How to budget and save one month of living expenses

Saving one month of living expenses will depend entirely on your ability to budget and track every dollar. The good news is that you should have a $1000 head start. I'm going to show you the easiest way to budget that has helped me stay consistent for over two years - and it's not a budgeting app. 

A recap of living expenses

Your household living expenses is the amount of money you need each month to cover your basic necessities such as rent, utilities, groceries, and gas.

Your income minus your living expenses is how much you have left to put towards savings. Hopefully, you also have some room for fun - like going out to eat with friends.

The problem with most budgeting methods

I tried to stick to a budget for years using numerous budgeting apps and spreadsheets.  But I would always give up after a couple of months. Finally, I realized that they all had one major flaw that prevented me from staying consistent: they overcomplicate the spending allowances. 

They often have a dozen spending categories, such as "personal hygiene", "clothing", and "home goods". This makes the whole process overwhelming and inefficient. Not to mention that it's far too specific to be relevant to everyone's unique financial situation. 

How do you sort a $248 Costco purchase if you bought groceries, socks, a new water filter, and medicine but don't remember the exact amounts for each? 

What do you do if you maxed out your $30 "personal hygiene" budget for the month but need a new tube of toothpaste? 

At the end of the day, none of those details matter! The only thing that matters is that you are tracking your overall spending. 

How to set up a budget with only 5 categories

Every dollar that comes into your life or leaves can be sorted in just 5 categories:

  1. Income
  2. Living Expenses
  3. Savings
  4. Guilt-Free Spending
  5. Investments

The only categories where you need to stay under a maximum budget are Living Expenses and Guilt-Free Spending. That's it. 

Guilt-Free Spending is a concept I learned from Ramit Sethi and it's exactly what it sounds like: money you can spend with zero guilt on whatever makes you happy. Life is not just about saving as much as possible. Maybe you enjoy getting a coffee each morning, or you want to use your entire Guilt-Free budget for the month on designer shoes. There's no wrong answer here, as long as you stay within the parameters. 

For IncomeSavings, and Investments, you want to give yourself minimum targets to reach each month. Income should be counted as your take-home pay after taxes.

The Investments category is for any money you contribute to your TFSA, RRSP, or other investment accounts. I definitely recommend putting a pause to any contributions you are making to those accounts until you have at least 3 months of living expenses in your emergency fund.

Donations and gifts could be lumped in with living expenses or guilt-free spending, depending on their frequency and your preference. You could also create a 6th category just for donations and gifts. That's up to you.

So here's what your spreadsheet is going to look like, with a sample budget:

Notice that columns 2-5 add up to precisely $5000 - every dollar coming in is accounted for.

When you first start tracking your spending, you want to do it at the end of every 1-2 weeks. You'll know if you are overspending at the beginning of the month so you can adjust as you go. Once you've been tracking your spending for a while, you can do it just once per month.

Here's what your sheet might look like at the end of the month when you've added up all your transactions:

Your actual living expenses were $104 under budget, and guilt-free spending was $145 under budget. So you have an extra $249 at the end of the month!

You can use that $249 to reach your savings goals faster (such as a fully-funded emergency fund) or put it towards long-term investments (such as your retirement account).

By following this budgeting strategy, you'll be able to reach just about any financial goal you set for yourself.

When you complete the goal of saving up one month of living expenses, add a comment below to share how you did it and so that we can celebrate with you.