as reducing your spending—but that distinction is exactly what a budget is for.
If there's a certain discretionary cost holding you back from reaching your long-term goals, it may be time to adjust your spending habits. Again, this doesn't mean you need to stop living life, but there may be more frugal ways to enjoy your favourite activities that don't necessitate spending money.
Eating out: consider taking free cooking classes online and turning that skill into an event with friends and family by preparing meals together.
Attending events: concerts, art galleries, and festivals are all fun, but if you're close to a city, there are countless free events to attend.
Social groups: going out with friends can be expensive, but it's not the friends themselves that are—consider staying in by organizing weekly activities at home.
Taking trips: Hiking the Swiss Alps may be a bucket-list item, but there are plenty of national and regional parks to enjoy here while your budget works to afford that dream vacation.
Debt reduction: we've previously outlined several debt reduction strategies to help save a tidy sum in interest payments.
Purchase alternatives: plenty of products have brand value markups, and while their packaging is more appealing, there are often cheaper alternatives to consider.
Nobody is suggesting you give up on all of these categories, but if they're holding you back from long-term financial success, even just cutting back on them can help you save extra money every month.
It's not always reasonable to expect you'll get a raise when you need it, but there are other ways to increase your revenue.
More shifts: if you're working part-time, you can have a discussion with your employer to begin taking on more hours throughout the week.
Seasonal work: plowing snow during the winter months or landscaping when it's warm out can help supplement income needs.
Seek elsewhere: if you're a salaried employee with enough experience, there's a chance you could find higher compensation elsewhere.
Reduce clutter: with peer-to-peer marketplaces becoming increasingly popular, selling things you no longer need or use can bring in extra money.
Get creative: although side hustles promising passive income are often misleading, putting in some extra work on your own time can be quite lucrative, such as thrifting and restoring furniture.
Tax credits: if you're eligible for tax deductions, you can reduce your overall amount owing and, in some cases, get a tidy return after filing.
Rental income: while usually in reference to apartment leases, you can even consider renting out equipment, like power tools, cameras, or otherwise expensive one-time costs.
Although the price of living has increased dramatically in recent years, inflation probably isn't going away any time soon. Some of these strategies may be a better fit for young adults, but some are becoming increasingly popular with retirees themselves, who are embracing part-time work. Not only is it a flexible option to shore up their monthly income, but it also helps them stay engaged, active, and social during retirement.
Creating an emergency fund is exactly what it sounds like—if you're faced with an unexpected home repair, medical expense, or unemployment, you'll have a safety net to fall back on. It also has the added benefit of helping you leave your savings untouched and keeping you on track with your short- and long-term goals.
It's recommended to put away anywhere from three to six months' worth of living expenses. This may seem daunting at first, but it's nothing to be intimidated by. Start small, stay consistent, and slowly build your way up.
It's worth repeating—a goals-oriented, values-based budget is much easier to follow than a number you've arbitrarily decided on. You can think about it as a spending plan, as a way to determine where your money is going, and as a tracking system to see just how much your budget helps at the end of the month.
A budget is a lot of things, but at the end of the day, it really is a tool to help you develop a healthier, more empowering relationship with your finances. How much you can afford to spend may change from month to month or year to year, and it's important to be aware that your budget should evolve alongside your needs.
If there's ever a life-altering event, such as marriage, starting a family, or progressing in your career, think about revisiting your spending plan to see if it still aligns with your current circumstances and long-term financial goals. Beyond that, it may be wise to review it quarterly in case there are missed opportunities to save for the future or you need to keep your spending in check.
A professional financial planner can certainly help, but if their services are beyond your means at this point in life, a sound budget may just help you get there quicker. Regardless, we hope this helps you manage your money with confidence, reach your goals, and encourages you to set new ones.
Under this framework, you'd allocate 50% of your net income towards needs, 30% towards wants, and 20% towards your savings. It's one of the simplest and most widely adopted budgeting methods.
This approach puts your savings account first by transferring a predetermined amount to your savings account every paycheque. From there, you settle nondiscretionary expenses and use the rest as you see fit. It's a strong approach for long-term savings.
Considering you'll need to balance your income and expenses perfectly to zero, this process is a bit more complex. It involves anticipating where every single dollar goes ahead of time, but can be more difficult to do properly if something changes. It's a fantastic method of fully understanding your finances.
For envelope budgets, you'll assign a balance into different categories through a spreadsheet or by placing cash in slips. Once you've depleted each basket, that expense category is locked for the month. It's a good test of restraint.
A mental budget is the cognitive process people undergo when organizing, evaluating, and tracking financial activities without explicitly marking them down in the moment. When considering a purchase, the mental budgeter weighs it against other expenses and their overall budget. It's a sign of high, passive financial literacy.