Juliet has been working in a retail shop for just over a year and has begun to ask herself two questions:

1. Money is pretty tight at the end of the month and it’s tempting to use her credit card but is worried about getting bills that she can’t pay.
2. What’s next for her? Juliet enjoys the people she works with and likes the work well enough but is starting to wonder what’s next.

After paying her rent, bills, food and has a couple evenings out with her friends, she’s out of money. She doesn’t own a car although belongs to a car share and buys a monthly transit pass. She doesn’t spend extravagantly on clothes or hair but would like to have nicer things. It’s very tempting to buy things when out with her friends and she often wonders how they afford to spend $100 to $200 each week on clothes. She does worry that if something happens with her job that she won’t be able to pay her bills. She feels guilty that she doesn’t travel to see her family very often because of the cost. Her family knows she doesn’t make much money and are really great about it but she still feels embarrassed that she’s not able to give the gifts she’d like to give for special occasions.

Once Juliet asks herself what she wants her life to look like and what her resources are, she can make a plan for herself. Her expenses are minimal and she hasn’t accumulated debt so far which are both positives. In order to earn more, she will have to take on more responsibility at her current job or consider changing jobs. In both cases, more education would help her to attain her goals. Many employers will either contribute to education or support employees through in-house training programs. If Juliet is able to meet with someone to discuss her goals for the future, they may be willing to help her with a plan. Alternatively, Juliet can begin researching other employers making a point to consider the growth opportunities and benefits that they may offer such as medical, dental, education and disability insurance. These all have value.

It may seem too soon but the other thing for Juliet can think about is long term savings. Even starting with $50 per pay cheque can add up over time and Juliet is young! The funds will be there for an emergency, a big purchase or a rainy day!

Living on a tight budget can cause great anxiety and overwhelm your life. Having a plan to grow out it and into something a little more comfortable can bring a sense of relief. It’s not to say that it will be easy but it is worth it. It’s a great feeling to be confident that you have a plan and are not living quite so close to the red line every month.

Step 1: What is your vision? What do you want your lifestyle to be like?

Step 2: For each goal, decide whether it’s something to work for within 1 year, 2 years or over a longer period of time.

Step 3: Take a look at your resources. How can you use them to make your plan a reality?

Step 4: Write out your plan to achieve your goals. Add enough detail that you are able to go step by step.

We’ll take a look at an example in the next post.

How do you define living on a tight budget? I think most of us would agree that the phrase implies that it is a challenge to make ends meet each month. Delving a little further, I think it means having just enough or not quite enough money coming in to cover the basics. Necessities such as housing, food, utilities, medical and clothing. Beyond that, most of our spending is discretionary, debt repayment (which may or may not be a result of spending on ‘wants’ as opposed to ‘needs’ and savings.

The reality today is that many households (whether your a single or a family) live on tight budgets and the difference between how well they manage or if they struggle depends on how resourceful they are.

If your budget doesn’t balance or you want to spend more than your income, you have 2 choices, earn more money or reduce expenses. Easy to write but how do you act on both or either of these two strategies? Consider your resources which may include:

• Additional cost saving strategies
• Further education to increase your earning potential
• Research and explore funded or free programs and seminars
• Collaborate with family and friends (i.e. if you plan to take night school but have a young child, will family and friends support you by looking after your child)
• Decide what you want and set a plan to achieve it

The first step is deciding to change your current situation, the next step is determining what you want your life to be and the following steps are assessing your resources and putting a plan in place. We’ll take a look at the planning aspect next post.

Step 11

The last one! You have a plan and you’ve put the wheels in motion. Don’t forget to set a reminder for yourself to review your progress. This will take a small amount of your time but I think it’s worthwhile.

1. Check the balances of your assets and debts and compare them to what they were at the start of the year.
2. Calculate your net worth.
3. Record your monthly income and expenses (actual) against your budget.

Monitoring your progress against your plan doesn’t have to be done on a monthly basis but perhaps quarterly or every two months when you’re starting out.

Take a look at the areas where you notice you are doing better than your plan or not meeting your plan and ask yourself ‘Why?’. Was it a single and infrequent blip or not? What can you do to address any issues sooner rather than later.

Good luck and we’ll check back in a couple months!

Step 10

What’s a plan without action? Convert your plan into action so that you achieve your goals. For example, if your objective is to repay your student loan more quickly then decide how much you can afford to pay extra each month and either:

a) Increase the monthly payment with the lender to the new amount; or
b) Set up an auto-transfer for the increased amount to a separate account and every few months, make a lump sum payment against the loan.

You will be amazed at how quickly you can achieve your plan once you make it a reality. Set up automatic savings transfers or set up an appointment to meet with your banker.

Step 9

Develop your budget!

Refer back to your net income and item by item subtract your expenses beginning with your needs, followed by your goals and discretionary spending making sure that your expenses and goal savings do not add up to more than your income. Use your average expenses from past experience but whatever amounts you decide to budget, they must be reasonable. For example:

• Net monthly income = $2,000
• Monthly expenses = rent $600, food $300, transportation $200, utilities & phone $100, entertainment $200, clothing $200, household $50, gifts $75 = $1625
• Leaving $375 for goals

If $375 isn’t going to allow you to achieve what you want to save for (trip, retirement etc.) then the options are to slim down other areas of spending or increase income. These are the same options if you can’t seem to cover your expenses with your income.

Next step is how to put the plan into action!

Step 8

Take another look at your goals as well as the cost and timeline associated with each one. For example, if you’d like to replace your car in 2 years and know that you will be able to sell your current vehicle for $10,000 and expect the new one to cost $25,000 (including taxes and other costs), you will target savings of $15,000 over 24 months which equals $625 per month.

Do this for each of your objectives and review the order of priority.

You’re almost finished!

Step 7

The difference between your assets and debts is called net worth. This is an easy number to calculate and a good one to know. If your net worth is positive then it means that you have financial resources and resources mean options. If your net worth is negative (more debts than assets) then this may be a point of focus for your 2013 financial plan.

Calculate your net worth and jot it down. Be sure to date it so you can measure your progress!

Step 6

Now’s a good time to take a look at assets, debts and liabilities. List your assets including things like cars, retirement savings (RSP’s) and savings, estimating the value that someone else would pay you for it. What could you sell it for?

List any money you owe and what payments you must make each month. Include credit card balances and vehicle lease payments.

Step 5

This may take slightly longer than 5 minutes but hopefully not too much longer. Write down your expenses starting with ‘must pay’ expenses or needs such as housing, food, utilities, transportation. Follow this with your discretionary expenses and note down what you typically spend on items such as entertainment or clothing. Some expenses are large and often paid annually, write these down too, noting that they’re annual or irregular.

If you’re not sure what you spend on average on some of these items, a quick review of your bank statement and credit card statements will give you a good idea. Remember, the idea is to write down what you have been spending, not what you think you should be spending 🙂