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How to Make an Effective Budget

Kaleido

Written by: Kaleido

March 28, 2022

It’s no secret: to be financially sound and balanced, you need to make a budget. But more than that, a budget must be well thought out, complete, and above all, easy to use so that you can quickly and easily add information to it on an ongoing basis. Let us look together now at how we can make a simple and effective budget.

 

The basic principle of making a budget is to separate your expenses from your income. So far, that’s easy enough.

The first step, therefore, is to define the state of your finances and to identify, in detail, the money coming in (income) and the money going out (expenses).

It is important to make an exhaustive list of all deposits to, and withdrawals from, your account. You must be absolutely honest and thorough in carrying out this exercise as it is the only way to get a true portrait of your finances. Forgetting any item could skew the resulting profile and render this exercise ineffective. The following checklist will ensure that you don’t omit any important elements.

Income includes:

  • salary (including tips or commissions);
  • government annuities or benefits;
  • alimony or child support payments;
  • rental income;
  • investment income;
  • any other source of regular income.

Expenses include:

  • rent or mortgage payments;
  • grocery expenses;
  • transportation costs (gas, bus/metro pass);
  • monthly payments (hydro, telephone, television, internet);
  • membership fees (gym, magazine, Netflix, other);
  • insurance (car and home);
  • credit card payments;
  • health care;
  • all other expenses (shopping, SAQ, restaurants and entertainment, gifts, car care, hairdresser, skin care, kids’ extracurricular activities, etc.).

How to Make a Budget Using Excel

Using Excel is the best way to ensure that you don’t to make errors in your calculations.

Excel software includes a number of prepared budget templates. Unfortunately, they are generally configured for euros and therefore do not correspond to the Quebec reality. They can, however, provide a basic model. You’ll simply have to add a few columns and formulas to get an accurate tool for your particular situation, which can be difficult to do if you are not familiar with the software. It is, therefore, often better to create your own template. That way, you’ll have the exact number of categories you require for your unique situation.

On the horizontal axis: prepare at least 15 columns.
The first column (column A) is for categories (revenue, fixed expenses, variable expenses, etc.).
Columns B to M are for the 12 months of the year.
Column N is for the total, and Column O is for general comments.

On the vertical axis, you’ll have to create 4 categories: revenue, fixed expenses, variable expenses, and lastly, savings. Each category will require several lines on which to enter the details. For example, the fixed expenses category would include: rent or mortgage payment on the first line, Hydro on the second line, cell phone on the third line, etc.; in other words, one line per expense.

Next, you’ll have to enter the formulas so that expenses can be automatically subtracted from revenues every time you make an entry to the spreadsheet. This will help you to closely monitor the amount of money that is available to you. Color coding the categories makes it easier to find the information you want at a glance. You can also adjust your budget in such a way that the tax-deductible amounts are clearly identified, which will be of great help to you when you fill out your income tax return.

Obviously, even if you create your own template, a certain mastery of the Excel program is required, which may be daunting to some people. If you don’t feel very comfortable using Excel, or if you just want to simplify the task, Kaleido offers a free, and very user-friendly budgeting tool. All you have to do is enter your data and it takes care of the rest for you.

Once you’ve established your financial profile, you’ll have a precise and true picture of your finances. Then you can start to set goals and plan for them financially for the short, mid, and long terms. If you need help, don’t hesitate to meet with a financial consultant who can help you implement a plan for retirement or for a major purchase such as a home, for example.

Make a Budget to Regain Control of Your Money

Making a budget and a financial plan will transform your life and your way of thinking about your daily spending. Not only will you gain an overview of your spending habits; you will also take control of your finances. You will be better able to prepare for the unexpected by putting money aside to create an emergency fund, and to plan for your future with complete peace of mind. Making a monthly budget is the first step toward being financially sound, and as importantly, toward alleviating your overall stress levels.

Among the many other benefits that making a budget provides, you will learn how to:

  • live within your means,
  • realize your goals,
  • plan for the future.

Living within Your Means

Practice common sense when it comes to your income. Living above ones means causes feelings of stress and uncertainty that are very difficult to cope with over the long term.

If you are in the red at the end of the month; if you have difficulty paying off your credit card(s) or monthly bills; you are most certainly living above your means, and it is imperative that you review that state of your finances and readjust your spending to be more realistic and in line with your income. This is most definitely not an easy task and could entail your making significant compromises. But there are questions you must ask yourself:

  • Is my rent too high?
  • Can I afford the car I have (monthly payments, insurance, maintenance, etc.)?
  • Can I lower my shopping budget?

If you’re not ready to make these compromises, you may need to find a job with a better salary.

In any case, being overindebted is not viable over the long term, so changes must be made.

Advice

  1. Establish an accurate budget that shows you exactly how much spendable income you have after you have covered your fixed costs. Such a budget allows you to know how much you can spend on a monthly basis.
  2. Be sure to pay off your credit card every month. If this is not possible, refrain from using it until the balance is completely paid off. Credit card interest rates can accumulate very quickly and it’s easy to fall into an infinite debt spiral.
  3. Your income must absolutely be enough to cover all of your monthly expenses. If this is not the case for you, there is surely a number of expenses that you could cut back on or eliminate.

Realizing Your Goals

Goals like changing your car, going on a trip, or buying yourself the motorcycle of your dreams are not necessarily unrealistic and can be realized if you plan for them. The key is to BUDGET.

Once you have identified the goal you want to realize, and have calculated the cost, all that’s left to do is make a savings plan for it.

If you wish to buy $10,000 motorcycle in 3 years, for example, you should add a “saving” category to your budget.

$10,000 ÷ 3 years ÷ 12 months = $277

Hence, you will have to save up $277 per month for 3 years to make your dream come true.

Advice

  1. Be patient and, above all, consistent. Even though 3 years might seem like a long time for your goal to become concrete, it is actually a completely realistic time frame for putting aside such a significant amount.
  2. Should you receive a windfall like a big tax return or an inheritance, put it into your savings. This could greatly increase your chances of realizing your goal sooner than expected.

Planning for Your Future

Whether it is about planning for your retirement, your children’s education, or a major project like buying a home, once again, the secret key is to budget. Making a budget gives you a clear picture of the savings you’ve built up and allows you to make adjustments if the time frames and amounts don’t seem realistic or in line with your needs.

Advice

  1. In your budget, make a separate “saving” section for each goal. For example, a section for a short-term goal (buying a home), a section for your retirement, and a section for your children’s education. The clearer your budget is, the less likely you will be to forget any important items.
  2. To save in a way that is sustainable and consistent, set up automatic withdrawals. This will ensure that there are no gaps in your savings timeline.
  3. If you come into a significant amount of money, such as a tax return or an inheritance, and you have no immediate need for that extra income, invest it toward one or more of your goals.
  4. Look into how your savings can earn interest. You can put the savings that are earmarked for your retirement in an RRSP, and those for your children’s education in an REEP, both of which generate significant interest. There’s nothing worse than money that is idle and doesn’t earn.

When Is It Important to Revise Your Budget?

Most major events in your life are bound to have an impact on your budget. It is, therefore, important to revise your budget every time there is a change in your revenue, most notably in the cases of:

  • a change of job or in salary:
    You changed job and your salary has increased, or maybe decreased, significantly. Any such change in your revenue will have an obvious impact on the management of your finances. You will consequently have to revise your budget and ascertain whether you can maintain your usual expenses or whether you must readjust.
  • loss of employment:
    Losing one’s job has serious consequences on one’s budget. Even if Employment Insurance benefits replace part of your usual income, your overall revenue will be substantially reduced. If you have an emergency fund, the impact won’t be as great, but you will still have to cut back on expenses until you find another job.
  • buying a home:
    Acquiring property most often entails other expenses that can be significant, but that are not necessarily factored into a budget. The Welcome Tax is a one-off expense, so it isn’t so problematic. Most often though, the costs of buying a new home include renovations and perhaps some new furniture or appliances. You must also plan for school and municipal taxes that are most likely of a different amount than what you were previously paying. In short, there’s no getting around the fact that a revision of your budget is necessary when buying a home.
  • divorce or separation:
    For a couple, the family budget usually includes both salaries. But when the couple splits, it has a major impact on the budget. Not only must you overhaul the budget that now includes a single salary, but you also have to include alimony payments in the revenue or expense column, depending on whether you are the one paying or receiving. If you have kids, you could incur additional expenses (transportation, daycare, etc.) When you separate, revising your budget is one of the first chapters of your new life. The sooner you do it, the fewer negative consequences the separation will have on your finances.
  • the death of a spouse:
    Unfortunately, the death of a spouse brings about big changes in one’s finances. As soon as you start receiving benefits from various public pension plans (Canada Pension Plan and Quebec Pension Plan), and that the life-insurance settlement kicks in, it’s very important to revise your budget accordingly.

Making sure that your budget is updated at all times allows you maintain control of your finances, no matter what life throws your way. You always have the option of calling on the services of a fiscal or financial expert who can give you guidance, answer your questions, and advise you on how to create a personalized financial plan.

How to Save Effectively

No matter the level of your income, you should not hesitate to set goals and plan for the future. There’s no doubt that if your income is low, your saving potential won’t be the same as it would be if you earned more. But what is essential is that you practice sound saving habits. It’s better to put aside small amounts over a long period of time than large amounts now and then. It is generally much more effective and leads to better results. Putting $1,000 aside now and then is difficult to do and requires great sacrifice. You won’t be able to do it on a regular basis and will probably abandon your efforts to save money. However, if you put $50 aside every week over the course of a year. for example, there is less of an impact on your day-to-day life and it requires less compromise on your part, but you’ll still have saved up $2,600 by the end of the year. Remember the moral of Hare and the Tortoise fable “You can be more successful by doing things slowly and steadily than by acting quickly and carelessly.” Well, this is a perfect example!

The key element of saving money then is CONSISTENCY.

To arrive at the amount you should save, there are two scenarios.

Scenario 1: You have a precise goal you want to reach.
You must establish the costs involved in your project and the time frame in which you want to realize your goal. This will tell you how much you need to save each month in order to get there.

Scenario 2: You don’t have a particular goal but you want to establish an emergency fund.
In this case, there is less pressure and you have more time. You can tally your revenue and your expenses and, when you arrive at the left-over, available amount each month, determine how much of it you can put aside on an ongoing basis to build your nest egg.

Your Income Is Low and You Can’t Afford to Save?
If your situation is such that you that your income is too low to permit you to save even one dollar, that’s precisely when making a budget could help you more than ever. By writing down all of your expenses, you will be better able to identify the ones that could easily be reduced, or even eliminated from your budget, so you can start saving. This will certainly require you to change some of your habits, but the benefits you’ll gain will be worth the trouble.

Advice

  1. Verify Your Expenses
    List (all) of your expenses and determine which ones could be reduced, or even eliminated (subscriptions, insurance, transportation, lottery tickets, restaurants, etc.).
  2. Cook More for Yourself
    Keep in mind that doing your own cooking is always a clearly more economical option than eating in restaurants or buying prepared meals from the grocery store.
  3. Shop Wisely
    Opt for family-size formats rather than individual portions. It will seem more expensive initially but you’ll see the savings over the course of several weeks.
  4. Keep an Eye on Sales
    Check flyers and available discount coupons before you go grocery shopping. There are also web sites that give tips on how to save on groceries.
  5. Save, even if It’s a Pittance!
    It’s better to save a little than not at all. If you can’t afford to put aside $100 per week, it doesn’t mean that you can’t save at all. Try putting aside whatever you can, even if it’s only $25 per week. It will accumulate and you will end up with a significant amount. In the end, any amount saved is worth it.

The Benefits of Making a Budget

At first, it may seem difficult to make a budget and to stick to it, but you’ll see right away how quickly it becomes a matter of habit. It is very motivating to keep up good habits when you see your nest egg growing and your debts decreasing, whatever the case may be for you.

Establishing a budget will allow you, most notably, to:

  • find peace of mind
    Imagine, no more stress related to financial insecurity. You’ll know exactly where you stand financially and you could even provide a security cushion for yourself, which is very reassuring when hard times hit.
  • decrease or eliminate senseless spending
    You are regaining control of your finances, so out with useless subscriptions, lottery tickets, and impulse purchases.
  • realize your goals
    Certain goals or projects may seem unrealistic from the perspective of your day-to-day life but planning for them financially makes it possible for them to materialize. What great motivation to take your finances in hand!
  • plan for the future
    With a well-thought-out savings plan, you can face the future with peace of mind. Whether it is for your children’s education or your retirement in the sun, your goals for the future suddenly become achievable.
  • be in control of your financial situation
    Knowing your financial situation down to the last detail gives you control. It is no longer your finances that dictate what you can and can’t do. When you know exactly how much money is coming in and going out, and you know how to manage it, you’re in a position of power, and that’s certainly good for the morale!



According to the Federal Government of Canada web site, nearly 50% of Canadians don’t have a budget and so they improvise financially on a day-to-day basis. A surprising fact given that study after study shows that the first step toward taking control of your finances is creating a budget and sticking to it.

 

So, take control of your finances and you’ll see for yourself the positive impact that adhering to a budget can have on your day-to-day life. Chances are that in no time, you’ll wonder how you could have managed your money any other way.

Are you ready to begin?
If so, download our online budgeting tool free of charge, and start budgeting!

Download our budgeting tool