We’re almost finished. We’ve tested our plan and found that there are a few adjustments to make in order to balance the budget and include some actions to achieve financial goals. This is probably the hardest part of designing a budget.

Let’s take a look at how Lily did it. After taking another look at her spending history, Lily realized that she spent a lot more on lunches, snacks, magazines and weekends away than she thought. She also did a little more research on her car loan and learned that she has 2.5 more years of payments ($300 per month) but if she increases her payments to $500 she will pay the loan off in 1.5 years. She also realized that she didn’t have any renter’s insurance.

Goals:
1) Start some retirement savings (RSP – Registered Retirement Savings)
2) Buy her first home

Recommendations:
1) Establish an emergency fund – Lily could rely on her RSP’s in a pinch but it’s a good idea to build up a little cash fund.
2) Start RSP savings, even if it’s a small monthly amount.
3) Pay off the car loan to free up a big chunk of monthly cash.
4) Arrange for renter’s insurance.

Options:
1) Share the rent and utilities = free up $250 per month.
2) Extra work (4 hours per week) = $250 per month.

Actions:

1. Pursue one or both of her options to bring in $500 more per month in the short term.
2. Set up a RSP savings account with an auto savings of $150 per month.
3. Set up an emergency account (savings account) with an auto transfer of $100 per month.
4. Cut down on the snacks, lunches out & magazines to fit entertainment spending within $400 per month.
5. Take out $60 per week leaving the rest in the entertainment ‘budget’ for haircuts, gifts. Make choices on weekends away to stay within budget.
6. Cut food budget to $200 per month.
7. Increase the car loan payments to $500 per month.
8. Once the car loan is repaid, increase the RSP savings by $500 per month to $650 per month.
9. Put tax returns and any other ‘found’ money into the emergency fund.

Here’s what Lily’s new budget will look like:

Rent $1,000
Car $500
Insurance $150
Gas & Repairs $150
Food $200
Utilities $200
Entertainment $400
Insurance $30
RSP $150
Savings $100

Total Expenses $2,880 per month

The total ($2,880) is higher than her net income ($2,812) however Lily has committed to looking for a place to share with a room mate which will reduce her expenses by approximately $250 and in the meantime she will pick up extra work to bring in $250 per month. If she succeeds in bringing in the extra $500 per month it will go a long way to help her achieve her goals much faster.

Next post will be Budget Basics – Part Eight (a wrap up of this series).

It’s time to incorporate some of the mechanics of budgeting into your budget. Until now, you’ve used your spending history to make your budget.

Take a look at your budget and review the income and expense categories and dollar amounts. Is there money left over after all the expenses are deducted from income? If so, great. If not, here’s the hard part. If your budget doesn’t balance (income > or = expenses) or if you want to include other things in your budget (such as saving for your goals) then you have 2 options:

1. Earn more money
2. Spend less
It may seem harsh but in order to balance your budget, you have choices to make. Focus on the expenses that you have control over – discretionary expenses. Decide what you will forgo in order to pay down your student loan faster, go on a vacation or buy a car. There is a place in your budget for long term savings goals such as buying a home or retirement. You may be able to afford only a small amount now, but starting sooner will pay huge benefits later.

Make it easy on yourself by:

• Paying with cash
• Set up automatic savings plans
• Increase loan payments
• Leave the credit cards at home

Whatever works for you. We’ll see how Lily does it in the next post.

Budget Basics – Part Five will address how to determine how much to put in your budget for specific items. Most of us can list the regular monthly categories and also attach a reasonably accurate $ amount to each one but there are lots of other items to consider.

There are many little expenses that are not as obvious but they add up quickly. Haircuts, gifts, drugstore/toiletries, car maintenance and holiday weekends. To make sure that you have included all of them, use your credit card and bank statements to check for items you may not have included. It may be a good idea to put them in separate categories so you can keep track of the allocated $.

If you choose to lump several budget items such as gifts in with entertainment, there is danger that you will spend your ‘entertainment’ budget and don’t have $ left to buy gifts. It’s a good idea to know what makes up your entertainment budget and take out your weekly allowance for regular cash purchases, leaving the rest in your account to cover off the irregular purchases.

For example – if your weekly entertainment budget is $100 and typically spend $10 on a lunch out, $40 on an evening out, $15 on coffees and snacks – you are left with $35. Are gifts or haircuts included in this category? If so, it’s a wise idea to take out $60 per week, leaving the remainder in your account to pay for gifts.

Let’s see what happened to Lily.

Lily earns $45,000 per year which converts to $3,750 per month before deductions ($45,000/12 = 3750). Assume 25% in deductions (income tax, medical & other benefits) leaves $2,812.50 per month net pay ($3,750 * (1-.25) = 2812.50). She is paid twice per month so her average net pay check is $1,406.25 ($2,812.50/2 = 1406.25).

Lily has the following monthly expenses – rent $1,000, car payment $300, car insurance $150, gas $150, food $300, utilities $200 and entertainment $400. These total $2,500.

Now, Lily is uncertain….her net pay is $2,812.50 per month and her expenses are $2,500.00 per month. She makes more than she spends … right? She should have $312.50 in her account at the end of each month. Why doesn’t she? She knows she has a balance on her credit card and she certainly doesn’t have a large savings account.

Lily hadn’t thoroughly calculated her other and entertainment expenses. She hadn’t included her hair cuts/colouring, gifts, holidays or car maintenance. She had thought that $400 per month sounded ‘about right’ for entertainment. In fact she has been spending more than $400 per month on all of these items and this is why she has a balance on her credit card of $1,500.

Canadian Expense Averages:

On average, Canadians spend 20% on shelter, $15% on transportation and 11% on food. The average deduction for taxes is 20%. This leaves about 35% for other things such as debt repayment, clothing, gifts, recreation, entertainment and savings (retirement and other). Remember – this is an average and depending where you live and your personal situation these percentages can vary.

Next post will address how to tweak your budget to include provisions to meet your financial goals.

Budget Basics – Part Three was about the mechanics of gathering your information and breaking it down into numbers and categories. This part can be tricky for people because there’s what you’ve historically spent and what you should allocate for your budget numbers.

At a later stage we will take a look at the whole budget in the context of your goals. We will also drill down to specific aspects of your finances that need tweaking or special attention. In the meantime, how do you know if what you’re setting as a budget number is reasonable?

Sometimes the dollar amount is a product of necessity. What I mean is that you don’t have wiggle room with some categories. Categories such as rent and utilities (except to cut out cable or minimize your mobile bill) are typically fixed monthly amounts. Your food expenditure is mostly within your control in that using your common sense will make the biggest difference to the amount you pay each month. Eating out, prepared and packaged foods are more expensive than making simple, well-balanced meals from basic ingredients. Likewise, what you spend on clothing is mostly discretionary. I know I’ve made ‘fashion mistakes’ – I wouldn’t like to add up that number! There are certain items you must have in your wardrobe and especially when you are beginning your career, there are many pieces you don’t have. With some planning and a list, these categories can be managed.

Here’s one way to do it. Start at the top with the fixed expenses that you can’t adjust month to month and then work through the rest in order of priority (needs to wants), calculating the minimum you think you can get away with. Use 1 column for the minimum amounts and another for the amounts you’ve spent in the past.

Here’s an example:

Lily earns $45,000 per year which converts to $3,750 per month before deductions ($45,000/12 = 3750). Assume 25% in deductions (income tax, medical & other benefits) leaves $2,812.50 per month net pay ($3,750 * (1-.25) = 2812.50). She is paid twice per month so her average net pay check is $1,406.25 ($2,812.50/2 = 1406.25).

Lily has the following monthly expenses – rent $1,000, car payment $300, car insurance $150, gas $150, food $300, utilities $200 and entertainment $400. These total $2,500.

Now, Lily is uncertain….her net pay is $2,812.50 per month and her expenses are $2,500.00 per month. She makes more than she spends … right? She should have $312.50 in her account at the end of each month. Why doesn’t she? She knows she has a balance on her credit card and she certainly doesn’t have a large savings account.

We’ll help Lily work through her budget during the next post.

Now that you know what information you need to make up your budget, let’s get started. Make sure you have all your information handy such as your pay check, bills, bank and credit card statements. What will you use to draft your budget? Paper or Excel – whatever is easiest for you. You will likely make some changes as you go. There are lots of templates on the Internet or you can make your own.

Start with your expenses. List your ‘needs’ (versus ‘wants’) first. Typically these are higher amounts and are predictable in terms of the monthly cost. Expenses such as rent, food and utilities are examples of ‘needs’. Debt repayment, transportation, clothing and grooming (toiletries and hair cuts) are next, followed by discretionary spending categories such as savings, entertainment and vacations. Use monthly amounts for your budget and if you don’t have a good idea of what you spend, then estimate. Review your bank and credit card statements – have you included everything? Total your expenses.

Compare the total monthly expenses to your net monthly income. Are you spending more than you make or less?

We’ll pause here for now. It’s a good idea to look back on your work in a day or two to see if you’re budget includes all your expenses. Next post will include an example.

Now you know what a budget is (Budget Basics – Part One), let’s talk about the components of a budget. Income and expenses are the 2 main components and within them are various categories.

Income is money earned. You get a paycheck or receive a pension, earn interest from investments. You may receive it regularly or sporadically. The important thing to know is how much you receive and when you receive it.

Most of us receive net pay which is what’s left after deductions from gross pay. Deductions such as income tax, Canada Pension Plan (CPP), Employment Insurance (EI), medical premiums, dental premiums etc. are calculated and deducted by your employer. If you receive income that has not had any deductions, then it is your responsibility to set money aside to make these payments yourself. Income tax can add up and if you don’t have it saved when you complete your taxes, it could be difficult to submit by the deadline. Costly penalties and interest charges can apply.

How often do you receive income? Weekly, bi-weekly (every 2 weeks), semimonthly (twice per month), monthly or sporadically. It’s easier to work with a monthly number so take your net income number and convert it to a monthly average. For example, if you are paid bi-weekly, take the net amount, multiply it by 26 and divide by 12. If the income you receive is infrequent then timing becomes important and a good strategy is to build up a buffer to cover your minimum expenses for a period of time until the next chunk of income comes in (don’t forget aside the income tax provision). You may receive additional income through the year such as a bonus or an income tax return. Note these but don’t depend on them.

Tip: If you are paid bi-weekly, you can force yourself to fit your expenses within a smaller budget and increase savings by working with a ‘monthly’ budget income of 2 times your bi-weekly pay. You will receive 2 ‘extra’ paychecks a year which you can use towards achieving a goal or putting aside for an irregular annual expense such as car insurance or vacations.

Expenses can be fixed or variable. For the most part, even variable expenses have are predictable which is where the budget comes in. List your expenses. It can be helpful to use categories such as Living, Entertainment, Gifts and Transportation. Within each category list the individual expenses starting with the necessities. For example expenses such as rent, food and utilities (hydro, cable, Internet, telephone) might fall within the Living category. Note which expenses are needs and which ones are wants. For each expense, note the minimum that you are required to pay. Maybe you can live on $200 per month for food but typically spend $275.

This is a good start. We’ll put some structure around your budget in the next post.

It’s a good time of year to tackle the topic. I’ll be taking a look at Budget Basics over a series of posts starting with ‘What’ and moving onward from there.

Most of us have a fairly good idea of what a budget is. Oxford defines a budget as:estimate or plan of how money will be spent over a period of time, in relation to the amount of money available

Quite straightforward. The definition suggests that it’s a good idea to document your budget as well as review your budget. Many of us have an idea of what we spend on what categories but if we don’t take the time to review what we actually spent against funds allocated to specific categories we aren’t using a budget.

The greater purpose of a budget is to be used as a tool to achieve objectives within a plan. In order to do this, regular reviews of the information in your budget will give you the knowledge to respond to budget hiccups and make adjustments as needed.

Most kids are back to school. Maybe this week is to get oriented and say hello to friends but next week it’s the real deal. Did you have enough time to get prepared? It’s a quick transition from summer fun to back to school. Here are a few suggestions to make sure you get the numbers covered.

• School Supplies: The costs adds up quickly so make sure you’re only buying what the kids really need.
• School Clothes: Determine what items are required and set a budget. If your child is older, involve them in the process by sharing the budget value and the list of items to be bought.
• After/Before School Care: What do you pay? Be sure to include it in the budget as well as any other costs when care isn’t covered by these programs (summer camps, ad hoc babysitting)
• Sports and Other Activities: Don’t forget to budget for these. Depending on the sports or activities your kids are involved in, it can be a sizable amount.

Life can be VERY busy once everyone in the house is back into the routine. Time is a valuable resource and it’s a juggling act just to make it through the week. There are short cuts but most of them come at a price.

Convenience foods are nutritionally inferior and more expensive. I find that making a menu and doing one food shop a week is the best way to get food on the table and in the lunch bags. I’m not very creative so trying to magic up a yummy dinner based on the fridge/cupboard contents is not an appetizing prospect. The fewer trips to the store the better and we throw out far less food it I buy it with a plan! There are stores and produce suppliers that deliver and not all of them charge a premium.

Cleaning and laundry can be a bore and adds up if you pay someone else to do it. What age are your kids? Old enough to contribute to maintaining the house? Maybe doing these things yourself covers the cost of a pizza night once a week.

The main thing it to work out a system that works for you in terms of time, money and stress. Taking a little time to plan and communicate with your family is a good way to make sure everyone’s on board.

Did you read Part 1? Did you take a stab at assessing your income and expenses? Did you draft your budget and cash flow statement? No worries if not, see the steps listed and an example to review.

1) Current savings and expected monthly income
2) Expenses paid and expenses you expect to pay (monthly and chunk payments)
3) Take a look at the difference

Lily is 20 years old and returning for her second year of post-secondary education. She spent the summer living at home with her parents and working in the service industry.

1: Lily worked 30 hours per week (4 shifts) and earned tips in addition to her wage. She earned an average of $2,500 each month and saved $8,000 over the 4 months. She plans to find a part time job for 8 hours per week earning at least $12 per hour. This will bring in approximately $400 per month during school = 8 * $400 = $4,800 over the school year.

Total savings and income = $12,800

2: Tuition & Books – She expects her tuition to cost $4,500 and books $400 for the year. Total = $4,900
Living – She’s sharing a 2 bedroom basement suite and will pay rent + utilities of $800 per month. Per month her bus pass is $50, food $200, phone and share of Internet $100, insurance $10 and entertainment/gifts/grooming $300. Her monthly expenses are $1460 x 8 months = $11,680

Total expenses = $16,580

3: The difference is $12,800 – $16,580 = $3,780

It may not seem like much money but Lily borrows the money now she will have payments to make upon graduation. 1 year of $375 per month to rid of it or slightly less for much longer. Doesn’t seem like a high price to pay however when you’re finished school and trying to get started it is much easier on the wallet if you can avoid student loan payments. All your expenses will increase and finding a job may take longer than planned.

Lily has a couple options to explore. Check with family to see if there is any financial support (she’s done a great job on earning what she can, designed a realistic budget and kept her expenses as low as possible), apply for scholarships &/or bursaries and ask her employer for any extra shifts over holidays or when she is able to do the work.

Perhaps you’re already there and in the process of getting settled or maybe you don’t have to travel. Either way, the next couple weeks will be a whirlwind! Lots of fun things to do and lots of tasks to get done.

In all the chaos, don’t forget to organize your $. Whether you’re starting out or you’re several years into your post-secondary education, what you earn and what you spend during your education will either limit or increase your choices upon completion. Your 1st goal is to complete your education to the best standard possible. Another of your top goals should be to finish with no or as little student debt as possible. This can be a lofty goal depending on your course of studies but worthwhile because entry level jobs don’t often pay well and having as few financial obligations will make it much easier. The other reason is that although you aren’t asked to repay student debt until you’ve finished school, it will take a VERY long time to repay it afterwards. If you pay the minimum it can take upwards of 10 years. Even if you set an aggressive repayment schedule, a $20,000 loan means approximately 5 YEARS of $500 PER MONTH.

Here are some things to do that can get you started in the right direction:

1. Understand your expenses & when they’re due (budget & cash flow)
2. Reduce and restrict your expenses as much as possible (think thrifty)
3. Get a part time job (in addition to your summer job)
4. Apply for scholarships & bursaries
5. Monitor your $ once every 3 months

A little more explanation:

1. Write out your budget including bulk expenses (books, tuition) and tally it up. Compare this to your bank account. Does it cover it? Is there enough? If not, what is the difference and how are you going to make it up?

2. Do a little research and you may be able to save some money. Buy used, use the on campus book stores (they will have a used section or a separate store), ask for student discounts, ask family for supplies (sheets, towels etc.). There are lots of resources for students. This is not the time to take up an expensive coffee habit!

3. Lots of people do it and some employers have great programs for student employees (benefits, tuition assistance etc.). 5 to 10 hours per week can make a huge difference in your annual income. It can also lead to full time work during holidays or after you complete your education.

4. There are lots available and for many different purposes. Don’t be shy. You have nothing to lose and everything to gain….and now that they are not taxed, it’s a great funding source!

5. Take the time to review your $ every 3 months. Doesn’t have to be complicated. What have you spent versus what income have you made or what savings you have? Better to know now rather than later if you need to make an adjustment.

How you choose to live the rest of student life will impact the rest of your working life. The patterns you set and the habits you develop will carry into the rest of your life.