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Budget

2025-04-117 minutes

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Are you able to estimate what percentage of your income goes into each spending category? Without a budget, it's quite difficult to know. A budget is a bit like an introspection of expenses, to help face reality.

Often, it's important to know your reality to help with personal finance decisions. We will try to answer several questions:

  • How much does it cost me to live?
  • What do I spend the most on?
  • How much do I have left at the end of the month?
  • Can I reduce certain expenses?
  • How much can I invest with each paycheck?

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The elements of a budget

There are 3 main categories.

Income

This includes all sources of income: salary, commissions, tips, etc.

Fixed expenses

Expenses that do not vary or vary little over time: rent, car payment, groceries, electricity, insurance, cell phone, internet, etc.

Variable expenses

This includes: restaurants, clothing, leisure, etc.

The back-of-the-envelope budget

If you don't want to do a complete budget, you can do an approximate budget. I advise using your net income, doing it on a monthly basis, and estimating values upwards.

Let's take the example of Chloé, who has a net income of $4,000 per month. She wants to know how much she can invest automatically each month. Chloé knows that her fixed expenses are around $1,900, so she rounds up to $2,000. Off the top of her head, she estimates that she pays about $1,000 per month in variable expenses. To be safe, she notes $1,200.

Category $
Net income 4,000
Fixed expenses 2,000
Variable expenses 1,200
Surplus 800

In 5 minutes, Chloé concludes that she can possibly invest up to $800 per month.

The complete budget

The back-of-the-envelope budget gives a general idea. To be more precise, you need to make a complete budget. To do this, simply take your bank statements, your credit card statements, and add up the amounts for each category. To get a fairly accurate idea, you generally need to repeat the exercise over the last 3 to 6 months to get an average for each category.

Let's go back to Chloé's example, who decides to take her statements from the last 4 months. She has also chosen the subcategories that interest her most in her variable expenses. Her average almost perfectly reflects her reality:

Average over 4 months $
Net income 4,050
Fixed expenses 1,950
Rent 1,200
Hydro 80
Insurance 80
Internet + Cell 120
Transportation 420
Subscriptions 100
Variable expenses 1,370
Groceries 400
Restaurants 370
Online purchases 200
Leisure 190
Other 110
Surplus 750

With her surplus, Chloé says she can certainly invest up to $750 per month.

Budget analysis

It is only when we complete a detailed budget that we realize our expenses. Now, it's time for introspection. Are we spending too much in certain categories? Are we surprised to see these amounts? This is a personal process. We are all responsible adults, which is why you are here. It's up to you to decide what suits you best and what you feel comfortable with.

To return to Chloé's example, she is surprised by 3 categories: restaurants, online purchases, and subscriptions. Instead of having her restaurant order delivered, she decides to take a walk and eat there. For online purchases, she will try to be more conscious before checking out and be patient before making her purchases, as she realizes that she often makes impulsive purchases. Finally, she canceled 2 subscriptions that she no longer used.

These changes will allow her to achieve a personal goal: investing $1,000 per month, or ~25% of her net income.

Buying a property

Housing is the largest expense for Canadian households2. The term house poor is used to describe people in a situation where the payments related to their housing prevent them from investing for their retirement. Their house becomes, in a way, their prison.

Buying a house is not just the mortgage. You must include the costs incurred in the first year: moving, welcome tax, notary fees, down payment, purchase of new furniture, repairs, etc. Then, the recurring costs: mortgage, utilities, insurance, municipal taxes, maintenance fees, condo fees, snow removal, etc.

Warning

The annual maintenance costs of a property amount to 1-5% of the property's value1. With a $400,000 house and a 2% annual maintenance costs, that's about $8,000 per year or $667 per month.

Tip

A maximum of 40% of your net income should go towards housing, and that includes all expenses related to the home, not just the mortgage. This is the figure I suggest to avoid feeling house poor.

Buy or rent

It is important to understand that, in the majority of cases, buying a house or a condo is an expense.

Renting costs less than buying. Rationally, financially, it is often more optimal to rent and invest the difference in the market. But the reality is different. First, you have to invest all the difference. Then, you have to live with not having a home of your own. Also, we only live once. It's important to invest, but you shouldn't go crazy either. This decision is up to each individual, again, you do you.

Personally, I have a beautiful home and I fully enjoy my comfort while being aware that it is not the optimal financial decision. It's my choice, and I'm okay with it.

Tip

Quickly compare the financial consequences of buying versus renting with this online tool.

The car

After housing and food, transportation is the third largest expense for Canadian households2. Some questions to ask yourself:

  • Do you really need the latest model car?
  • Do you need both of your cars when you are both working from home?
  • Could you get rid of your car payments and buy a used one outright instead?

Again, you are responsible adults; it's up to you to decide what suits you best. However, be aware that having debt on an asset that loses value over time is a really bad financial decision.

Tip

I suggest you consider the cost of ownership of the car you are considering buying.

The 50/30/20 budget

The 50/30/20 budget exists to provide a starting point. A rule of thumb to give an idea of what a balanced budget might look like. The allocations are based on your net income.

Allocation Category Examples
50% Needs Rent, groceries, transportation
30% Wants Restaurants, leisure
20% Savings Pay off debts, invest

For Chloé, with her income of $4,050 per month, it is approximately:

Monthly Expense Category Actual Allocation 50/30/20 Allocation
1,950 Needs ~48% 50%
1,370 Wants ~34% 30%
750 Savings ~18% 20%

Obviously, these rules of thumb do not apply to everyone. For some, it will be 60/25/15, for others 40/20/40.

Idea

50/30/20, needs/wants/savings. This is from the largest expense to the smallest. But, in order of importance, it should rather be 50/20/30. Needs first, savings second, and then what's left for wants.

How much should we really invest?

The short answer? As much as possible.

Personal finance is unique to each individual. Depending on the situation, it can be difficult to save 20% of your paychecks. Quite frankly, as much as possible remains the best answer, whether it's 15%, 20%, or 40%. The important thing is to invest and be satisfied with your financial situation.

A good starting goal is to aim to invest 15% of your paychecks automatically. Once you achieve that, you increase it.

To get an idea of a solid amount to invest, you can calculate the total available space in the different financial vehicles for a given income. Let's take the example of Chloé, who earned $76,000 last year.

Vehicle Maximum
FHSA 8,000
RRSP 13,680
TFSA 7,000
Total 28,680

$28,680, or ~38% of her gross income. As we saw in the Saving plans article, Emma was able to reach this goal.

Note

Generally, when we say to aim to invest 15% of your net income, we are talking about 15% of your paychecks. Over the year, it can be interesting to calculate your investment % on your gross income, since the FHSA and RRSP are based on gross income and allow you to invest even more, thanks to the tax advantages they provide.

  1. Average property maintenance costs: ScotiaBank ↩

  2. Spending statistics: Statistics Canada ↩↩