Why budgeting is so important
In the 2019 Canadian Financial Capability survey, it was revealed that 1 in 6 Canadians admitted that their monthly spending well exceeded their monthly income and 1 in 4 admit to borrowing money to buy food and daily essential items. Many Canadians are certainly feeling the financial pressure of outstanding loans, credit card debt, mortgage repayments, car loans, student loans all adding up to cause the spiraling effect of robbing Peter to pay Paul.
Shockingly only 49% of Canadian use a budget to manage their money. 20% report using either a spreadsheet, financial software or mobile app, while 14% still use the traditional method of writing their budget out and using envelopes or jam jars to assign money to different bills or projects. The people that do budget are in a much better place financially than those that don’t.
It’s also interesting to note that many people who responded to the survey said that they would benefit from using a budget, but the excuses for not using one range from it’s too boring or time consuming, not enough time, not responsible for the household finances or it’s just too overwhelming.
Brian Feroldi said the best time you can spend is with your bank statement and that is so true, it can be scary but so enlightening. If you dedicate 1 hour every month to go through your bank account and credit card statement you’ll soon see where your money is or isn’t working well for you and what you are spending your money on. It’s easy to sign up for things and have the payments come directly out of your credit card or bank account but are you truly using that $20 virtual gym membership or are you wasting $240 per year that could be saved or used much more effectively. Are you tapping out over $1000 on food each month, countless take-outs, coffees, and let’s not even think about the other things that you really don’t need. I’m sure once you get your magnifying glass out you’ll soon see those non-essential buys very easily, but you have to be honest with yourself.
A great blogger who I really enjoy is Mr. Money Mustache a badass (his words), Canadian who along with his then wife, decided in their mid twenties they wanted to retire by their mid-thirties. They successfully did this by taking a long hard look at their finances and how they could make their money work well for them. His blog posts will certainly have you reaching for your bank statements and looking at ways you too can make your money work more efficiently. If you set your mind to it you too could be retired in 7 years, that’s exactly how long it took him and his wife to live their dream.
Budgeting is a simple way of knowing exactly what your money is doing for you each month. A way of setting and achieving your financial short and long term goals and giving you maximum control of your money and not the other way round.
6 basic types of budgeting
- Elizabeth Warren developed the 50-30-20 rule – where you allocate 50% of your income to your needs, rent, mortgage payments, utilities etc., 30% to your wants things that you maybe can’t live with out, cable, Netflix, manicure etc., and the remaining 20% goes to savings or paying off your debts.
- Dave Ramsey’s envelope method, a great method to help you control spending habits, cash is placed in each category envelope and you stop spending when the money has run out.
- Flexible budgeting – you money is allocated as circumstances change, this will require more effort on your part but can be a less rigid way of managing your money.
- Static budgeting – this is where your use of your money stays the same regardless of any income increases you may have.
- 80/20 – this is where your expenses come from 80% of your income and you aim to save 20% each month.
The 50-30-20, 80/20 and envelope method are probably a good place to start if your new to budgeting.
Set your goals
Before you start your budget it’s a good idea to consider what you short and long term goals are. Things like:
- Paying off your credit card
- Saving for your retirement or other life event
- Saving for a new car or new home
- Becoming totally debt free
- Reducing your monthly spending
Keep track of your money
Always a good exercise, keep a note of everything you spend if you’re buying a Starbucks Caffe latte (Grande) every day on your way to work at $3.95 a pop you’re spending $19.75 a week. That’s $79 a month and a whopping $987.50 a year assuming you forgo them when you on vacation. If you write down everything you spend for a month or two you’ll soon see where you can make drastic savings or you’ll definitely decide if your latte is a need rather than a want.
Getting Started
- list all of your living expenses.
- list your recurring payments (pension contributions, car payments, gym memberships, Netflix etc.,)
- Use your long and short term goals to set money aside
- track your spending and see where you deviated from your plan or equally see where you are hitting your targets
- Be kind to yourself, adjust your budget as you need to, Rome wasn’t built in a day and you’re not going to get your finances in order after 1 month.
The government of Canada has a great free tool that you can use to get you started with your budget, just plug in your income, savings and expenses and you’re off to the races. They’ll also tell you if you’re on track or spending more than the average Canadian.
They also have other tools that you can tap into, mortgage calculator, financial goal calculator, bank comparison, to name but a few, click the link here to check them out and start making plans and savings today.
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a post such as this, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.