Step 1 to Financial Freedom in Canada: Tracking Your Spending (How to Budget)

Tracking your spending can be really helpful to travel enthusiasts.

As travel enthusiasts, we’re always looking to get the maximum value on our travel spend. That’s why we focus on credit card sign up bonuses & maximizing redemptions.

Unfortunately, it can be very challenging to achieve your travel goals if your personal finances are all out of whack. If you have credit card debt, it can be hard to get new credit cards (and their subsequent sign up bonuses). If you can’t retire, it can limit the amount of freedom you have to travel.

Simply put, a strong personal finance foundation can help you maximize the points/travel game.

Do you want to know what I consider the first step in achieving financial wellness and becoming financially free? Tracking your spending. This may seem like a no-brainer, but so many people either don’t realize how much they are spending or spend without even thinking about it.

While most people start with getting out of debt (we’ll get to that later on in the series) or saving for retirement (we’ll get to that too), it’s really difficult to start doing those things without having an accurate picture as to where your money is going. Tracking your spending doesn’t need to be a tedious process, and the days of the individual line item Excel spreadsheets are no longer a requirement.

The more accurate your information is, the easier it will be for you to make changes and reach your goals. It might seem tedious at first but it’s not as bad as you think.

In this post, I’ll show how simple it can be.

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Why You Should Be Tracking Your Spending

If you’re looking to improve your personal finance situation or achieve a state of financial wellness, some things are imperative. I’m sure you’ve heard about the importance of saving for retirement, getting out of debt, & investing your money.

All those are important steps in the process, but it’s EXTREMELY difficult to take these steps, without having a good understanding of where your money is going.

For travellers, you need to stay organized financially.

It would be like building an Ikea dresser without the instructions. It could be done, but you’d rather have the instructions. In the personal finance world, your budget can be those instructions.

A lot of people think that they don’t need to track spending (and maybe you’ll get to a point in your life when you don’t have to), but there are several reasons why you should. Tracking your spending can help you manage your money more efficiently, and make better financial decisions in the future.

Don’t confuse “tracking your spending” with “don’t spend money.” Having no social life while hunkering down in your home is not a representation of someone with a good grasp on their finances. Tracking your spending is about sourcing the necessary information to make educated financial decisions in the future.

All in all: 

• Tracking your spending provides you with the necessary foundation for building wealth 
• You will use this information when looking at how to get out of debt, or saving for retirement
• Tracking your spending is not the same as “spend less money” or “have no fun”

When You Should be Tracking Your Spending

This should be the first thing you do on your road to financial freedom.

As mentioned earlier, this step will provide you with the ability to make educated financial decisions on your road to financial freedom.

How to Track Your Spending

For those who spend most of their days in front of a computer, budgeting can be somewhat of a simple process. For those who are rarely in front of a computer, it can be a bit more difficult (although there are mobile options we’ll touch on later).

It’s important to set a budgeting method that fits your lifestyle.

If you try to follow a really strict line item budget, but you only want to spend 10 minutes budgeting every 2 weeks, you’re going to find it challenging to stick to your budget.

Here are 4 Budgeting Techniques that work for most Canadians

1. The 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, travel, 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 is 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 a 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. The 80/20 Budget

For those who want to take a REALLY SIMPLE approach to budgeting, the 80/20 rule could be the approach for you. Essentially, you’re putting aside 20% for savings, and the rest is yours to do with 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 many 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: Canadians who check their spending once every few weeks.

3. 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 on a weekly basis.

4. 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 an 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, a 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.).

Tools you Can Use to Help Track Your Spending

Mint.com

Mint is a revolutionary, free way to manage your finances.

It connects all the different financial accounts in your life and tracks them against customizable budgets, which makes managing money more straightforward than ever before.

With Mint, you can automatically import all of the transactions from any number or type of accounts and easily assign them categories that are relevant for what kind of expenses they represent – this means no more constantly looking through old bank statements trying to find where something went!

Mint.com Features

Transaction Tab 

Transactions will automatically be allocated to a particular budgetary category, but users have the ability to permanently allocate retailers to a particular category (for example, you can make it so “Walmart” is always allocated to your grocery budget).

You can also manually input cash transactions.

Budgets Tab

This is where you can customize your  budget.

Creating a budget can be daunting, so Mint.com will automatically pre-populate your budget with some of the most common budget line items like:

• Mortgage & rent
• Food & Dining
• Car Insurance
• Bills & Utilities

You can fill in your budget by choosing from hundreds of budgetary line items.

Items from the transaction tab will be automatically assigned to a budget category. If you would prefer that a certain retailer be assigned a different budget line, you can set it so that retailer goes to the preferred budget category.

Goals Tab

This section of the Mint plan is designed to help you track your saving goals. You can choose from a number of goals that are pre-set or create custom ones

3 Positives of Mint.com 

• Mint.com is Extremely Easy to Use
• Mint.com is free to use
• Great Mobile Experience

Conclusion

It’s extremely challenging to achieve major financial goals (buy a home, get out of debt, travel the world, etc) without an understanding of where your money is going on a monthly basis. Tracking your spending will provide you with the foundational knowledge to make educated personal finance decisions going forward.

You don’t need to spend hours tracking every single penny, as there are several budgeting methods that can accommodate your individual needs, and this exercise doesn’t mean you should be spending less. It’s about understanding your starting point.

You can leverage tools like Mint.com, or even an excel spreadsheet to determine your monthly costs. Just make sure your process is easy and will allow you to stick with it long term.

4 Tips to Help You on Your Financial Wellness Journey

1. Download an excel program or a software like Mint.com to track your spending
2. Pick a tracking method from the ones listed above
3. If possible, link your credit cards & savings accounts to your budgeting software
4. Regularly check your spending to ensure you’re on track to hitting your financial goals