How to Create a Budget (that works!)

Make your money work for you so you no longer have to work for it.

My husband and I had a total of $250,000 in our bank accounts by the time we hit our thirties and own two properties.

I’ve been asked a number of times how we’ve been able to afford the things we have and I’ll tell you exactly what I told them. 

We have a budget.

Both my husband and I have tracked our spending since we were kids. When we got together, we continued to track everything. 

Our budget is what has stopped us from making rash purchases, and has helped us plan for the future. 

Where to Start

The most simple, slap-you-in-the-face budget workbook is the Gail VazOxlade’s budget. Download it here (little button bottom right) and the instructions here.

This is going to take work.  It may feel painful and you want to avoid it at all costs but trust me when I say, it is so worth it!

Once you finish making your budget, you will feel so powerful and energized. 

You will be able to see your path to financial freedom from debt. 

You will be able to see how quickly and easily you can take that dream vacation. 

You will get excited about the areas of your life (budget) that you can put your own stamp on (DIY/learning skills) so they are not sucking your wallet dry. 

Welcome to the homestead life!

Set a Preliminary Budget

Unless you know what you’ve been spending for the last six months, the easiest way to make a budget is by starting with what you think you spend each month. 

Start by completing the Gail budget. 

The goal is that your total should be black, and not red.  Are you starting to see where you may need to shift your spending habits?

Two categories to NEVER remove from your budget – even if they have only $20 allotted to them: Emergency Fund and Savings.

Emergency Fund

Everyone should have an emergency fund.  Ideally your fund should have enough in it to cover three months of expenses. I never thought that much of it until we had to use it. Completely unexpected, blindsided, and so grateful it was there.  You never know if you’re going to be laid off, someone get sick, or suddenly have less income coming in.  And emergency fund is a MUST!  You’ll be so grateful, even for that extra $240.

Savings

You need savings.  It doesn’t matter how much debt you have, or if you have RRSPs or a pension plan, you need savings.

This is not your “we have money so I can buy this” it’s your “I’m not touching this until I’m old and grey.”  Again, even if it’s only $5 a week.

Invest this money! Have your money work FOR you.  Check out Socially Responsible Investing.

Your savings will supplement your retirement plan, whether you have a pension package or not.

Step 1. Gather Income and Expenses

You’ll want to have your last 6 months’ worth of data for how you’ve spent your money to be able to get a good picture of what your budget needs be.

Pull up your numbers for the last six months:

• Credit card statements
• Bank statements
• Bills (phone, internet, utility, mortgage, car, childcare, etc.)
• Receipts (electronic or paper)
• Pay stubs
• Investments

Do your absolute BEST to gather everything.

For long-term items like mortgage, insurance, car payments, etc. get your full agreement.

Step 2. Get Your Debt Numbers

You need to know what you owe.  The goal of a budget is to pay off your debt ASAP and to get your spending within your means.  The fun of a budget is to also get you to freedom faster!

Whether than means a vacation you’ve always wanted or renos on the house, it doesn’t matter.  Financial freedom is based in knowing what you’re doing with your money!

Don’t think of a budget as being restrictive. By spending less now, you have more money in the future – it compounds. 

You’ll have financial independence. 

Financial independence is the ability to have something in life go wrong like lose your job and have that cushion to be ok.

It’s also having that room in your finances to take a leap of faith and leave your job to pursue your passions.

Step 3: Add in the Debt

For your debt you’ll need:

• What you owe
• For what
• Interest rate
• Interest term
• Minimum payment

Get that debt completely paid off in 2-3 years.  MAX 3 years for really significant debt.  It’s 100% possible.  Yes, it truly is. 

For big debt, that might mean selling a house, or downgrading a vehicle – making big sacrifices. Or really, giving up the “Joneses lifestyle” that got you into debt in the first place.

Step 4. Create a Tracking System

As you create what your budget is going to look like, at the same time you need a tracking system to track your spending going forth.  You can start this at any time and the best time to do it is NOW.

I find having a simple notebook or even a few pages stapled together works well for this purpose.  No need to be fancy. A few pieces of scrap paper will meet the purpose. No excuses!

Write the budget columns at the top of each page. 

As you spend, record on the corresponding budget page:

• Date purchased
• Store
• Amount spent

Now, you may not know which transaction goes into which budget but that will come as you learn more about your spending habits. The important thing is to record it down as soon as you spend! You can even have a Miscellaneous budget page, if necessary.

Bonus: Keep Track of Your Receipts

If you really want to keep track of your spending and know EXACTLY what each budget line is – keep track of your receipts.  As you record the spending in your notebook, put a number on the receipt, add the number to your budget line, and stuff the receipt in an envelope for that month.

This will really help you narrow down where your money is going.  It’s also useful to get you in the habit of saving your receipts!  You never know when you might need to return something, or cost compare.

If you purchased something and didn’t get a receipt, record the date, store, amount, and item in your phone or email it to yourself.

Going this in-depth, even for a few months is well worth it!

Step. 5: Enter Your Numbers

Using the Gail VazOxlade spreadsheet, enter your total numbers spent for that month in each of the areas.

For items that happen annually, divide the TOTAL cost by 12 so you have your monthly amount.

Habit-stack entering what you spend into a budget book every day. Meaning, do it right after you do something you do every day.

For example, when you come home and take off your coat and shoes, make the next thing a habit of putting your receipts in a receipt jar on the kitchen counter.

Create another habit where after the dinner dishes are put away, enter the receipts into your budget book.

Have a Plan for the Future

You need to have a plan for the future. Talk to an investment manager.  Get referrals from your friends for people they trust. Your savings should be working for you.

Planning on having kids? Want to renovate something in your home? Take a vacation? Need a new car or tires soon?

Speak with your partner and map out a plan of your goals and when you’d like to achieve them. Find out how much they cost and how much you’ll have to save for them.

What About Retirement?

Let’s look at some quick numbers.

Say you retire at age 65 and the average person lives to about 85.  That’s 20 years of retirement!

You should plan on having about 80-90% of what you live on now, per year. But also account for other things you might like to do like travelling more.

Plan on setting aside about 10% of your income ASAP, each year to go towards retirement. 

That number should be more around 20% if you want an adequate retirement income so start small and keep it moving up as quickly as possible.

Your retirement needs are not so much based on your income but more how much you spend – what kind of a lifestyle are you looking to maintain.

For example, if you currently make $100,000 but live off of $80,000, then multiply $80,000 by 20 and that’s what you need.

Once you have a number you can quickly start working towards it.

Keeping in mind that changing your lifestyle to live off of, say, $30,000, increases how much extra funds you have to go towards retirement, and how much less you actually need to continue your lifestyle = financial independence faster!

Homesteading skills create the $30,000 lifestyle.

Here’s a quick timeline to use in order to get to that magic number:

• By 30: Have the equivalent of your salary saved
• By 40: Have three times your salary saved
• By 50: Have six times your salary saved
• By 60: Have eight times your salary saved
• By 67: Have 10 times your salary saved

Debt Repayment

Call everyone and get your interest rates down!  Threaten bankruptcy.  There are tons of websites that help you do this. 

Ask to speak to supervisors.  Do whatever you can to get that interest rate into the single digits.

Organized your debt with the largest interest first.  Put your minimum payments on the rest of the debt, and focus your attention on paying down your largest interest debt first.

Once that debt is completely paid off, focus all of your debt repayment funds on the next highest. 

That includes the funds for the minimum payment you were already making!  Let’s not skimp on the funds you’ve already set aside for debt repayment.

*Your mortgage does not count towards debt as it’s not considered consumer debt. 

It’s usually a smart idea to go to weekly payments and additional annual lump sum payments when your interest rate is low. You’ll be completely debt-free sooner!

Budget Pinching Time

Are you in the black?  If not, you need to make some cuts or make more money. 

Be realistic but also challenge yourself.  You can completely live within your means and gain a massive bank account in order to fund the lifestyle you want. 

“Work like no one wants to so that you can have the life everyone wants.”

Here are some great posts that may help you:

---

After You’ve Made Your Budget

Congratulations, you’ve just made your budget!  There will be tweaking along the way as you find what works for you. 

As you continue to track your spending, you’ll see quite quickly where your spending habits may not be in line with your goals. 

If you get off track, that’s ok, no one’s watching you.  Don’t let it happen two days in a row. Get right back on and start tracking.  Go back and fill in the blanks.

Check out areas of your budget that could do with some homesteading skills.

Is it making zero waste reusable products? Growing your own food? Making meals at home?

Here are some greater starter posts to help you out:

You’re on your way to living the life you want!