How do I create a budget? We make it make sense

#MakeItMakeSense is a series from the Star that breaks down personal finance questions to help young Canadians gain more confidence and understanding around financial literacy.

Many people often think there is a right or wrong way to start a budget but there are numerous ways to create one, says money expert Jessica Moorhouse.

“Ultimately all a budget is, is a spending plan, which means it’s just a way for you to outline money coming in, money going out, how much you’re earning and where it goes in terms of all your different expenses and savings,” she said.

“A budget is just a way to organize what you want to happen with your money.”

So, how can people start drawing up a monthly budget that best suits them? We brought in Moorhouse to share her best tips and advice for this week’s #MakeItMakeSense.

How do I start creating a budget?

Moorhouse said the first step is to calculate what your income is before taxes and deductions, then subsequently, figure out what’s left after all those taxes and deductions in order to understand how much you are paying in tax and how much is being taken off of your overall pay.

This is especially important for people who are self-employed to make sure they are setting aside enough money to pay their tax bills, she said.

When it comes to budgeting, Moorhouse often encourages her clients to “pay themselves first,” which means making sure that you’re prioritizing saving and then using whatever’s left over for expenses.

“Because if you do the reverse, you’ll always find that there’s never enough money left over for savings, because it’s very easy to find something to spend it on,” she said.

Next, Moorhouse suggests looking at your fixed and variable expenses. Fixed expenses are costs that are the exact same amount every single month, like rent. On the other hand, variable expenses, like the term suggests, tend to vary from month to month and may be less or more depending on someone’s needs, like groceries.

When big expenses come up and people need to rework their budget, Moorhouse advises taking a look at variable expenses first to see if there’s a way to redistribute some of that money into fixed expenses or help pay off things like your credit card bill.

“This is because fixed expenses are difficult to cut as most of them are utilities or rent that you need to pay,” she said, adding variable expenses are usually where people tend to overspend.

Cutting back on a budget will vary from person to person but it’s all about looking at your biggest expenses and if there is a way to reduce those expenses, said Moorhouse.

“It could even be like looking at your cellphone bill and seeking out a competitor with a lower rate, cancelling a gym membership and working (out) outdoors during the summer, or taking a break from a streaming service to save $10-$20 for the month,” she said.

Moorhouse adds when you cut costs, it doesn’t mean you have to do without those services or items forever, it can be temporary until you earn more money or costs go down.

How do I make sure I follow my budget?

Moorhouse advises people to track their spending to ensure they know what is happening to their money.

“You can then compare it to what you actually want to put your money toward and if there’s a disconnect, you can find the culprit. Maybe you’re eating out too much or there was a big expense you didn’t budget for like a car repair,” she said.

Additionally, reviewing your spending habits can help rework your budget, Moorhouse adds. For instance, if you notice you have to repair your car, you could start saving money for an emergency fund to rectify future situations.

To prevent overspending on variable expenses, Moorhouse says people can also test out different systems to discipline themselves to stay within budget.

“Some people do the old cash envelope system where you set aside a particular amount of cash for yourself each month and once it’s out, you have to wait until the next pay day,” said Moorhouse.

“Others do this digitally by using a debit card so you don’t go into overdraft or by using a prepaid Visa.”

Moorhouse emphasizes there’s nothing wrong with splurging but that’s why it’s important to have a budget to allocate money so you can buy and do the fun things you wish to do.

What resources can I use to help craft a budget?

Moorhouse points out there are many ways people like to organize their budgets, from using paper-based chart methods to online templates on Canva.

Whichever an individual chooses, Moorhouse encourages people to test different ones out to see which works best for them, adding many are customizable in colours and design.

“There’s so many free and (affordable) budget sheets and templates online, even on Etsy. Even financial influencers these days have a bunch to see which ones are pleasing to your eye and you’re actually excited to pop into and use,” she said.

Moorhouse added using these templates to track your spending each month can also help you visualize in the future where you were a year ago versus now to keep you motivated when it comes to your finances.

“You can even follow communities online that are knowledgeable and excited about budgeting which will give you more excitement and reaffirm you’re not doing it alone,” said Moorhouse.

Got a question or scenario that you’d like to see tackled? Reach out to Madi via email madisonwong@thestar.ca and we’ll #MakeItMakeSense.Jessica Moorhouse is an Accredited Financial Counsellor Canada®, host of the More Money Podcast and founder of financial education company MoorMoney Media Inc.

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By Jon Doe