Free Template for you at the end of this article.
Well it is a new year and a new decade so Happy New Year to you. I wish you health, wealth and prosperity. As it does with every new year many people’s thoughts turn to goals and resolutions with an aim to better or improve their health, their wealth, maybe plan some travel or whatever it is that you are wanting to focus on for 2020.
Every New Year, I also develop an affliction for setting a few goals and I think it is a great time of year (the beginning) to adjust your plan and set your aim on some things that can make your life more enjoyable. Now I cannot comment intelligently on setting any fitness goals (although I really really try to) or travel (I do those too), but maybe I can help with a little advice on how you might be able to set a few sensible financial goals that will improve your money situation and maybe give you a few tips on how to follow through and nail them.
In this New years Resolution Series, today we will focus on creating a budget.
Make a Budget you can Stick to.
The easiest place to start renovating your financial situation is to create a budget. To do that you will need to figure out what it costs you to live the way you’ve been living. I recommend using a full month to track your expenses to better learn how your money is being spent and on what. I sometimes call this the “discovery” phase as I am willing to bet you will be surprised how much you spend on exotic coffees or monthly memberships that you don’t really use. I am not suggesting you quit anything for this “discovery” month. Just live the way you usually live and do your best to keep track of what you spend.
If you are a sandwich generation child that is helping one or both of your parents to make ends meet at the end of the month, this would be the section to include the expense in.
It is as easy as it has ever been today with so many budget apps for your phone and online banking tools that you can use to track where your money goes. Don’t change anything in the first month, simply try and keep track of where and when you spend your money.
Now that you have a pretty good idea of what your essential spending habits are, you can begin to organize your expenses. Some expenses happen every month and they can be a great place to start your monthly expense list. These are sometimes called fixed costs. Things like the mortgage or rent, heat, electricity, phones, daycare, car payment, cable, internet, bus pass, parking are usually pretty predictable expenses you can count on every month.
The next category we will want to look at are the monthly expenses that are also fixed but they come in the form of memberships and activities, etc. These days there is no end to services you can subscribe to online and it is a good idea to do an inventory of what these costs are at least once a year to make sure that you are not paying for services that you might not use or need. This category will also include activities like gym memberships, yoga, hockey, karate, ballet, swimming, etc.
I can hear you wondering “where the food is on the list?” Well, let’s look at groceries now. Most month’s groceries are reasonably predictable, but it is a good idea to figure out what you are spending anyway. That is why during the “discovery” month, you should track what you spend on food. Set a category for how much you spend on groceries, and another category for what you spend on food that you eat out, either at restaurants and food courts (gas stations?). You can include your coffees here as well. You can make it as detailed as you like, or you can just add the simple two categories of groceries you eat at home (or a lunch you bring from home), and food you buy and consume outside your home.
Most people carry debt in some form whether that be on credit cards, personal lines of credit, personal loans, Income Tax, money borrowed from family members or friends and any other sort of debt that you carry. This is the section you can use to capture the expenses.
Investments (along with reducing debt) are what will help you achieve the goals that you are setting out to accomplish, so there needs to be a section in your monthly expenses for money you are setting aside for the future. Monthly RRSP and TFSA contributions as well as any general savings should be recorded here.
Creating a budget might not always be at the top of your list when it comes to entertaining lifestyle moments, but it can help lead to more of them.
Speaking of entertainment, you might be surprised to find out how much you spend on keeping yourself entertained. You should include a section in expenditures for entertainment and here you can include movies, going out with friends and family, theatre tickets or whatever it is you do to enjoy yourself. This will give you a good starting point to understand why there is sometimes the month last longer than your pay cheque.
Lastly, you want a catch-all section in your budget for expenses that don’t fall under any of your categories listed above. This way there is no expense that you won’t be aware of.
Revenue and Income
Now that we have the expenses taken care of, we can turn to how much you have to spend every month – Income. For most people, the main source of income is their job and that should be the first entry on your income list. If you are a business owner, you can indicate what you typically take from the business as income per month in this section. If you are retired and have pension income, include it here. Whatever your main source of income is, lead with it.
Next you may have other sources of income from either a secondary small business or dividend income that comes monthly or quarterly, or maybe you have some rental property that earns income. You my be earning a pension from a previous career in addition to your main employment or business income. Add it here. Any other income that has not been included that you are lucky enough to have earned, should be included here.
Add Them Up.
When you begin this exercise, it will not be a natural habit at first but just like any habit, the first few steps are the hardest. Keep at it and when you get to the end of your first month you will be rewarded with some powerful knowledge. You will know where your money goes and where it comes from.
Think of it as a doctor visit to a doctor you have never met before. The doctor will likely check your heart and your blood pressure, make you stand on a scale, take some blood, pee in cup and all the other things a doctor needs in order to get a good overall picture of you present health. This is very much the same exercise, but you can do it yourself and don’t have to wear a hospital gown (unless you want to).
Your own budget is really the starting point to any strong financial plan. Armed with this knowledge, you can now start to make decisions about what you can do to improve upon your situation going forward. Maybe cutting out a coffee or two a week will help make a TFSA contribution that funds a trip every few years. Maybe that music membership on our phone would become a small contribution toward an education savings plan for a child. When you know where to look it is much easier to find solutions and put together a solid plan that will make the end of the month a lot easier.
If you would like a free template of the spreadsheet that I use when I meet with my clients, send me an email request here and I will gladly share it with you.
Best of Luck as you begin your financial journey!
Kevin-Barry Henry.Buy My #1 Bestseller Here
THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.