The 10 Best Budgeting Methods for Canadians

Budgeting is important, but it doesn’t need to be difficult 

When I was in university, I often found myself scrounging for loose change just to have a fun night out. Typically, this rock bottom situation would result in me muttering to myself “I really need to start budgeting”. For some reason, I believed that financially responsible individuals were the people who painstakingly tracked every single dollar spent on needs and wants. Therefore, as someone who wanted to be financially responsible, I would: 

• Create a VERY DETAILED excel spreadsheet
• Hang on to every single receipt 
• Manually enter all the receipts into the aforementioned spreadsheet
• Never pay with debit or credit. Cash only 

This process would often conclude after a few weeks, and eventually result in me once again scrounging for change just to have a fun night out telling myself “I need to start budgeting.”

I have read a lot of books and listened to enough seminars to realize that there is no secret sauce for everybody when it comes to budgeting. Certain individuals thrive with simplistic budgeting systems, and some people prefer the detailed Excel spreadsheet mentioned above.

Regardless of the eventual direction you take with your budgeting process, the important thing is that you have one. Part of the journey to financial freedom is to have a clear understanding of the comings and goings of your money. This will enable you to make factually-based decisions in your life. 

Stay up to Date on the Latest Travel Deals

Here are 10 budgeting methods that work for most Canadians 

1. 20/30/50 Budget

Rather than having individual budgetary categories (coffee, bars, haircuts, etc.), the 20/30/50 method suggests dividing your spending into 3 categories: 

1. 20% for savings – Pension, RRSP, TFA 
2. 30% for wants – clothing, vacation, bars, or pretty much anything you enjoy doing 
3. 50% for needs – Mortgage, rent, utilities, car, cell phone, or pretty much anything you can’t live without 

This a great approach to budgeting, as it allows a lot of freedom with your spending. Purchases can easily be put into these 3 categories with free software like mint.com.

Benefits of the 20/30/50 Budget

• 20% savings is well above the national average, so you will be setting yourself up for a stress free retirement 
• This an extremely easy budget to track, and can be set up quickly 

Drawbacks of the 20/30/50 Budget

• For those Canadians who are living paycheck-to-paycheck, this budget doesn’t necessarily leave a lot of wiggle room. 
• Some people may “waste” money on things they don’t need just to hit their 30% benchmark. That money may be better off stashed away for a rainy day

This budget works for………Canadians who want a simplified approach to budgeting. 

2. 80/20 Budget 

For those who want to take a SIMPLE approach to budgeting, the 80/20 rule could be the approach for you. In this method, you’re putting aside 20% for savings, and the rest is yours to do with it what you want.

This could be useful for those at the beginning or the end of their financial journey, as their “needs” may be limited due to several factors.

Benefits of the 80/20 Budget

• Keeps budgeting simplistic 
• For those who want more fun money, this could be a great way to reduce your fixed costs 

Drawbacks of the 80/20 Budget

• Many people struggle with broad-based budgeting because they need detailed information to control high spending habits. If this sounds like you, there are better options out there 

This budget works for………Canadians check their spending once every few weeks.

3. The Sub-Savings Budget 

As you’re probably starting to notice, most of these budgets are simple spin-offs of each other, and the sub-savings budget is no exception. This budget breaks down the 20% allocated towards savings into different sub-categories to help you with goal planning. For example, you may want to put 10% of your savings into a short-term financial vehicle like a TFSA to pay for a wedding. If you’re saving up to buy a house for the first time, the majority of your savings may be placed into a RRSP. 

The bottom line is the sub-savings budget method allows you to further dive into where your savings are going. As with most budgets, budgetary software can automatically track these transactions. 

Benefits of the Sub-Savings Budget 

• Allows you to track savings for short and long-term goals
• The ever-increasing number of technology platforms in the market today allow you to easily automate transactions into your various savings accounts

Drawbacks of the Sub-Savings Budget

• While putting aside 20% of your income will certainly help with your savings goals, this budgetary approach neglects the spending categorization that most people associate with budgeting

This budget works for………Canadians who want to save for large short-term purchases (wedding, house, car, etc.).

4. Pay Yourself First Budget 

This budget is a byproduct of the commonly used phrase “pay yourself first”. The approach urges you to limit your spending as much as possible and put the maximum amount of money aside in a savings vehicle. The Financial Independence Retire Early (FIRE) community promotes this budgetary process 

Benefit of the Pay Yourself First Budget 

• This will allow you to rack up savings FAST
• Frivolous spending is easily eliminated with this budget, and some individuals enjoy the challenge of minimizing spending 

Drawbacks of the Pay Yourself First Budget 

• Saving and investing as much money as possible will obviously help you achieve your financial goals quicker, but can also cause stress in other aspects of your life (particularly socially)

This budget works for………Canadians who have the capability to save aggressive amounts of money, or someone who has low monthly expenses

5. Zero Based Budget 

This is a simple approach to budgeting as well, albeit a bit more time-consuming. In summary, this budgeting method takes your monthly earnings and allocates them into different categories until there is nothing left. 

Having every purchase allocated to a specific subcategory can be time-consuming, but using a debit or credit card for every purchase, and having those purchases sync up with budgeting software can go a long way to simplifying this process.

Benefit of the Zero Based Budgeting system 

• It makes every dollar count 
• There is flexibility as to the percentage you’d like to put away for saving (although >15% is encouraged)

Drawbacks of the Zero Based Budgeting System

If you’re putting away a certain percentage of your monthly savings to a retirement fund, and leveraging the remaining amount on monthly purchases, it doesn’t leave a great deal of money available in an emergency fund. Should something unforeseen arise, individuals who use this budgeting approach may not have a lot of cash liquidity 

This budget works for………Someone who has already saved a good amount of money in an accessible savings fund.

 

6. The Envelope System 

We’ve all heard of this system throughout our lives. At the start of the month, put aside money in an envelope for groceries, gas, coffee, etc. and only leverage the envelopes for purchases in those particular categories. No credit cards, no debit cards.

I think credit cards are a great way to earn either cash back, or free travel, but addiction is something that many Canadians deal with, and credit card addiction is something that should be taken seriously. This is a great alternative for those who prefer to keep their credit card locked away.

Benefits of the Envelope System Budget  

• Keeps those with high spending habits in check
• Allows you to physically track your spending patterns 

Drawbacks of the Envelope System Budget

• Canadians have access to free travel and cash back by leveraging credit cards. This budget system eliminates that benefit

This budget works for………Canadians who have a history of uncontrollable spending

7. The “No Budget” Budget 

This approach works for some people (although I don’t recommend it). The “no budget” budget works for people who naturally don’t spend a lot of money, and thus don’t feel the need to track their spending. One thing to note is that those using this approach should still try and save a good portion of their savings, as money sitting in a chequing account serves very little value.

Benefits of the “No Budget” Budget 

• Pretty much eliminates the stress associated with budgeting. If you’re in the 1% of the population who naturally has low spending patterns, I’m envious. 

Drawbacks of the “No Budget” Budget

• Budgeting is best used as part of a broader financial plan. Bypassing this step makes it extremely difficult to maximize your financial well-being 

This budget works for………Canadians who have extremely low monthly expenses (students & seniors for example).

8. The Line Item Budget 

This is probably the first thing you think of when the term “budgeting” comes to mind. Every purchase is placed into a particular sub-category (coffee shops, groceries, gas, etc.). This is a very granular approach to budgeting and is great for people who don’t mind the tedious task of going through every one of their purchases.

Benefits of the “Line Item” Budget  

• You will very quickly understand where your money is going, and is a great first step to take if you’re looking to curb your spending
• Purchases made through a debit or credit card can be automatically synced with your budgeting software

Drawbacks of the “Line Item” Budget

• Even with the majority of your purchases automatically synced to your budget, this is still a very time-consuming approach to budgeting, and could result in people getting frustrated, and ultimately giving up on the budgeting process

This budget works for………Canadians who intend to analyze their spending weekly.

9. Priority Based Budgeting 

Many of the methods listed above suggest you allocate a certain portion of your income to “wants”. As the name suggests, this budgetary method requires you to list out your spending priorities prior to creating your monthly or quarterly budget. Based on those priorities, you will be able to set your budget appropriately.

For example, an avid golfer may allocate a good portion of his/her discretionary income to green fees in the summer and clothing in the winter. 

Benefits of the Priority Based Budget  

• This approach will give you a better understanding of your “wants” and also allows you to seasonally plan your spending 

Drawbacks of the Priority Based Budget 

• Needs change over time, and some individuals view this step as and unnecessary step in the budgeting process

This budget works for………Canadians who have seasonal or inconsistent spending patterns

10. The Reverse Budget 

Rather than sifting through your purchases with a fine tooth comb, the reserve budget requires you to set financial goals rather than track your spending. Much of your monthly spending is focused on achieving goals such as: paying off a car loan, reducing utilities, using less cell phone data, etc. 

Benefits of the Reverse Budget  

• Hitting a financial goal can go a long way to reducing the stress associated with money management

Drawbacks of the Reverse Budget 

• While hitting a financial goal is certainly a great thing to strive for, this approach can sacrifice important initiatives such as planning for retirement in favor of short-term goals 

This budget works for………Canadians who have unsuccessfully tried budgeting in the past, and are looking for a new perspective on money management.

Conclusion

In my opinion, picking the right budget for a particular individual should depend on a number of factors. Ultimately, your budgeting process should give you a lens into your long-term savings goals, your short-term savings goals, and your everyday spending. 

Having an understanding of these three things will allow you to properly plan your financial roadmap accordingly, and set yourself on a path to financial freedom.

4 Tips to Help You on Your Financial Wellness Journey

1. Pick a budget software that you feel fits your needs, and make sure the software can sync up with your credit or debit card purchases.
2. Try a few of the suggestions listed above. Experimenting will help provide direction as to the method that’s right for you.
3. Review your budget at no fewer than once every 2-3 weeks. Actively tracking your spending will help provide insight into your spending patterns.
4. If possible, sync up your budgeting software with your spending accounts (RRSP, TFSA, HISA, etc.) so you can actively track the dollars going toward your savings goals.