Budget Building Is Documenting Your Road To Debt Freedom
Before the 2021 New Year starts I wanted to go over how budget building worked for us and how it can for you too.
Everything and everyone has been hit hard with the Covid-19 pandemic which means 2021 is going to be a catch-up year.
We already know how the financial impact has struck us and now we have to do damage control.
Living on a tight budget or not having enough money to cover all of your monthly debts can be stressful for anyone.
If this is the first time you’re going to use a budget or if you’re new to Canadian Budget Binder, congratulations and welcome.
You will find an abundance of free budgeting tools and information on CBB as well as a blogger who cares about finance.
What You’ll Learn From Budget Building
In October we learned about the consequences of not using a budget and for those who want to be part of the budget savers.
- Understanding How Budget Building Happens
- 10-Step Mini Budget Course
- Benefits of Budget Building
- Three Types Of Expenses You Need To Know About
- Taking advantage of Free Cash
- The importance of setting up Projected Expenses
- Types of Budgets To Explore
- Figuring out your Debt To Income Ratio
- Monthly Net Income
- Ordering your Credit Score and Credit Report
- Best Budgeting Tools
Understanding How Budget Building Happens
I took everything that we went through as a couple back in 2012 and created a 10 step mini budgeting series for you.
You’ll find it’s simple and straight to the point but if there’s something you need help with, drop a comment.
I’m not one of those guys who needs to complicate money because it doesn’t have to be that way.
Most people want a simplified budget building process because life and family take up a great majority of the time.
Having a quiet area to review 0ur free 10 step mini budgeting course will allow you to gain a better understanding.
Benefits Of Budget Building
At the time of creating the Canadian Budget Binder, excel spreadsheet budgeting was somewhat foreign to us.
My parents never used a budget and neither did Mrs. CBB’s family so we were starting from scratch.
Like most people, we would track our debts and expenses with a passbook and then online as banking became the norm.
Unfortunately, we started to see cracks in the way we were saving and spending money and knew that we could do better.
Taking the easy way out trying to thrive financially without a budget will come with regrets down the road.
There, I said it. You NEED a budget.
Building a budget in excel came after the pencil and paper budget and we connected with it far better.
Some people might like a budget app or the basic pen and paper budget approach but for those who understand excel, it’s better.
There, I said it. You NEED a budget.
- Budgeting is as easy as you make it
- Less Financial Stress
- You feel accomplished and on track
- In Control of your financial health
- Visual representation of where you stand with today, tomorrow, and in the future when you retire.
- Budget Building is NOT Perfect
- Household Expenses to Consider
Three Types Of Expenses
While starting a budget seems simple there’s a bit more homework that needs to be completed before jumping in.
I think this is where people get overwhelmed with budgeting because it has a few layers to peel before you get to the fruit.
As we started writing our budget goals for the year back in 2012 it occurred to us that we needed to understand the types of expenses.
On our budgeting journey, we felt we were faced with two expenses which are fixed expenses and variable expenses.
1. Fixed Expenses In A Nutshell
Fixed expenses are those bills that are due each month and are generally the same amount as you have little control.
Examples of fixed expenses are rent, mortgage, insurance, or predictable expenses so there are no surprises.
They can be some of the most expensive of expenses that you struggle to pay but at least you know how much you’ll need monthly.
You will find there’s not much to fixed expenses however with variable expenses the nutshell is cracked open.
In other words, you have the control of where to put your nuts and which will yield you the best results.
2. Variable Expenses Outside Of A Nutshell
Variable expenses are those expenses that you CAN control which I always tell my fans who are struggling to keep peeling the orange.
Trying to get to the fruit by jumping hoops is never going to get you to the debt-free status if you know what I mean.
Things MUST change if you are struggling to pay the bills and your variable expenses are always on the chopping board.
Changing Your Variable Expense To Free Up Cash
Have a look at changing or eliminating your telecommunication bundles such as television, home phone, skip the data, or internet services.
You can also track your food budget for a couple of months and start meal planning around grocery sales only.
Stay away from shopping online if you find this is an easy trigger for you to spend money until you gain financial control.
Try your best to be frugal when it comes to clothing and other gently used items by visiting second-hand shops.
We did all of this and for the most part, continue this practice even though we’ve been debt-free since 2014.
Your lust for savings and realizing what needs are important may change as it did for us.
We have no problem buying clothing second-hand and taking advantage of major sales days such as 50% off days.
At the grocery store while we use a meal plan we keep our eyes on the reduced rack for products, health and beauty, and loads of other products.
Take Advantage Of Free Cash
Using the Flash Food App for Loblaws stores is awesome and we check it every day to see what price reductions are being offered.
If you are behind with credit card payments call them up and explain your situation and ask if they could lower the rate.
By doing so would help you pay back your credit card expenses instead of having more interest tacked on.
If they say no keep on peeling that orange to find more ways to eliminate expenses under your control.
I know I’ve said this a million times on the blog but leaving free money on the table is all wrong.
The idea for variable expenses is to slash and save wherever you can to help boost income and slim the financial load.
3. Projected Expenses Is The Missing Link
This is where people struggle because they may be one-time expenses at some point in time during the year.
These are the expenses consumers forget about when budget building however must not be ignored.
Although when budget building one important budget category is emergency savings.
When you are dealing with projected expenses you should never have to take money from your emergency savings.
Once you create your goals and expenses list for the year these types of expenses should be covered.
Budget Building Is Never Perfect
There is NO budget out there that is perfect but it’s better to budget than to be staring at a blank page of uncertainty.
Now, here’s the kicker. We aren’t perfect and things just happen to come up as it did for me the other day.
My truck needed new tires and I did NOT factor that into projected expenses because I didn’t give any thought to it.
Every year you will add more to your projected expenses so you save up as the year or years go on.
If I had considered my tires in the last 3 years of owning my truck I would have had to save $41 a month in our PE bank account.
So that’s 36 months /1500 (cost of my tires) = $41.66 that I know I need to stash away for the next set.
Obviously, the price will go up but at least you’re going to be ahead of the game when it comes to replacing them.
Mine came with cheap factory tires that needed to go but these new tires may last longer.
Even so, I’m going on the 3-year timeline just to be safe.
You could do the same if you need a new roof and have a timeline for hiring a company.
It could be a year, two years, or longer. Once you get a roof estimate you’ll know what type of price you will be paying and can start saving.
Projected expenses will save your sanity if you can save for them without having a big bill thrown at you when the time comes.
Household Expenses When Budget Building
The budget building process includes knowing from A to Z all of your household expenses.
As mentioned about your fixed expenses are simple because they are what they are every month.
What other budget categories should you create?
We broke our budget categories down as far as we could so we could see numbers on a true scale.
For example, we kept groceries only for groceries and health and beauty in another category.
You can have a look at our monthly budgets for the past years to see how we’ve created our budget categories.
And to be fair, you will find that your categories may change year after year.
Once you become a budgeting pro you may want to break them down further as we have.
It’s not an obsession it’s just a way of understanding where the money is going and where we can chop, slash, or get rid of when needed.
Budget categories paint a detailed picture and how much detail you want is up to you.
Debt To Income Ratio
Not everyone wants to know their debt to income ratio but if you want to be successful at becoming debt-free faster you need to know.
When budget building you must be realistic and know how much money you have coming in which we talked about above.
You also need to know the exact numbers of every debt you owe.
Part of budgeting is understanding the health of your overall financial picture so you need to understand your debt.
What are some types of debt you might hold?
- Mortgage Debt
- Credit Card Debt
- Medical Debt (ex: Dentist, Cosmetic Surgery, Costs not covered under OHIP)
- Consumer Debt
- Personal Debt (money you owe someone friends, family)
- Payday Loans
- Student Loan Debt
The idea is to figure out how much debt you owe in comparison to your gross income.
This is called your Debt To Income Ratio.
When applying for a loan or mortgage some organizations want to know your debt to income ratio to decide on whether you’ll be able to pay them back.
When you arrive at a number you’ll see how much money you are earning and how much debt you owe.
It’s one of those numbers that can be scary but don’t let it get you down, we all have to start somewhere.
Order Your Credit Score and Credit Report
I also suggest that at least once a year to find out what your credit score is and to get your credit report.
We use Borrowell but also have checked out Credit Verify which is also a great system for Canadians.
Did you know you can get your Equifax credit score for free from our partners at Borrowell?
In under 3 minutes, you’ll be able to access your credit score and full credit report – for free!
Why should you understand your credit score?
If you’re planning on getting a mortgage, finding a new job, financing a car, applying for a loan, or signing a lease, your credit score will be taken into account. Having a higher score will make it easier (and cheaper) to do those things.
Borrowell’s mission is to help Canadians make great decisions about credit. Checking your score won’t affect it.
Borrowell will never ask for your credit information and doesn’t share your data with third parties.
Who is Credit Verify?
Credit Verify is a Canadian consumer-facing credit report that focuses on helping customers with credit education and suitable products to rebuild credit.
Credit Verify also offers Identity Protection Monitoring and Internet Scan services to their customers.
Credit Verify is owned by Credique, LLC and is available in all provinces, except Quebec.
To read your full credit report Credit Valley only charges you $1 which in my opinion is very reasonable.
Monthly Net Income
If I asked you how much money you net each month would you know that number?
For some of you, it may fluctuate or be irregular based on when your employer pays you.
However, you should always have somewhat of an estimate so you can start budget building.
Your net income is how much money you get deposited into your bank account monthly from your employer.
If you are a business owner and work for yourself and want to begin budget building you’d do the same.
How much are you being paid by yourself each month?
You can also use a net worth income tracker for your budget binder and track month to month what you net.
This will make budget building easier if you know what net income amount you are working with.
Best Budgeting Tools To Get You Started
There are so many budgeting apps and free budgets online that you can choose anyone you want.
However, if you are like me and would rather track your budget manually or with the excel budget spreadsheet the choice is yours.
I find that I lean more towards the excel spreadsheet for budgeting only because I’ve set time aside to work on it.
Top 2020 Canadian Budget Apps
Below are some of the Top Canadian Budgeting Apps for 2020 and I’m sure into 2021.
- You Need A Budget
- Pocket Guard
- Spending Tracker
What I can tell you is that our excel budget spreadsheet has been successful for us and continues to be motivating.
The great news is that you can test different types of budgets to see which is a fit for you or your family.
Why choose Canadian Budget Binder?
- Canadian Budget Binder Excel Spreadsheet is Free
- Tonnes of budgeting articles based on our personal experience from debt to debt-free
- Building a Budget Binder using my free finance printable series
- Using a Cash Budget
- Magic Jars For Budgeting
To get yourself ready for your New Year Budget Building journey there are only 5 simple Budgeting tools that you will need.
Discussion: If you have any questions about getting the budget ready for 2021 please to leave me a comment below.
Disclaimer: This post may include links where I get a small commission if you click on them. It helps support this blog.