Pamela MacNaughtan

Believe it or not, there is a difference between creating a budget, and creating a functional budget. Creating a budget is easy. You sit down, decided how much money you think you should spend and try to follow it. Unfortunately, those types of budgets have a tendency to be unrealistic. That is why it’s vital to create what I call, a functional budget.

Figure Out How Much You’re Spending

Keep track of your expenses!

In my former life, I worked as a bankruptcy counsellor, and part of my job was helping clients create functional budgets after declaring bankruptcy. During counselling sessions, I’d ask clients to keep track of their spending for a month. Why? Because in order to create a budget that is easy to follow, and makes sense for your income, you need to figure out exactly how much money you’re spending.

You need to keep track of every single penny you spend for a one month period. It’s tedious, but you’ll be amazed to see how you’re spending your money. This exercise is not a particularly fun one, but it is a necessary one. You can choose between one of the following methods:

  1. Buy a small notebook; small enough to carry with you. Each morning write the date at the top of a blank page, then as you spend your money, write down how much you spent (to the penny!), and where you spent the money.
  2. If remembering to write things down as you spend is a scary thought (I seem to forget to write things down, especially if I’m in a rush), then make sure you keep receipts for absolutely everything you bought during the day. Then record what you spent at the end of the day.

Figuring out how much (and where) you’re spending each day is two-fold. We’ve talked about carrying a notebook and recording everything you spend, and now we’re going to talk about creating a ‘Monthly Expense Tracker’.

At the beginning of the month sit down and create a money tracker. You can do it in a program like Excel, or you can draw one out. Whichever is easiest for you. Your monthly expense tracker should have categories that fit with your lifestyle, things you spend money on every month. Include categories like food, cigarettes, alcohol, transportation, gas. Anything that you buy throughout the month.

Monthly Expense Tracker

Date  Food Transportation Alcohol  Total Spent
Dec 13, 2012 $15.18 $3.00 $18.18
Dec 14, 2012 $4.59 $21.37 $25.96

The number of columns depends on what type of things your spending money on. 

Each night when you’re going through your expenses, lump them into categories, add up the total for each category and write in into the appropriate column in your money tracker. If you don’t have a column for something, make one! It’s important to be completely accurate. The point of this exercise is to learn where your money is going, and how much of it. At the end of the month, you may be surprised to see exactly how much you spend on cigarettes, booze, food…

Income vs Expenses

Figuring out how much you’re spending is a bit of a wake-up call and an integral part of creating a functional budget. The next step in the process is to compare your income and expenses. All of it!

In this exercise I want you to grab a piece of paper (or open a new worksheet in excel), your monthly expense tracker, and your pay stubs.

Step One

The first step is to find out your monthly income. If you’re paid a salary  (or hourly with set hours) this part will be easy. If you’re paid hourly and do not have set hours, then add up your net income from each paystub over the past 6 months, and divide the total by 6 to get your average monthly income. This is the income we’ll use for this exercise.

When you’re listing your income (payroll, child support, spousal support, social assistance, employment insurance), include tax credits (this is common in Canada). Things like money you earn by selling your things, odd jobs etc. are hard to pinpoint, so leave those off for now.

Step Two

This is probably the most important step, writing down your discretionary and non-discretionary expenses. This is what I want you to do. Start with your monthly non-discretionary expenses (these are essential expenses). Write down the ones that apply to you, and the monthly cost. Many of you won’t have these expenses.

As I mentioned above, many of you won’t have non-discretionary expenses, however, all of you will have discretionary expenses. For this part of the exercise, I want you to divide your discretionary expenses into columns: monthly, quarterly, and annually.

When you list your expenses, look at your monthly expense tracker. Make sure all of those expenses are included in this exercise. Also think about things you buy every couple months or every year. List everything you can think of, this needs to be a realistic view of what your expenses are in order for you to create a functional budget.

Step Three

Add up your quarterly expenses and divide the total by four. This will give you the monthly cost of those expenses. The add up your annual expenses and divide the total by twelve. Add all of your non-discretionary and discretionary expenses together (including the monthly total for your quarterly and annual expenses) to get your total monthly expenses.

Take your monthly expense total and subtract that from your monthly income total. Do you break even? Are you overspending? Do you have surplus income? Welcome to wake-up call number two!

Creating a Functional Budget

Now that you know where you stand in terms of your spending habits, and your income vs your expenses, it’s time to create a functional budget. If you’re overspending each month now is the time to decide where you’re going to make cuts in your spending, but I’ll touch more on that in a bit. The first thing I want you to do is to create a budget spreadsheet in excel or buy an accounting book.

Create columns for each expense, and remember to include a column for your travel fund. After all, we’re creating a budget so it’s easier for you to see what your spending, and how much money you’ve saved for your travels!

Step One

Let’s start with your expenses first (we’ll add your savings column in a bit). I find it easier to put things into sections. The first part of my budget has my set expenses like rent, telephone (I have a set plan), car insurance, car payment.

Date Rent/Mortgage Telephone  Cable Internet Car payment Car Insurance
 $850  $100  $50  $30  $250  $42

Once I have my set expenses, I add on my other monthly expenses. Like this:

Date Rent/Mortgage Telephone  Cable Internet Car payment Car Insurance Food Utilities Clothing
 $850  $100  $50  $30  $250  $42  $100  $42  $25

Remember: Life is unpredictable. Things happen. Cushion your budget. Take what you’re spending, and add some extra money to each column as a ‘just in case’ measure.

Step Two

Now that you’ve allotted money for necessary expenses, it’s time to figure out how much to budget for the fun expenses, as well as for your travel fund! The first thing I do is add up the budget totals I have written down, then subtract that number from my monthly income. I then use this new number to decide how much I want to budget for each of my fun expenses.

Let’s say I have a surplus of $380 for my fun expenses. I’m currently saving to move to Asia, so I may decide to budget $200 a month for my expat funds, then divide the leftover money between my other fun expenses.

Date Expat Funds Movies  Going Out Misc. Spending
 $200  $30  $50  $100

Using Your Budget

Once you’ve created your budget, it’s time to start using it. The best way to do this is to record your expenses each night before bed. Not once a week. Not once a month. If you want to control your spending and have a realistic view as to where your finances are, you should enter your expenses each night. By doing it nightly you can see exactly where you are; which allows you to make adjustments.

Adjustments? Yep! When you start using a budget you’ll discover that you’ve either budgeted too much or too little for certain categories.  Is it Wednesday and you’ve already spent 80% of your food budget for the month? Yikes! It’s time to evaluate what your spending, and possibly adjust your budget so you have a little more money in your food budget, and less in another area. The key is to not sell yourself short. Don’t create a really tight budget in the beginning. Give yourself breathing room, then tighten things up a few months down the road; when you’re comfortable with your budget and know your spending habits and needs.

Date Rent/Mortgage Telephone  Cable Internet Car payment Car Insurance
 $850  $100  $50  $30  $250  $42
 15.11.12  + $850  + $120  + $55  +$32  + $200  $25
 01.12.12  – $850  – $75.00  – $51.25  – $30
 balance  $0  $45  $3.75  $0  $200  $25
 07.12.12  + $425  + $35  + $125  + $20
 balance  $425  $80 $0 $0  $325  $45


Helpful Resources



  • December 17, 2012

    Wow, you really break it down. This is going to be hard since I don’t have a steady income. But thanks for posting this!

  • December 18, 2012

    I most definitely need to sit down and read this through carefully. Keeping a budget has never been my forte, so this post is definitely a keeper. I’m Pinning it now!

  • December 18, 2012

    Great tips here. A big life lesson is learning to be smart with your money. Who do you have car insurance with? I could use a rate like that!!

  • Megan

    December 19, 2012

    Great post, I have the hard skills to do this and have done it before. The biggest thing I found is keeping it up and not to get lazy (that is when I spend too much). I’ve dedicated Boxing Day to create my new budget and non-monetary rewards for keeping it at it at milestones (1 month, 3 months, 6 months …)

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