When most people hear the word, “Budget”, moans and groans generally follow. WHY IS THAT?
For starters, staying on track can be difficult while life events derail your
best intentions. Secondly, having a
budget sounds so restrictive that people feel BOXED into a corner. BUT
really a budget is intended to keep you and your money on track. Most people are fooled into believing a budget
is a one-size fits all. NOT TRUE. Your budget
has to be tailored for your family needs.
The way to get started is to quit
talking and begin doing. ~~Walt
Disney
If you procrastinate in creating a budget, the road ends here. Enough talk and a little more action. GUESS what? It is not difficult if you have some sound guidance. It’s as easy as 1-2-3.
1. LOOK
at your month-to-month expenditures. FIRSTLY,
they can be easily labeled as: Shelter,
Basic, Discretionary, and Transportation. Placed into one category, these are
your LIFESTYLE
NEEDS. The very things you
spend your money on day-to-day. SECONDLY,
you may have a loan, credit cards and mortgage payments. These totals formulate your DEBT. LASTLY, you have your SAVINGS. Your list may include long term savings for
retirement, education, vehicle replacement, vacations and short term savings
for annual expenditures (property insurance and taxes), emergencies, appliances
and furniture.
2.
FOCUS on only the three categories. Together as a couple (or single) can be
involved in the next important step, determining the percentage allocated to
each of the three categories: Lifestyle Needs; Debt
Repayment; and Savings. Initially, prepare to divide your combined
net income(s) -- your take-home pay/after-tax income (whatever you call it). Work with 10 dimes to represent 100% of your
income. Each dime represents 10%. YES, this appears elementary but it works!
It’s an easy way to determine the percentage to each category by physically
shifting dimes with 10% increments, for example: 60% Lifestyle Needs; 20% Debt
Repayment and 20% Savings. Because you have an estimate of your monthly
expenses you have a fair understanding of your allocations. However, the challenge is whether you can
reduce our lifestyle needs (primarily in discretionary spending) by 10% in
order to allocate this percentage to Savings (i.e. family vacation)? Perhaps your
focus is to reduce debt, is it possible to shift 10% from Lifestyle Needs to
Debt Repayment? Regardless the amount
assigned to each category is tailored to fit your needs.
3. STRUCTURE your bank accounts
to align with your specific categories.
This is your budget in its simplest form.
The following illustration shows
all deposits from your income (employment, sales commission, pension, CPP/OAS) directed
to an account, designated as the Collection Account. (This can be either a chequing
or saving account depending on the service charge package offered.) From the
Collection Account, a specific transfer is created to cover your monthly
lifestyle needs. You are restricted from
touching any extra cash designated for debt repayment and savings. In essence, you are giving yourself an
allowance, a similar process given to children. This method offers protection
from you. (In some situations, you are your own worst enemy. Having too much
money in a chequing account can be dangerous.) Therefore, you can only spend the amount you
give yourself in your designated LIFESTYLE NEEDS account. Because you can check the balance of your
account regularly, you always know “when
you get close to being busted.”
Your loan, credit cards and
mortgage payments are made directly from your Collection Account (the account
where your incomes are pooled). Likewise the same process is followed with your
savings. All you need to do is ensure you
stick to the allocations assigned to each of the categories.
At the beginning of this process
the percentage designated to your debt repayment may be significantly higher;
but as you pay off debt, the shift can be made to increase savings. If you
receive pay increases, the percentages will increase accordingly to your net
income.
The trick to saving is easy {out
of sight-out of mind}. Do not allow
yourself a savings account you can access easily UNLESS you are extremely
disciplined… or if the account is specifically earmarked as Emergency
Savings. Only you know for certain what
an emergency is. NO EXCUSES. Otherwise, set the transfer to a mutual fund
(for short and long term savings). You
can visually see the balances on-line; but you would physically have to visit
your investment advisor to make a withdrawal.
The harder the access, the less the temptation. As you watch your savings grow, imagine
paying for the vacation or new vehicle with this money. Putting your life on automatic is SO EASY
with pre-authorized transfers straight from your Collection Account to
designated investments (RRSP, TFSA, RESP, Non-Registered Savings) for specific
purposes. You can equate this to making loan
payments to the person who deserves to be paid the most – YOU!
ROOM for modification is a must. Remember the tag line: one size doesn’t fit
all.
- If joint accounts don’t work for you; then the set-up can be modified so you share at the very least the lifestyle expenses as a percentage of your incomes.
- If you work together well as a couple, then one spouse’s income could be designated solely for lifestyle needs; while other pays down debt and contributes to the savings.
- If you like, set up a “Crazy Money” allowance. This amount is your permission to blow anyway you choose: “Beer with the boys. Rendezvous with the girls at a spa.” You decide – you don’t have to report to your partner where the money went all you need to do is stay with your limit. Happy Husband; Happy Wife makes for a Happy Life.
HERE
COMES THE CHALLENGE AND REWARD: You
may have a budget and are proud because you have taken this important step. If
you struggle with making this work, you can always seek help from your
financial planner. This is one of many
ways a financial planner can help. The end result is if you spend wisely, pay debt
diligently and save faithfully, you can have
everything you really want.
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