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It’s a debate that’s as old as the hills: to budget or not to budget?
Those on Team Budget swear up and down that the only way to manage your money effectively is to list your expenses and match them with your income. It’s common sense, they say, without a plan for your money, you’ll struggle to stay on track. Period.
Team No-Budget, on the other hand, baulks at this conventional wisdom. Budgets are a waste of time, they argue. As long as you save money and don’t overspend, you don’t need to list out all your expenses.
So who’s right? Well, in a way, they both are. Ultimately, the best money management plan is the one that helps you save money and hit your financial goals faster. If you can do that without a budget, great. It you can’t, well, get on the budget.
But don’t get us wrong here. Budgets can give you insight into your spending habits and savings progress, helping you make necessary changes to your financial situation. They might not be right for every Canadian, but we’re willing to be they’re right for most people.
When should you suck it up and make a budget? Let’s take a closer look and see.
When should you budget?
We’ll go ahead and say that most Canadians need a budget. Sure, you may be the unicorn who controls their spending and crushes their financial goals without one. But chances are your personal finances will be stronger with a budget firmly in place.
That said, some situations call for a tighter budget than others. Here are five surefire signs you definitely need to follow a monthly budget. `
1. You live paycheque to paycheque
Income comes in, and income goes out. That, in a nutshell, is how many Canadians live. They can be high-earners. They can be low-earners. But regardless of how much they make, the outcome is the same: their expenses are draining their income, preventing them from saving money or paying off debt.
If you live paycheque to paycheque, a budget can be the wakeup call you need to change your spending habits. Knowing how much you’re spending in certain categories can help you identify excessive and unnecessary expenditures. Even finding room in your budget for a small amount, such as $50 to $100, can widen the gap between your income and expenses, giving you some wiggle room to pay down debt or start saving money.
Chances are with more control over your spending, you’ll break the paycheque-to-paycheque cycle, thereby helping you put more money aside.
2. Your debt continues to rise
Debt can easily sneak up on us. We roll a balance over, pay the minimums on credit cards, take out another loan to cover an unexpected expense. What’s worse — unpaid debt brings along pesky interest rates and fees, which can make the debt hole that much deeper.
That’s where a budget comes in. When debt feels like it’s spinning out of control, a budget can put the reins back in your hands. A full list of expenses, including your debt payments, can help you make a plan to pay off debt faster.
Do you feel like you can only make minimum debt payments? Use your budget to trim variable expenses, such as groceries and eating out, and identify expenses you can eliminate all together. Yes, this will be difficult. But by accepting certain limitations now, you’ll empower yourself to get out of debt sooner.
3. You have no emergency fund
No matter how old you are, or what you make annually, you should always have emergency money laid aside, ideally three to six months of living expenses. Without an emergency fund, you’ll be tempted to dip into your retirement savings or stay afloat by borrowing money.
But make no mistake. Emergency funds can be difficult to build. A month of emergency expenses could take months to save, and if you deplete your emergency savings before you hit your goal, you can feel discouraged to start again from zero.
This is where a budget can really work its magic. By creating a budget around a specific goal (say $500 a month), you can prioritize building and replenishing your emergency fund faster. You can even automate your savings contributions, which will pull a certain amount from your checking account every time you get paid, ensuring you always have money put aside.
4. You don’t know where your money is going
Most Canadians can relate to this: you make enough money to hypothetically live way below your means, yet at the end of the month, you feel cash-strapped and desperate for payday. What’s worse is that you have nothing to show for all your spending. No savings, no retirement account, not even an emergency fund.
What’s going on? Simple. You’re suffering from spending amnesia. You spend money on things and experiences you don’t need, then forget about them.
If you’re unaware of how much you’re really spending, a budget can be the reality check you need to get back on track. Once you see how much you’re spending on, say, eating out, you’ll better understand why you’re not saving at the rate you’d like. From there you can slash excessive spending and put more toward your goals.
5. You struggle to save money
Budgets aren’t just for overspenders. They can help under savers, too. In fact, if you find yourself always aiming at the same financial goals — saving for a home, or just having money in a savings account — it’s time to design a budget that helps you finally hit them.
Most people won’t find an extra $500 a month after creating a budget. And that’s okay. Part of creating a budget is seeing where you can make small adjustments. For example, you may spend $550 on groceries, but after digging into your grocery bills, you decide you can cut the frozen dinners, saving you $50. Likewise, you may question if you really need certain nonessential expenses, like streaming services or prime memberships, especially in light of your savings goals. $50 may not seem like a lot, but truthfully — some progress is better than no progress.
When can you go without a budget?
We’re very much pro-budget. But we also understand financial advice isn’t (thankfully) one-size-fits all. Some Canadians might do well without a budget, especially if they do the following:
1. You automate your essential spending
Instead of budgeting essential costs, some Canadians have set up automatic withdrawals from checking accounts. When the paycheque hits the bank, money is automatically taken out to pay for rent or mortgages, utility bills, debt payments, insurance premiums, even savings and retirement contributions. Whatever is left becomes money for other expenses, such as groceries, subscriptions, and dining out.
With this method, you know your essentials are covered. And the money that remains is money you can spend (or save). So long as there’s money in the bank, you don’t have to worry about overspending.
Of course, this method only works if you know for certain you’ll have enough to cover your essentials. Those with a variable income may struggle to automate withdrawals, especially during bad months.
2. You already live below your means
Canadians who are naturally frugal, or who aren’t tempted to spend excessively, may not need to list out every expense to stay on track. In fact, if you’re living below your means, you’re essentially doing what a budget promises to do: spending less than you make. If you’re already doing that, bravo — you’re one of lucky few.
3. You’re saving regularly
Many Canadians find saving money difficult, if not downright impossible, without a budget. But maybe you don’t. If you’re regularly putting money into savings and retirement accounts, a budget might not be necessary.
Do You Really Need a Budget?
The short answer: unless you’re a natural saver or naturally thrifty, you should make a budget. Even if you are frugal by nature, a budget can still help you hit your goals faster. For this reason, most Canadians will do themselves a big favour by budgeting out their expenses and savings goals.