Budgeting for Success

 

We know the dangers of driving too fast on an icy highway. A vehicle can easily spin out of control and collide with other vehicles or anything that gets in its way. The consequences can be disastrous.  However, we can remain hopeful that the vehicle can recover and come to an abrupt stop with the occupant unscathed. Whether we are talking about “reckless driving” or “reckless spending”, both are the result of reckless behavior. 

I sometimes wonder if people choose to ignore the well-intended message, “live within your means” which warns them to spend only what they earn. Instead some replace this with a more fun piece of advice like “enjoy life while you can.” 

Although there is nothing wrong with enjoying life, I am certain that splurging beyond what we earn is not permission to do so.  Imagine taking a vacation we can’t afford, purchasing a vehicle with monthly payments we can barely make, buying more clothes than our closet can hold, or doling more toys on our children than they need.  What’s the point in enjoying life in this way when all this splurging leads to despair?   

As a financial planner, I meet with clients who are looking for a glimmer of hope to get back on track.  I have to admit sometimes their situations look very grave to the point that they require help from the Credit Counselling Society.  In either case, whether someone chooses to draft a consumer proposal agreement with their creditors or declare bankruptcy, both their credit reports and their lives will be severely impacted as a result of their actions. These are tough life lessons.    

I once heard a speaker share with her audience that you have to scare people before they will be willing to take the appropriate action. Reading through the details of a consumer proposal should be enough to scare you into realizing that you never want to travel down this road.

I truly appreciate that the Credit Counselling Society offers helpful advice in making a personal budget.    Their workbook, 7 Steps that will help you build a budget that works, provides the tools designed to create a spending and saving plan that ensures you find success in achieving your financial goals.

Maybe you don’t like to be scared into action, however if you need help determining  whether you are travelling down a slippery slope, spending more than you earn, consider these H-E-L-P tips.

H – Heed the warnings.  Look at your bank statements to identify whether the withdrawals are greater than the deposits. 

E – Excel at making the best use of your hard-earned dollars.  Only you can take care of the money that you have earned.

L – Learn about creating a budget that helps you work toward your goals.  

P – Promise yourself that you will stick to the plan so that you can enjoy life with the income you currently earn.  

Have you encountered any “h-e-l-p” tips that make sound financial advice? Please share.

Thinking about Becoming a Home Owner?

 

 

 

Becoming a home owner may sound glorious; however owning a home comes with a cost. Quickly jumping into the deal simply because it seems like “the RIGHT thing to do” does not necessarily mean it is.  If you buy prematurely and discover the costs are overwhelming, you may not be able to sell and recoup your investment.  One way to be certain you are ready to become a home owner is to do your homework.    

The best information and worksheets are found at the Canadian Mortgage and Housing Corporation website.  Because a home is one of the biggest purchases you will make in a lifetime, taking time to research and understand the steps will be worth the effort.   CMHC’s booklet, “Home Buying Step by Step” is easily obtained in both print or download format.  Click here to receive a copy.

Knowing the different types of costs and expenses associated with owning a home is important.  There’s more to swapping a rent expense for a mortgage payment. Categorizing the costs into three separate compartments will help you determine the money required to finance the major purchase.  First are the upfront costs, the money required to secure the purchase.  Second will be the ongoing mortgage payments and utilities expenses.  Lastly, the cost of regular maintenance and the “renovations” which will turn the home into your dream castle need to be considered.   Using The Home Purchase Cost Estimate worksheet will safeguard you from excluding any important items.  

Another valuable tool is the word glossary to familiarize you with the terminology. Understanding the industry’s language maximizes your understanding of all aspects of your purchase.  Whether it is the difference between the mortgage term and amortization period or between a closed and open mortgage, the word glossary helps eliminate any confusion encountered in your research. Speaking from experience, getting tripped-up by terminology is easy.  You may think mortgage life insurance and mortgage loan insurance are one and the same but they’re not.  In your conversations with any professional, always ask for clarification if you are ever in doubt. 

When contemplating your home purchase, you will be working with experts from “start to finish”.  Another useful worksheet, Your Team of Professionals, will be invaluable.  Your team will consist of a lawyer, realtor, mortgage specialist, property insurance agent, life insurance broker and perhaps even a home inspector or appraiser.  Creating and maintaining an updated contact list will be convenient for you.   

In last week’s blog the discussion was about the benefits of a larger down payment. This week the focus now takes a peek at the big picture.  The concept of budgeting is always a part of the discussion when people are considering a home purchase. The final decision, whether to buy or not to buy, will depend on what you can afford in both the purchase price and mortgage payment.  Once the payment is known then the rest is in the math.  First, the payment calculation must align with the industry’s guidelines as explained in the blog, Borrowing Money is like Jumping Hurdles.   Second, a compromise may be required to determine which lifestyle expenses you are willing to give-up in order to take-on a mortgage payment. CMHC offers two specific worksheets, Current Household Budget and Household Budget As Homeowner to analyze your present and future spending.   Tallying the costs will answer the question of whether or not you can afford to buy a home at this time.

The recommendation I quite often make to clients is to “play house” to determine whether they can manage all the costs.   As children, we always loved to pretend.  You might like to pretend you are home owners before you assume the actual role.  Deposit the difference between your current household budget and the anticipated homeowner household budget into a separate savings account.   Since you will incur these expenses as a home owner, you are both practicing and preparing for the change.  If you are managing your finances effectively and avoiding any shortfall, you will have the proof needed to support your decision.  Becoming a home owner will then be a rewarding experience because you have adequately done your homework.    



Spending Your Windfall

 

Every once in a while we hit the jack pot. {I am not referring to your Las Vegas winnings.}  The jackpot is your employment bonus and tax refund which drop in your lap.  How will you spend yours?  No doubt your windfall can be spent ten times over ~~ the long awaited vacation, the new big screen television, or the new set of golf clubs.  Since I am not one to spoil a party, because I love a good party, I suggest you tread wisely.  When you think seriously, this windfall can also give you peace of mind.  Peace of mind comes in the form of paying down student loans, topping up RRSP contributions, saving for children’s educations or paying off credit cards. What should you do?  With so many directions to travel on the road to financial success, choosing the right one requires discretion.  This starts with reviewing your goals, dreams, and aspirations.

Here’s a thought.  In previous blogs, I referred to having three worlds: the past, the present, and the future.  These three worlds are connected to the debt you incurred from the past, the lifestyle you want to enjoy in the present moment, and the savings you require to retire comfortably in the future.  To adequately meet the demands in each world, you need to divide your jackpot equally. You don’t have to choose one over the other (unless you want to do so.)

Here is an example.

With a tax refund of $1,500, a top-up payment of $500 is applied to your credit card.  The new television purchase is $500 and the remaining $500 is deposited to your Registered Retirement Savings Plan (RRSP).  Using this logical approach allows all your goals to be met with the extra cash.

To ensure you are achieving your goals and living within your allotted income, you may wish to refresh your memory by reading “Why Do I Need A Budget?"  Because life happens, your budget should be revised annually to accommodate any changes. “Get Smarter About Money” provides useful tools and information when it’s time to review your budget.  Click here to access this website.

Now it’s your turn to think about what you will do with your windfall. 

 

Why Do I Need a Budget?

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.