How to Create a Budget That Works
About 27 percent of Canadians spend their whole paycheque every month.  Some spend more than they earn, creating an increasing amount of debt. There are two ways to break out of the paycheque-to-paycheque cycle and get out of debt: you can earn more money, or you can spend less.
While the economy in Canada is strong, and it’s possible to ask for a raise, it makes more sense to simply start where you are. Most Canadians who are trying to get control of their finances work to pay down debt with a solid budget. About half of Canadians continue to use their budget to control their finances, even if they are not trying to pay down debt. Of course, the trick is creating a budget that is reasonable and works for you.
Step 1: Track your spending
You can’t budget without knowing how much you spend every month. Fortunately, unless you use cash for most of your purchases, you already have these numbers tracked for you. Use the financial statements from your banking and your credit cards to see how much you spend every month. Really comb through your expenses to see just how much you spend on food, clothing, entertainment, gas and more.
In addition to raw expenses, also look at your credit card balances and other loans. What are the interest rates on those loans? The higher the interest rate, the more expensive the debt and the harder it is to pay down. Once you’ve got a good measure of how much you spend every month, it’s time to sort out priorities.
Step 2: Determine your budget categories
Some of your budget categories will be determined for you. Unless you’re able to change your living situation or trade in a car, your living and transportation expenses are probably already set. The goal is to spend less every month, so if it possible to make a big change like selling an expensive car to buy a less expensive one, that might be a great way to get ahead with your budget.
Other budget categories might need a bit more consideration. How much do you really spend on food every month? Is a lot of that fast food and lunches out at work? Can you save a lot of money by bringing your lunch a few days per week? If you are budgeting for multiple people in your household, you will need their input as well to determine what you and your partner consider reasonable to spend on entertainment, food, clothing, and more.
Step 3: Reduce expenses as much as is comfortable
As you were setting up your budget categories, you likely considered the amount you’re currently spending per month and how much you’d like to spend instead. There is a temptation when first budgeting to hack away at every unnecessary expense to save money by removing all wants and paying only for needs.
This can backfire, however, if you remove all the comforts and hobbies from your life. Instead, set a budget that includes a bit of fun and comfort so that you won’t feel deprived as you work on saving money. True minimalism isn’t for everyone.
Step 4: Debt Consolidation
Credit card and other small, expensive loans can be a budget killer. If you have several credit cards that are maxed out or close to it, the minimum payments on those cards are likely not making much of a dent in your overall debt. Debt consolidation offers you a chance to pay off the expensive cards, remove those minimum payments, and pay just a single, set amount every month.
To make debt consolidation work, you’ll need a loan. A debt consolidation loan is designed for this purpose. A debt consolidation loan is a personal loan that you apply for, and if approved, is used to pay off the expensive credit cards completely. Use the loan proceeds to pay off the complete balances of the smaller cards. Then you’ll make a single, set monthly payment to the new personal loan. When you’ve made all the payments, you will have paid off that debt completely, which can also improve your credit report.
To make debt consolidation work, be sure to:
- Only borrow if a loan that has a lower interest rate than the card cards you’re paying off.
- Close the credit cards or put them away after you’ve paid them off. Debt consolidation won’t work if you just run up the balances again.
- Pay at least the minimum payment every month on the installment loans for debt consolidation. If you can, pay more toward your new personal loan and pay off your debt even faster.
Step 5: Pay Off Debt
The goal of budgeting and debt consolidation is to find more room in your budget. Before you spend all that new money on fun and adventure, consider using it to pay off even more debts so that you can reduce your monthly expenses and build up savings. On average, households in Canada are saving around 8 percent of their income for retirement and emergencies.  Experts recommend saving closer to 10 or even 20 percent of your income.
To pay down all your debts, including your vehicle, personal, and home loans, you can use one of two methods. In both methods, you create a budget and pay the minimum amount on all your bills, including any new debt consolidation loans.
- The Debt Avalanche method suggests that you pay down your highest interest rate debts first. If your car loan has an 8% APR, it would be paid off before your student loan with a 6% APR before your mortgage with a 4% APR.
- The Debt Snowball method suggests that you pay off the smallest balance first and then proceed to those with the larger balance. A student loan with a $2,000 balance would be paid before a car loan with a $8,000 balance, regardless of APR, using the Snowball method.
In both pay-off strategies, the amount you can pay to creditors every month accumulates. You pay off the first debt and then take that minimum payment and immediately apply it to the next debt, increasing that monthly payment and paying off your debt faster and faster as the amount you’re working with each month increases.
If you have high interest installment loans or payday loans, using debt consolidation can help you to save more when you are able to get an online loan with a lower interest rate to pay off others with a higher interest rate or APR.
Managing personal finances can be hard. Fortunately, frugal living is habit-forming and tremendously rewarding when you’re able to spend your money how you’d like and on things you enjoy. The first step to debt-free living is, of course, creating a reasonable budget.