Want a Balanced Budget? Here’s How to Build One

If you’re currently overspending or living beyond your means, it’s time to create a balanced budget. A balanced budget means your total monthly expenses will either match or be less than your total monthly income.

Getting to a balanced budget can take some time — and there are many ways to create a budget that’s easy to stick to. Here’s everything you need to know about how to balance your budget and stay on track to achieve your financial goals.

What is a balanced budget?

When your budget is balanced, it means you’re spending exactly what you earn or less than what you earn. So, if your monthly income is $4,000 Canadian dollars, in order for your budget to be balanced, you would need to spend $4,000 or less each month.

It’s a good idea to spend less than your income to set money aside for other financial goals, like an emergency fund, short-term savings plans, or debt repayments. Aiming for a budget deficit will give you more wiggle room to use your money how you see fit.

What’s a budget deficit?

A budget deficit is the exact opposite of a balanced budget. Your budget is considered in a deficit (or loss) when you spend more money than you bring in. For example, if you calculate your budget and find out you bring home $3,500 in take-home pay each month but are spending $4,000 a month, your budget is in a deficit.

When you’re facing a budget deficit, you will likely have credit card debt or loans to help you manage your costs. You might also be dipping into savings more often than you’d like in order to cover your lifestyle.

Government spending and balanced budgets

You might hear the term “balanced budget” frequently when referring to government spending. Federal governments, like the Canadian and United States governments, all aim for the same financial goal: balanced budgets.

A budget deficit occurs when the government's spending is higher than the amount it brings in via revenue. Government revenue can come from various places, but taxes are one way a government makes money.

A budget surplus occurs when government spending is too low, leaving money for the government to use toward public programs, social security, tax rebates, and other projects.

More often than not, governments end up with budget deficits or surpluses. While balanced budgets do occur, they don’t happen often. As long as budget deficits can be “balanced” by budget surpluses the following year, they normally aren’t a cause for concern.

Repeated or large budget deficits may lead to federal debt and prompt the government to borrow money to cover the nation's debt.

How a balanced budget works

When building a balanced budget, the goal is to either break even or create a budget surplus. To get started, you first need to look at all the expenses you have going out of your bank account each month. You may want to split them into a few main categories, such as:

• Rent/bills

• Groceries and gas

• Subscriptions

• Entertainment

• Restaurant purchases

• Other non-essentials

• Debt repayments

• Savings

You can widen these categories and bucket them as “nonessentials,” “essentials,” “debt,” and “savings,” but itemizing your spending can help you figure out where you have room to pare back.

For example, if you see that you’re currently spending $500 over your budget but also notice you spend $800 in restaurant visits throughout the month, this might be an area where you can cut back your spending to create a more balanced budget.

Here’s how to plug in your findings to see if you have a balanced budget:

Monthly income

$3,750

Rent and bills

$2,300

Groceries and gas

$400

Subscriptions

$50

Entertainment

$80

Restaurant purchases

$800

Other non essentials

$70

Debt repayments

$300

Savings

$250

Remaining balance

-$500

You’ll see you’re spending $500 more than you can afford each month. If you decide you can scale back on going out to eat, here’s an example of what your new balanced budget could look like:

Monthly income

$3,750

Rent and bills

$2,300

Groceries and gas

$400

Subscriptions

$50

Entertainment

$80

Restaurant purchases

$300

Other non essentials

$70

Debt repayments

$300

Savings

$250

Remaining balance

$0

Financial methods to help you build a balanced budget

There are many methods to help you start working toward a balanced budget. If you’re not sure where to start, here are a few popular methods that can help.

50/30/20 budgeting strategy

You might enjoy the 50/30/20 budgeting rule if you’re struggling to understand how much of your money should be spent on essentials, nonessentials, and savings. Using this budgeting rule, 50% of your money should be spent on essentials (rent, bills, food, and debt repayments), 30% on nonessentials (takeout, dinners with friends, concerts), and 20% toward savings goals. This can help you easily develop and stick to a balanced budget.

You might find the math doesn’t work out exactly for your particular situation, especially if you live in a city with a high cost of living. That’s okay. You can adjust the numbers as you need to in order to ensure you can afford essentials. If your rent is closer to 40% of your monthly salary, you may need to change the percentages to 60/20/20.

Use this method as a guideline to get you to your perfect balanced budget.

Zero-budgeting method

This budgeting method easily aligns with creating a balanced budget. Using this method, you want to assign a job to every dollar coming into your account. You can use a budgeting app or budgeting spreadsheet template to help.

You may enjoy knowing where every dollar you earn goes, but some might find this method too rigid. Maybe you like having a flex category that can serve as a spending fund, or maybe you have bills that fluctuate that make it hard to utilize this method. While the goal is to reach zero at the end of the month, aim for a budget surplus if making the math work out exactly is too time-consuming.

Pay yourself first

If you find overspending on nonessentials is what’s keeping you from maintaining a balanced budget, the pay yourself first method may help. This budgeting strategy focuses on transferring money to a savings account to ensure you don’t miss out on savings opportunities by overspending. It’s helpful to set up an automatic transfer on payday or have the money diverted to a separate savings account directly from your paycheque.

When you don’t see or physically move money out of your account, you won’t feel like you’re “losing” money. And when you’re working with a lower amount to manage your essential and nonessential purchases each month, you’ll be less likely to overspend.

A balanced budget occurs when your spending and earnings align. 5 tips to making budgeting easier

At its core, the concept of a balanced budget is simple: don’t spend more than you earn each month. The more you practice this concept, the more it will become routine. Here are some tips that can help.

Open a high interest savings account

To boost your savings earnings a little more, open a high interest savings account that earns a competitive interest rate. Right now, high interest savings accounts in Canada earn upwards of 5% APY and generally have low or no fees. High interest savings accounts also come with all the perks you could want, like overdraft protection coverage and CDIC protection.

If you already have a high interest savings plan, you might consider other savings options too, like a tax-free savings account or investment account to potentially grow your money even more. You can also open an alternative savings account, like KOHO’s hybrid spending and savings option.

Monitor your credit score

What does building your credit score have to do with sticking to a balanced budget? A lot. If you have debt payments, paying them on-time will help you boost your score, while reducing your debt balance. As you pay off accounts, you’ll have more money circulating in your budget to create a budget surplus that you can use toward other money goals.

Having a high credit score can also help you qualify for lower rates on your insurance, which can also help save you money. Be sure to check out your free credit score regularly to keep a pulse on how you’re improving.

Make mindless shopping online harder

If you tend to splurge when shopping online, make this step a little harder for yourself. Remove your credit card numbers from social media apps, online stores, and your credit card browser. Having to type in your card’s number or grab your virtual card number from an app adds an extra step in the checkout process. When it takes more time to make a purchase, you’ll have more time to weigh whether it’s really worth the splurge. This small step can go a long way in helping you maintain a balanced budget.

Treat your credit card like a debit card

If you find it easy to overspend when using your credit card to shop, there’s an easy way to change this habit. Instead of paying your credit card once a month, start paying daily or weekly. You can also pay off your credit card charge after every purchase to help get into this habit.

When money is leaving your chequing account more frequently, you’ll be more aware of how much you have left to spend, which can curb your tendency to overspend.

Plus, paying your credit card more regularly can help keep your credit utilization low — a major factor that helps determine your credit score — helping you boost your score a little higher.

Remember why you’re creating a balanced budget

Saying no to purchases you really want to make can be challenging. However, it becomes a little easier when you remember why you’re on your budgeting journey. Is it to help pay off debt so you’re finally debt-free and can enjoy more of your money? Is it to work towards short- or long-term savings goals that you and your family can enjoy? Or maybe it’s just because you want to get smarter with money and stop living paycheque to paycheque.

Whatever the reason, it’s important to keep it at the forefront of your balanced budget journey, so you’ll continue to feel motivated and encouraged along the way.