How to set a personal budget

Form new habits and stick to them

Financially, the point spread in the game of life might be defined as the difference between wages, which you want in the lead, and the cost of living, which you hope is trailing far behind. In good times like that, a defined strategy may seem unnecessary. You're winning, so why change anything?

But the game can change. Inflation enters from the sidelines, interest rates rise and the cost of living starts to make unwanted gains, closing that spread. If you want to stay ahead, you need a new game plan. That’s a budget.

To help, we’ve brought in a ringer: Mark Slanina, a Finance instructor at the JR Shaw School of Business. With his tips – from understanding the psychology of spending to easing in new habits – we might move closer to being personal finance champs, regardless of the competition on any given day.

Understand why you spend

businessman in suit buttoning cuffs

“There are a lot of things that are very difficult to cut back on,” says Slanina. This includes fixed costs such as rent or mortgage, insurance, utility bills and so on. At the same time, however, he believes most people’s spending keeps pace with their salaries – which doesn’t help.

“You start to make a certain amount of money, and your habits are set at that limit,” he says.

For example, you once bought coffee everyday. When you moved up the ladder, you started buying things to reflect that. “When you make money, that’s when $6 lattes come into effect.”

That might be why your personal spending seems high – because, for a while, you could get away with it. That’s OK, says Slanina, because such spending is easy to reduce.

Examine your spending

man holding tablet and writing down notes

If you rely on debit or credit cards, you have an invaluable record of exactly where you spend your money during a month.

“A lot of people don’t follow the money,” says Slanina. But it’s easy.

Open up your online banking, create a spreadsheet, and start sorting costs into categories that include those fixed expenses: house stuff, food, entertainment, clothing, and so on.

“Find ways to cut back that won’t hurt your life that badly,” says Slanina. The end result is a guide to your expenses that might point to, say, the benefit of brown-bag lunches.

Use what you learn

woman tapping credit card to pay for something

We may tend to spend more freely with the tap of a card than by laying down coins and bills, Slanina says. Use that to your advantage by switching to cold hard cash, which can be tougher to let go.

You can be even more deliberate by tying that cash to your budget spreadsheet.

Label envelopes with the categories from your research and fill them with real money that you will allow yourself to spend that month on those items. This way, says Slanina, “you can see how fast you spend it” and adjust along the way to make those funds last until it’s time to refill the envelopes next month.

Break old habits slowly

barista preparing pour-over coffee

Don’t expect to be able to drop that $6 latte tomorrow.

“That’s going to work for about a week and then you get sick of it because you haven’t really built yourself up to it,” says Slanina. “If the habits have been around for years, it’s tough to do a 180.”

Be kind to yourself but firm.

“Start small,” he adds. “Instead of getting the latte, buy the $3 coffee even [for] just half the days of the week. Once you get used to that, reestablish what you spend on and ask, ‘Where can I cut a little bit more?’”

Keep those new habits

man holding basket of food in grocery story aisle

The Bank of Canada’s current efforts to reduce inflation will not bring prices back down to what once seemed reasonable.

“Inflation is an increase in prices over time,” says Slanina. If inflation were to drop to 0%, he adds, this only means an item shouldn’t cost more in a year than its inflated price.

That is, your new habits should become your new game plan.

“That takes a bit of work,” says Slanina, but as your ongoing efforts to examine and adapt start to open up the spread between wages and costs, it’ll prove to be the winning strategy. Don’t change a thing.

Deal with credit card debt

“There are a lot of Canadians with massive amounts of credit card debt,” says Slanina. In November 2022, Equifax identified a record-high average Canadian credit card balance of $2,121.

Typically high interest rates on those cards can make them hard to pay off.

“If you really need to, try to get a loan with the bank. Put your entire credit card debt on it. You can possibly go from a 20% interest rate down to around 10%, or something like that,” says Slanina.

Then, if possible, label some envelopes, fill them with cash, and set those credit cards aside.

Banner image by martin-dm/

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