Written By Ariane Denis, B.Com., C.Adm, F.Pl.
February 8, 2016
Make budgeting your new winter sport!
Winter has finally caught up with us, and here’s a perfect activity for you when you decide to take a break from cocooning: make a budget!
Have we gone mad?
Though you may hate the word, and find working on one depressing, a budget is above all a tool to help you achieve your financial goals, or at least to prevent you from falling into a debt trap. In plain language: a budget is a plan that determines how your money will be spent. There’s nothing depressing about that!
But why is it so difficult to set up a budget and stick to it? Here are some of the excuses we tend to make for ourselves:
Excuse #1: Doing a budget is boring…
A budget may not seem exciting at first, but it helps you keep track of your income, expenses, debts and savings. And it’s the latter that adds pizzazz to the exercise! Seeing your savings grow allows you to dream and set goals: why not aim to repay your mortgage faster, or retire at 60, or go on vacation during spring break, or just spoil yourself. A budget gives you the freedom to choose. So start dreaming and make a budget!
Excuse #2: I don’t need a budget
Everyone needs a budget, even high-income earners. Life is not linear and significant changes such as marriage, divorce, the birth of a child, retirement or disability all have an impact on your personal finances. A budget helps to plan for the short term and for the long term; it helps you navigate through important changes and helps you stay afloat, without sinking into a debt spiral. How can you max out your retirement savings if you don’t know your monthly savings potential?
Excuse #3: It’s too much work
Sticking to a budget can be cumbersome at first, but after a few months it will become second nature. Give it some time – a month is probably not long enough. You should plan your budget for the whole year ahead so you’ll need to be really motivated. And as there are many ways to make a budget, you’ll need to find the tool that best suits your lifestyle. There are a host of easy-to-use spreadsheets and applications for smartphones and tablets out there. Alternatively, the good old envelope system also does the trick. And many other tools are available to make budgeting a breeze: pre-authorized payments, automatic savings, online bank statements. If you use these tools, you may only need to look at your budget once a month to make sure that everything runs like clockwork.
Allow me to introduce you to Reality
A budget should work on paper, but it should also be able to face the test of reality. Don’t underestimate your expenses, and track fixed expenses such as rent or mortgage payments, car payments, gasoline, public transit, insurance, groceries, cable and Internet, and hydro. Keep a close eye on your discretionary expenses such as vacations, clothes, birthday gifts, entertainment and dining out. Also budget ahead for expenses that occur once a year: Christmas gifts, registration fees, driving licenses, and city and school taxes, to name a few. If you keep an eye on your expenses, you’ll have a pretty comprehensive picture of your financial situation.
Does your budget show that you’re spending too much? Identify what you can cut but don’t go overboard: to stop dining out altogether may not be realistic. Make sure you budget for the occasional treat, otherwise you’ll feel like your missing out on life and that will cause your budget to derail.
If you happen to have a surplus, use it to add to your savings or to reduce your debts. Max out your RRSP, top up your RESP, use available contribution room in your TFSA, or make a double payment on your mortgage: all of the above will brighten your financial picture.
Plan for the unexpected
What do you do when your car breaks down or your roof starts leaking…? Unplanned-for expenses such as these are infuriating, because most of the time you don’t have the money available for the repairs. That’s where your emergency fund comes in, also called a cushion. If you budget for contingencies, you won’t need to resort to your line of credit in case of an emergency expense. As a rule of thumb, put aside an amount equivalent to three months’ worth of expenses. That may sound like a lot, but imagine losing your job…
Sometimes the opposite happens and you receive a windfall: an unexpected inheritance, a bigger than expected bonus, a winning lottery ticket. Instead of embarking on a spending spree and squandering your money, use your budget to assess how to allocate the money. Give yourself some time to think about it.
So how about it?
In this age of immediate gratification and getting what you want, when you want, doing a budget puts both your feet firmly back on the ground. There is something very rewarding in seeing your debts melt, your savings grow, and your goals getting closer.