By Cynthia Batchelor, Financial Advisor of Assante Capital Management Ltd.
As costs go up and we all look to where we can save a little money, the talk about a budget comes up increasingly in conversation. It can often be overwhelming when your payments keep changing and the bills keep piling up. So, what can you do to make sense of it all? Make a budget. A budget is tally of your income and expenses for a set period. Planning out your budget can help you to understand what you are spending where and how you can cut costs.
One of the first things I remind people when discussing their budget plan is to “pay yourself first”. What does this mean? Simply put, it means to commit a certain part of your income to savings each paycheque. This will allow you to ensure that you can retire comfortably, have funds for set aside for unforeseen expenses, or generally know that you are able to live comfortably.
If you are looking for a budgeting framework, the rule would be 50/30/20. 50% of your income for needs (rent/mortgage, food, utilities) 30% for wants (dining out, the gym, sports & entertainment, trips) and 20% for savings (retirement and emergency funds). Remember to do the following.
· Pay yourself first (this is the 20%)
· Map out your spending (know exactly what you are spending each month – create a spreadsheet of the other 80%)
· Always be prepared to adjust (you might need to reduce or stop the wants)
· Calculate the actual cost of your debts (know your interest payments)
· Make budgeting a regular routine (revisit your budget at least 4 times a year to ensure you are on track)
Let’s now look at the most common budgeting mistakes.
Not tracking expenses (it is important you know where all your money is spent down to the last $5 at Tim Hortons)
Overspending (if you spend more than you earn you will end up paying interest charges which will eat up more of your hard-earned money)
Not planning for unexpected expenses (let’s go back to that 20% rule)
Not adjusting the budget as circumstances change (if you have fixed costs or needs that go up you will need to adjust your wants part of your budget)
Underestimating expenses (sometimes your utilities are lower, like gas in the summer, don’t get caught in thinking that stays the same all year round, plan ahead)
Relying too heavily on credit (high interest rates can eat away at your savings and income)
Not prioritizing expenses (pay your high debt and needs first, forgo the wants)
Not accounting for irregular income (if you don’t have stable income, don’t count on it)
If you need help creating a budget, see a financial advisor.
Cynthia Batchelor is a Financial Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at 613.258.1997 or visit ofarrellwealth.com to discuss your circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.