Why is Budgeting Important?

Would it surprise you that only a third of Canadians feel confident in their ability to manage their finances? In a 2020 survey by the Financial Consumer Agency of Canada, just over a third (34%) of respondents felt confident in their money management skills, yet only half (49%) reported that they had a budget.

It shouldn’t be too surprising, then, that 30% of Canadians admitted to dipping into their savings during the pandemic to cover expenses, according to a 2021 survey by Credit Karma, or that 30% of Canadians said they were living paycheck to paycheck, according to a 2021 RBC survey.

These statistics suggest that many Canadians struggle with budgeting and managing their finances, especially during times of financial uncertainty like the COVID-19 pandemic or a potential recession.

One easy, low-cost way to take charge of your finances is to develop a budget.

What is a budget and why is it important?

A budget is a tool to track when and how you earn or spend money. Creating a budget is an important financial pillar — a critical step that helps set the foundation for overall financial success and security.

Definition of budgeting

Creating a budget allows you to oversee and better understand whether you or your household has enough money coming in to pay all the anticipated expenses. In this way, a budget can help you make more informed financial decisions.

In fact, there are four benefits to creating a budget:

(1) Helps you save money: Budgeting helps you set financial goals and prioritize your spending. By creating a budget, you can set aside money for savings, emergency funds, and other financial goals.

(2) Reduces stress: By having a clear understanding of your financial situation, you can reduce stress and anxiety related to money. Budgeting can help you feel more in control of your finances and give you peace of mind.

(3) Helps you prepare for the future: Budgeting helps you plan for the future by setting aside money for retirement, education, or other long-term goals. By having a plan in place, you can make progress toward your goals and feel more confident about your financial future.

(4) Improves your credit score: By paying bills on time and managing your debt, you can improve your credit score. A good credit score can help you qualify for better interest rates on loans, credit cards, and other financial products.

In general, a budget is an important tool for managing your finances and achieving your financial goals. It can help you live within your means, reduce stress, and improve your financial well-being. To help you budget effectively, consider these seven budgeting strategies.

7 Effective Budgeting Strategies

Effective budgeting strategies will vary depending on individual circumstances, financial goals, and lifestyle. Still, the most common budgeting strategies are also some of the most effective. 

If your goal this year is to develop or stick to a realistic budget, then here are seven budgeting strategies that can help: 

Track your expenses

Start by tracking all of your expenses for at least a month, so you have a clear idea of where your money is going. This will help you identify areas where you can cut back and areas where you need to spend more.

Create a budget

Based on your tracked expenses, create a budget that includes your income and expenses. Include categories for fixed expenses (like rent, utilities, and insurance) and variable expenses (like groceries, entertainment, and shopping).

Prioritize your spending

Allocate your budget towards your most important expenses first, such as bills, savings, and debt payments.

Use cash

Try using cash for your variable expenses, such as groceries and entertainment. This can help you stick to your budget and prevent overspending.

Use a budgeting app

Consider using a budgeting app like Mint, YNAB, or Personal Capital to help you track your expenses, create a budget, and stay on track. (Learn more about the most popular budgeting apps in Canada.) 

Set financial goals

Set short-term and long-term financial goals for yourself. These can include saving for a vacation, paying off debt, or building an emergency fund.

Review your budget regularly

Regularly review your budget to see if it’s working for you. If you find that you’re overspending in certain areas, adjust your budget accordingly.

Remember, effective budgeting requires discipline and consistency. Stick to your budget and make adjustments as needed to achieve your financial goals.